Sunday, September 25, 2011

SEC's War on Insider Trading


In Roger Lowenstein's NYTimes story, you'll find several familiar people, including Raj Rajaratnam and Mark Cuban, at the receiving end of SEC's recent assault. Here's an excerpt from this gripping essay:

Then, in August 2006, the S.E.C. got a tip about a New York hedge fund, Sedna Capital Management. [Sanjay] Wadhwa [a lawyer in SEC's Manhattan bureau] was assigned to this case, too. Sedna was a small fund, but its manager, Rengan Rajaratnam, was the younger brother of Raj Rajaratnam, the head of Galleon Group, a $7 billion fund. Born in Sri Lanka and educated at Wharton, the elder Rajaratnam kept an extensive network of business associates, many of whom were also South Asians. Since 2000, his fund outperformed its peers by a stunning eight percentage points a year. Wadhwa’s focus began to shift to Raj, a gregarious, daring trader who reminded him of Plotkin.

... [T]he S.E.C. began an examination of Galleon, issuing subpoenas for its trading, telephone and bank records, its appointment calendars and e-mail. Wadhwa’s interest was piqued by the cryptic tone of Rajaratnam’s instant messages with Roomy Khan, a former Intel employee with extensive contacts in Silicon Valley. One, from Khan to Rajaratnam, urged the hedge fund magnate not to buy Polycom stock until she got “guidance.” Sensing the potential for a criminal case, the agency briefed lawyers at the Southern District, who agreed the case looked promising. Then, in March 2007, the S.E.C. received an anonymous letter on plain white paper claiming that Galleon traded tips in exchange for prostitution and “other forms of illegal entertainment.” The author hurled a taunting challenge at the regulators: “It hurts my heart to see how these guys make monkeys out of individual investors, S.E.C. insider trading regulations and the attorney general’s office.”

The S.E.C. could not identify the letter’s author, nor did prostitution figure in the eventual charges. But that June, Rajaratnam trooped downtown to the S.E.C. for a formal deposition. The agency’s lawyers asked about insider trading — which he denied. Less than a month later, Hilton Hotels revealed that it was being acquired; Finra promptly notified the S.E.C. that Galleon had invested in Hilton before the news broke. Wadhwa was stunned by Rajaratnam’s brass.

Two weeks later, Rajaratnam did it again: Galleon sold Google just before it announced disappointing earnings. In November, an F.B.I. agent visited Khan and asked if she would be willing to talk about Rajaratnam. Khan replied, “What took you so long?” [...]

2 Comments:

  1. Desi Babu said...

    Dear Prof. Abinandan,

    Insider trading has the "moral equivalence" of plagiarism in academia. Both, have been around for quite some time. And both can be fixed by fixing the work culture, not the laws or their enforcement.

    Fortunately for US investors, the United States is still a country of laws, and for all that matters, the SEC has usually done quite well for itself. I don't think we can say the same about the Indian financial and law enforcement agencies. After many years of being back in India, and being out of touch with the US markets, I can still confidently invest in a stock that trades on NYSE or NASDAQ (not that I do, for logistical reasons). Till date, I have not mustered up the courage to invest in a single Indian stock, as I am not a speculator, and I don't think that I can trust the audited financial results here.

    Everyone is up for sale.

    About the "mode" of payment Mr. Rajaratnam used, well, you will be surprised how the people who "print" the currency notes for the Federal Reserve, still fervently believe in the ancient system of "barter" that tends to involve the most ancient "profession". It gives the phrase "you scratch my back and I will scratch yours" an entirely new meaning. Doesn't it?

    Peace!

  2. WebMiner said...

    Don't trust a "free market" where some entities claim to be above it and "regulating" it. The Indian version of the "free market" is more honest: it is public knowledge that no one is above market forces, not even the PM. Once you internalize this, dealing with the market is actually easier and more uniform. E.g., you realize that the only people who make money off equity in India are brokers, fund managers, financiers and politicians, not middle-class investors. So if you want to make money from equity badly enough, you get into one of those cadres.