FE Editorial : Inside track

Written by The Financial Express | Updated: Oct 28 2011, 08:31am hrs
Given that there is no evidence of him benefiting financially from tipping off Raj Rajaratnamwithin less than 60 seconds in several cases, such as when Warren Buffett planned to invest $5bn in Goldman Sachs in 2008most admit the SEC will have a tough job securing a conviction against Rajat Gupta, more so if the contents of the wire taps are not admissible as evidence. The important thing from India's point of view is that, if convicted, Gupta will be the 50th, or thereabouts, person who has confessed or been convicted of insider trading in the past 18-20 months in the USjust last week, Drew Brownstein, the founder and CEO of Denver-based Big 5 Asset Management, pleaded guilty to trading on inside information about a corporate merger and making more than $2.5mn on this. Indeed, it took the SEC just 18 months from the time it formerly charged Rajaratnam to convicting him. In 2010, The Economist reported, the SEC brought 53 cases against 138 individuals and entities, a jump of more than 40% that in the year before; and the SEC is using tools like wire taps, typically used in crimes like drug busting and gang violence.

Cut to India, and you see that Sebis track record is abysmal. While the number of insider trading investigations are up from 10 in 2009-10 to 28 in 2010-11, there are few that are high-profile. In the Wockhardt case, which qualifies as high-profile, however, the sentence for the CFO who was found guilty of insider trading was a mere R5 lakh and not allowing him to work as a compliance officer for 18 monthsRajaratnam, by contrast, got 11 years in jail. Apart from making insider trading a criminal offence, Sebi needs to develop neural networks (whos related to whom, and how), a complete digital list of directors of each subsidiary/front company, and a software tracking system. The FSA in the UK, The Economist reports, has just launched its Zen system to find suspicious patterns around corporate events such as takeovers and the SEC wants one that will allow it to see equity and derivatives markets in real timethis could carry a price tag of more than $1bn!