Rick Maiman/Bloomberg
Congratulations to the prosecutors and FBI agents responsible for the sweeping insider-trading conviction on May 11 of Raj Rajaratnam. The good guys won a round. Do not, however, take the wrong lesson from the government's triumph. The nailing of the Galleon Group hedge fund tycoon doesn't mean the end of insider trading any more than a roundup at Rick's Cafe meant the end of gambling in Casablanca. What the seven-week trial revealed is that insider trading is even more pervasive than previously thought.
Even as the Feds use wiretaps and other sophisticated methods to police the financial industry, the schemers and schemes are proliferating. Wall Street, the Galleon case shows, is all about insider trading.
To his credit, the Street's main beat cop, Manhattan U.S. Attorney Preet Bharara, has conceded lately that illegal trading is "rampant." More prosecutions are on the docket, but: "Insider trading can't be stopped by a case or two," says Bruce A. Baird, a partner with law firm Covington & Burling in Washington. As a young prosecutor, Baird worked on the Ivan Boesky-era illegal-trading cases in the 1980s. If anything, opportunities to profit on secret information have mushroomed since Boesky's day, as have the cast of characters with access to valuable tidbits. Greed and the will to best competitors, he says, "are powerful instinctive human drives."
The Galleon trial involved an enormous and varied troupe of players. At the end, a federal jury found Rajaratnam, 53, guilty of engaging in a seven-year conspiracy to trade on illegal tips from corporate executives, bankers, consultants, traders, and directors of public companies, including Goldman Sachs (GS). It was the largest and most important insider-trading case in a generation. Rajaratnam, a U.S. citizen born in Sri Lanka, gained $64 million, prosecutors said, and at a sentencing hearing scheduled for July 29, faces 19½ years in prison. All told, more than 40 people have pleaded guilty or face criminal charges or civil lawsuits stemming from a nationwide investigation that has roots going back to 1998.
The most striking aspect of the case was the sheer volume of obscure financial-world figures with access to potentially lucrative tips—and an inclination to sell them. "The government's recent insider-trading prosecutions have shined a light on both the recent democratization and globalization of what is allegedly inside information," says Adam J. Wasserman, a white-collar criminal attorney at the Dechert law firm in New York. "It's not just in the hands of CEOs and CFOs anymore."
The FBI's investigation started with Roomy Khan, a former Intel (INTC) engineer who gave semiconductor pricing and sales data to Galleon, according to the government. She later worked at the New York-based hedge fund and eventually cooperated with the government as part of a plea bargain. Among those charged is Zvi Goffer, a 34-year-old day trader known among colleagues as "Octopussy." The James Bond-themed nickname alluded to his many sources of tech industry gossip. He has pleaded not guilty and awaits trial later in May.
The Galleon investigation took jurors into the murky world of expert-network firms, a new breed of middlemen that market nonpublic corporate information. For a fee, the firms connect hedge fund traders with talkative corporate workers. (If this sounds like an invitation to monkey business, it is.) Evidence in the Galleon case showed that one such network, Primary Global Research, paid Manosha Karunatilaka, a former U.S. account manager at Taiwan Semiconductor Manufacturing (TSM), $200 per phone call to reveal production reports on the chipmaker's largest customers. The information went to hedge fund traders. Karunatilaka, 37, pleaded guilty the day of the Rajaratnam conviction. Eight Primary Global employees or consultants crossed the line by divulging confidential information, according to the government.
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