At $25m, the rings alleged profits were not unusually large. More shocking is the breadth of companies and the seniority of the individuals involved. Rajaratnam, who is accused of soliciting and trading on non-public information but denies wrongdoing, is a well-known investor in technology stocks.
Those said to have passed on tips about deals and upcoming earnings news at various public companies include a senior executive at IBM and employees from Moodys, a rating agency, McKinsey, a consultancy, and Intel, a chipmaker.
End of the RajThe intricacy of this web highlights how many firms have access to privileged information from large companies. Rating agencies, for instance, are told about pending deals so they can be ready with upgrades or downgrades when the announcement comes. In this case a Moodys analyst, who has not been charged, allegedly received $10,000 for letting slip that Hilton Hotels was about to be bought by Blackstone, a private-equity firm.
Insider trading can be hard to prove. The recipient of information must be shown to have encouraged or known about a breach of fiduciary duty. The line between legitimate research and ill-gotten information is fuzzy. There are other quirks. An insider-trading case against Mark Cuban, owner of the Dallas Mavericks, a basketball team, was dismissed in July because he had not promised not to trade on sensitive information.
Nailing hedge funds can be particularly difficult. Many trade in and out of stocks so frequentlyGalleon might do so more than 1,000 times a daythat it can be hard to link wrongdoing to specific transactions. Front-running takeovers is just one concern. Funds can exploit small price movements, often caused by mundane newsabout, say, product developmentand use derivatives to magnify gains.
The case against Rajaratnam is based in part on the novel use of wiretaps, a technique previously reserved for blue-collar criminals such as mobsters and terrorists. According to the complaint, he was taped telling a co-conspirator to buy and sell and buy and sell shares in AMD, a technology firm, to avoid drawing attention to illicit trades. Galleons traders were encouraged to sail close to the windas one put it, you get an edge or youre gone.
Investors are now flocking to pull their money out, prompting Mr Rajaratnam to say on October 21st that he would wind down Galleons funds. The affair even rocked share prices in his native Sri Lanka.
Regulators are looking to gain an edge, too, by stepping up their data-mining efforts. The Galleon case benefited from the detection of suspicious trades by the New York Stock Exchanges systems. They are also looking for help from poachers-turned-gamekeepers, such as the Goldman Sachs man hired to help shake up the Securities and Exchange Commissions enforcement division. Officials warn of more big cases to come. Friedman would not be amused, but many will be only too happy to see more Wall Street grandees in cuffs.
The Economist Newspaper Limited