The New Yorker is one of the best sources of long-form journalism out there. George Packer recently authored an 11,000+ word article on the largest insider trading case in the history of insider trading cases: Raj Rajaratnam’s Galleon hedge fund. Rajaratnam created an elaborate and extensive network of outside consultants and executives at various publicly traded companies that fed him actionable insider information. Insider trading is everywhere you look:
In the language of hedge funds, Galleon’s strategy was to “arbitrage reality” with the consensus on the Street—to find information about a given company that diverged from Wall Street’s view, allowing Galleon to cash in when the company’s stock price rose or fell. At Galleon, this was known as “getting an edge.” The analyst or portfolio manager with the best read on a company was called the “axe” on that stock. The surest way to become the axe was to have a source who passed on information about a company’s earnings, upcoming deals, and other confidential matters. The ultimate edge was insider trading—the acquisition of nonpublic information about a company—and Rajaratnam was the king axe.
The trial of Raj Rajaratnam began on March 8, 2011, in the federal courthouse at 500 Pearl Street, in lower Manhattan. Prosecutors accused him of having made $63.8 million, in profits and averted losses, from insider trading. Forty-seven conspirators, in overlapping networks of insider trading, had already been charged, and twenty-three of them had pleaded guilty.
As someone who has worked with securities litigation and some insider trading allegations in the past, I have a somewhat unique view of the widespread corruption in the world of finance. I’m willing to make the prediction that less than 0.1% of all insider trading eventually gets detected by regulators like the SEC. Part of the reason is that the SEC and other regulators are incompetent (at least this is the general consensus held by the other side of the Street). Another explanation is that insider trading on a small scale is too hard to detect, too hard to prove, and not worth pursuing.
But the biggest reason is that there is just too much insider information in the collective minds of market participants. Think of the people who have access to insider information: auditors at a company engaged in accounting fraud, accountants and other financial analysts responsible for preparing a company’s quarterly financial statements, corporate-level executives involved in major strategic decisions, government regulators responsible for approving a new drug or a transaction, rating agencies, and (especially) lawyers who are involved with all sorts of confidential matters. I myself could be a rich man if I chose to act on some of the unannounced mergers that I have been exposed to. In fact, I bet the average degree of separation to someone who has insider information is less than one: if you yourself do not possess insider information, you probably know someone who does.
Returning to the article:
Bharara referred me to a 2007 poll in which twenty-five hundred Wall Street professionals were asked if they would use inside information to make ten million dollars if the chances of getting caught were fifty per cent. Seven per cent said yes. But, if there was zero chance of getting caught, fifty-eight per cent said that they would break the law.
Read the full article here.
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