Galleon insider trading: An unchecked financial cancer that metastasized
Oct 30th 2009 11:00AM
Updated Dec 4th 2009 5:24PM
Some cancers are particularly nasty because they spread so quickly through the body. The same can be said for the way insider trading can spread its black wings throughout the financial system. This comes to mind as one contemplates the latest revelations about Galleon Group, the formerly $3.7 billion hedge fund whose founder, Raj Rajaratnam, has been charged in the largest hedge fund insider-trading case ever. Rajaratnam is out on $100 million bail.
The latest news about Galleon does not expose all the new cancer sites -- but it adds some color to what we already knew. Specifically, it reveals how the SEC failed to investigate Galleon in 2001 after a Galleon associate was convicted of wire fraud, even though a concerned JPMorgan Chase (JPM) analyst reported to the SEC that year that something was fishy at Galleon. And "color" is a key word, because it appears that Galleon and its hangers-on used it as code for insidery information, the use of which to trade may have been in violation of insider-trading laws.
An example of such information -- confidential Intel (INTC) billing and sales reports from 1998 -- is clearly insider information on which it is illegal to trade. But Bloomberg News reports that Roomy Khan, a former Intel employee, faxed that information to Rajaratnam in 1998. Khan pleaded guilty in April 2001 to one count of wire fraud; in 2002, she was sentenced to six months home detention, fined $30,000 and ordered to pay $120,000 restitution.
A decade later, Rajaratnam's cancer cells were still permeating Intel. That's because he had another Intel insider passing him tips. This time, prosecutors allege, it was Rajiv Goel (pictured), managing director of Intel's treasury group, who passed along news about Clearwire Corp. that he learned through investments made by Intel. Rajaratnam used that inside information to make $579,000 -- and he rewarded his informant by making profitable trades for him in Goel's personal brokerage account, Bloomberg reports.
Goel was charged on Oct. 16 with passing tips to Rajaratnam and is now enjoying administrative leave from Intel while free on $750,000 bail.
Not only did the SEC fail to pursue the evidence from its earlier Intel case that would have led it to Galleon, it also ignored JPMorgan's warnings about Rajaratnam's conduct in 2001. FT.com reports that an analyst at a JPMorgan unit charged with spotting trouble at hedge funds found big problems with Galleon. The analyst noted that Rajaratnam had "an axe to grind" and "liked to operate in the 'grey areas'" of the markets.
FT.com reports that the analyst suggested reducing the bank's exposure to Galleon. That would have been good advice. But thanks to JPMorgan's acquisition of Bear Stearns, the firm may be exposed to Galleon through New Castle Funds, Bear's former equity hedge fund group. New Castle employees Todd Kurland and Danielle Chiesi are among Goel's fellow Galleon indictees.
Let's get real. It is highly unlikely that the cancer of insider trading on Wall Street is limited to the people and instances we've learned about so far. But like cancer, insider trading is sometimes hard to find. And it's even harder to prove in court.
The only hope we have to see the stock market restored to a somewhat level playing field is if the SEC keeps indicting people, which puts fear into the hearts of all the other insider traders whom we're not reading about.
Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.