Investment bankers, fund managers and stockbrokers around the world will all have one name on their lips today: Raj Rajaratnam.
Overnight, the former billionaire and founder of Galleon Group was convicted of insider trading after prosecutors claimed Rajaratnam made almost $US64 million between 2003 and 2009 by extracting inside information from a network of sources throughout corporate America.
The case relied heavily on hours of taped conversations obtained through wire taps. While Rajaratnam claimed he received information on companies including eBay, Goldman Sachs and Intel from legitimate sources, the tapes told a different story.
Reuters had a great example of the way Rajaratnam worked.
In 2008, he received a call from Danielle Chiesi, a former trader at the New Castle Funds hedge fund and key source, telling him that Akamai Technologies, then trading above $32 per share was set to announce its full-year outlook, with profits set to fall.
“They’re gonna guide down,” Chiesi, who has now pleaded guilty to three counts of conspiracy, told Rajaratnam on July 24, 2008.
“I just got a call from my guy. I played him like a finely tuned piano.”
“I’m short it, you know that, right?” Rajaratnam answered.
“Yeah, but please just give me a chance to short it a little bit… They think it’s gonna go to 25. We just short into this. Short into this.”
Six days later Akamai made its announcement and the stock fell below $26 and Rajaratnam called Chiesi.
“Hi Dani, Raj. I just wanted to say thank you.”
In the world of investing, information is everything. Getting information – and perhaps more importantly processing it – before the next person is a key part of gaining a competitive advantage.
But that information must be obtained legally. What US prosecutors were able to show was that Rajaratnam had accessed “material, non-public information” from company insiders and traded on it for a profit.
Insider trading convictions are reasonably rare, so claiming a big name scalp is something regulators celebrate at any time.
But this case has special significance in the post GFC world. Last year, separate polls found that 90% of respondents believed Wall Street was “rigged” against investors, while 56% agreed with the statement that bankers and brokers “enrich themselves at the expense of ordinary people and have a negative impact on the economy”.
Regulators may be able to start dispelling some of these fears with Rajaratnam’s conviction, as US District Attorney Preet Bharara made clear overnight.
“There are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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