Raj Rajaratnam and the Wall Street Way

The arrest of Galleon Group's Raj Rajaratnam provides a glimpse into how far Wall Street will go to get an edge and make money. Whether guilty or not, it certainly shows that the average investor stands very little chance against these "big guys."

An article in Bloomberg details some of the allegations. Once again, whether he is convicted of insider trading or not, what the information reveals is an intricate network of personal contacts that feed info to those in the "in." What many construe as brains is just the ability to get close enough to get information before anyone else. Of course, getting information first takes intelligence, but not when some of the things that were done crossed ethical lines. It's infinitely easier to make money cheating.

"Prosecutors say Rajaratnam traded on leaks from insiders at Polycom, Moody’s Investors Service Inc. and Market Street Partners. In another alleged scheme, Chiesi got tips from an unidentified person at Akamai Technologies Inc. and from Moffat, according to one of the criminal complaints. These tips generated others, prosecutors said, as Chiesi passed them onto to Rajaratnam, who in turn gave Chiesi inside information.

The government’s complaint quotes conversations between Chiesi and Rajaratnam, including a July 24, 2008, discussion that they allegedly had after she spoke to the person at Akamai. That day, Akamai stock had closed at $32.18.

‘Gonna Guide Down’

“Akamai,” Chiesi told Rajaratnam, according to the complaint. “They’re gonna guide down. I just got a call from my guy."

The NY Times has an article exploring the line between inside trading and aggressive research. The article says:

"Insider trading, however, can be difficult to prove, said Leslie R. Caldwell, the co-chief of the white-collar crime division at the law firm Morgan, Lewis & Bockius. The line between buying legitimate research, trading rumors and gossip, and illegally paying for market-moving information can be complicated."

It's my understanding though that if a company receives information that is not publicly disclosed, and especially if they have paid for it, as Rajaratnam was alleged to have done, then that is insider trading.

Other hedge funds and money market funds are undoubtedly watching this case with interest. If Rajaratnam goes to jail, then many managers will be wondering if they might be next.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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  • AronLiv

    October 20, 2009

    This is true. It also demonstrates something else quite interesting. This guy and his cronies weren't concerned with results, they were only concerned about future guidance. That provides a glimpse into what is driving this market. Results are terrible but CFOs are all believing that things can't get any worse so that are guiding up.

  • Sam Cass

    October 20, 2009

    Guidance has always been a big issue on Wall Street. It's the pressure that keeps CEOs up at night and forces companies to manage for the short term. It's part of the problem with Wall Street.

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