Hedge Fund Boss Guilty Of Insider Dealing

Published in Investing on 12 May 2011

Billionaire hedge fund manager Raj Rajaratnam is found guilty.

In a verdict that has sent shock waves through the hedge fund industry, Raj Rajaratnam, founder of the now defunct Galleon Group, has been found guilty in the US courts on 14 counts of insider dealing, comprising 9 counts of securities fraud and 5 of conspiracy.

In the largest hedge fund insider dealing case in history, Rajaratnam was accused of illegally making over $60m between 2003 and 2009 through trading on non-public information acquired from a number of strategically-placed insiders.

Wirth Rajaratnam now out on $100m bail, sentencing will take place on July 29, when he is expected to be handed down a term of between 15 and 19 years.

Rajaratnam is not alone, as this case is the culmination of lengthy investigations into insider trading at hedge funds, and more than 40 people have been charged during the last 18 months. Most have pleaded guilty, with Rajaratnam's case being the first to come to trial.

Phone tap evidence

If not the verdict itself, then the nature of the evidence will surely have others in the business nervously looking over their shoulders, as Rajaratnam was convicted on the evidence of dozens of telephone taps of his calls to his insider stooges. In one of them, key cohort Danielle Chiesi was heard to say she was glad they were talking on a "secure line".

Ms Chiesi, who had already admitted her part in the fraud but had not given evidence in this trial, passed on key inside information on IBM, Sun Microsystems, and AMD, some of which she had obtained from an IBM executive with whom she was having an affair.

Other tip-offs included news of Google's results, and advance notice of acquisitions and other key strategic information, including plans to take over the Hilton hotel group.

With so much apparently damning evidence, and with fellow conspirators already having confessed, it might seem surprising that Rajaratnam denied the charges and faced trial. 

But then, a large ego and supreme self-confidence are often the keys to, and just occasionally the downfall of, such fraudsters. Maybe he has an appeal surprise up his sleeve, or maybe it was just arrogance -- we shall have to wait and see.

Where next?

With the Galleon case pretty much wrapped up, investigators will now focus more of their attention on the so-called "expert networks" which can potentially provide rich sources of insider information. 

These networks, which comprise financial managers, consultants, big company executives, investment groups, and others, are the routes by which many enterprises seek investment and expertise. And if any links in the chains can be bought by fraudulent traders, the illegal profits to be gained from milking them can be huge.

The hedge fund industry is worth something like $2 trillion, so it's perhaps not surprising that it will attract its fair share of crooks. But the saddest part of the Rajaratnam affair was summed up well by prosecuting attorney Preet Bharara, who said…

"Rajaratnam was among the best and the brightest – one of the most educated, successful and privileged professionals in the country. Yet, like so many others recently, he let greed and corruption cause his undoing."

Who does it hurt?

Many will not see crimes like this as affecting ordinary people -- it's surely just high flying rich folk swapping the millions between each other, isn't it? 

Well, no, the truth is very different. Every hard working person who has a portion of their pensions or other retirement investments tied up in the shares of companies involved in crimes like this is a victim -- and every pound ripped off to line the pockets of insider-dealing crooks is a pound that has been denied to such honest investors.

Knowing that one more such criminal has been taken off the streets pleases me greatly, and I look forward to verdict -- and while I generally dislike the ever growing trend towards snooping into our private business, maybe the use of phone tapping in this case will make a few more turn away from the temptations of illegal greed.

More from Alan Oscroft:

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