Another shocker

Written by Andrew Szabo
Thursday, 22 October 2009 00:00

After the Bernie Madoff revelations, one might have feared that we are hopelessly jaded by financial intrigue. Then along comes the Galleon insider trading story. It restores faith in Wall Street’s continuing power to shock.

Federal prosecutors on Oct. 16 filed criminal charges of conspiracy and securities fraud against Raj Rajeratnam, billionaire founder of Manhattan-based Galleon Group. Federal marshals arrested him under allegations of insider trading in the stocks of companies including Hilton Hotels, Google, Advanced Micro Devices and Akamai. Federal marshals also arrested five alleged co-conspirators: Mark Kurland, president of Newcastle Partners LP or Newcastle Funds, a private equity firm based in White Plains, N.Y.; Danielle Chiesi, an employee of Newcastle; Rajiv Goel, of Intel, who was involved in their venture capital effort; Anil Kumar, an executive at consulting giant McKinsey and Company; and Robert Moffatt, an IBM executive working at its Armonk, N.Y., headquarters.

The Galleon allegations differ fundamentally from those against Mr. Madoff. Mr. Madoff’s operation siphoned huge amounts of money from investors under false pretenses. However, Mr. Madoff’s firm carried out little or no actual trading, and it did not benefit from any privileged information about publicly listed companies. The federal allegations against Mr. Rajeratnam center on another fundamental purpose of federal securities laws (particularly the 1934 Securities Exchange Act, and regulations under it). That goal is to preserve fairness among competing investors as to the availability of highly relevant and timely information affecting publicly listed companies.

A former Galleon employee, not yet named, cooperated with federal authorities in hopes of receiving a reduced sentence. Prosecutors say that they have wiretap evidence implicating the defendants. Although insider trading cases can be hard to prove, the wiretap evidence is potentially damning.

We can expect more cases, both relating to the alleged Galleon trading ring and to unrelated matters, as part of a federal crackdown on insider trading networks. Targets will include hedge funds, Wall Street firms and law firms. The government has identified certain targets for investigation based on a “data mining” project, begun about two years ago, that looked for patterns of suspicious trading.

“Once investigators find a cluster of correlated trades, they tap other sources of information to unravel how its members obtain and share tips,” said an article by Bloomberg News Service published on Oct. 19. “For example, if a group profits on trades before a series of corporate takeovers, the SEC may check ... which investment banks or law firms advised the deals. If one firm was involved in all of them, an employee there may be the source of the leak.”

The Galleon news suggests that the Securities and Exchange Commission and federal authorities, shamed and embarrassed by the Enron and Madoff debacles among others, are increasing the scope and effectiveness of their enforcement activities.

Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment adviser. Questions, call 531-2877 or e-mail This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Previous columns may be found at Blog.GreenwichFinancial.com.