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[Oct 14, 2011] Rajaratnam Gets 11-Year Prison Term - Bloomberg

Raj Rajaratnam, the Galleon Group LLC co-founder whom prosecutors called “the modern face of illegal insider trading,” was sentenced to 11 years in prison, one of the longest terms ever for insider trading, though less than half of the maximum sought by the government.

Rajaratnam, 54, is the central figure in what U.S. investigators called the largest hedge fund insider trading case in U.S. history. The probe, which leveraged the widespread use of FBI wiretaps for the first time in such an inquiry, led to convictions of more than two dozen people. Prosecutors said he made more than $72 million by using illegal tips to trade in stocks of companies including Goldman Sachs Group Inc., Intel Corp. (INTC), Google Inc. (GOOG), ATI Technologies Inc. and Clearwire Corp. (CLWR)

U.S. District Judge Richard Holwell sentenced Rajaratnam today before a packed courtroom in Manhattan. Holwell, who agreed with prosecutors that Rajaratnam led the scheme and that he obstructed a Securities and Exchange Commission probe, pointed to Rajaratnam’s philanthropy and his diabetes and kidney disease in giving him less time than prosecutors had sought.

‘Lighter Sentence’ “This is a lighter sentence than anticipated,” said Anthony Sabino, a professor at St. John’s University in New York, pointing to the U.S. request for as many as 24 1/2 years. Sabino said the judge still sent a message with the 11-year term. “Holwell is clearly achieving a crucial goal here, that is, telling Wall Street that this kind of criminality will not be tolerated, and will be severely punished.”

Holwell denied Rajaratnam’s request to remain free on bail while he appeals his conviction, and told him to surrender on Nov. 28. The judge said he would recommend sending him to the medical center at the federal correctional complex in Butner, North Carolina. Bernard Madoff, the convicted Ponzi scheme mastermind, is serving a 150-year term at the facility.

The judge also ordered Rajaratnam to forfeit $53.8 million and sentenced him to two years of supervised release after his prison term is up.

“Insider trading is an assault upon our free markets,” Holwell said. He gave Rajaratnam a shorter term than the U.S. sought, citing the defendant’s charitable works and poor health. “Prison provides a more intense punishment for critically ill prisoners,” the judge said.

Rajaratnam said nothing to reporters as he left the courthouse and got into a black sport-utility vehicle.

‘Financial Empire’ “Two years ago, Raj Rajaratnam stood at the summit of Wall Street, commanding his own financial empire,” Manhattan U.S. Attorney Preet Bharara said in a statement after the hearing. “Today, Mr. Rajaratnam stood once more and faced justice which was meted out to him. It is a sad conclusion to what once seemed to be a glittering story.” Bharara said Rajaratnam’s is the longest prison sentence given for insider trading.

The Galleon case helped trigger two other overlapping insider-trading investigations that relied heavily on wiretaps, a tool more commonly used to probe organized crime. In the past 18 months, Bharara charged more than 50 people in the three schemes with insider-trading crimes.

A federal jury in Manhattan convicted Rajaratnam on May 11 of all 14 counts of securities fraud and conspiracy against him. During the two-month trial, the panel heard evidence that he engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies.

‘No Different’ “Raj Rajaratnam is no different from a host of others who falsely attributed impressive investment results to superior research and acumen,” said Janice Fedarcyk, head of the New York office of the Federal Bureau of Investigation. “His considerable fortune was built on a clandestine network of corruption and concealment. Raj Rajaratnam did not merely bend the rules; he broke the law.”

Prosecutors asked for a prison term ranging from 19 years and seven months to 24 1/2 years, citing federal sentencing guidelines and the ‘historic nature of his crimes.”

The U.S. compared Rajaratnam to Enron Corp.’s Jeffrey Skilling, who helped bring down the massive energy trader, and WorldCom Inc.’s Bernard Ebbers, convicted in what prosecutors called “the worst of accounting frauds.”

Skilling was sentenced to 24 years in prison on charges that included fraud and insider trading, and Ebbers got 25 years. The Galleon Group hedge fund manager was also put in the same category as Madoff, whose massive scam they said represented “the worst of Ponzi schemes.”

‘Grotesquely Severe’ Rajaratnam’s lawyers had asked for a sentence below the term sought by the government, one that was “fair, dispassionate and proportionate.” They said the federal guideline range overstated the seriousness of Rajaratnam’s crimes, and called the term sought by the U.S. “grotesquely severe.”

Today, defense attorney Terence Lynam requested leniency for his client, calling him a “kind, considerate, polite, generous and caring person.”

More than 200 people wrote letters to the court on Rajaratnam’s behalf, according to Holwell.

Lynam said Rajaratnam asked family members not to come to the sentencing hearing because of the media attention the case has drawn. Rajaratnam's wife, Asha, however, was in the third row. Lynam also emphasized Rajaratnam’s ill health.

“Any lengthy term of imprisonment would likely shorten his life,” Lynam said. “Based on the conduct for which he was convicted, he does not deserve to die in prison.”

Claiming Rajaratnam’s actions made him only $7.4 million, the defense had asked for 6 1/2 to 8 years, according to a person familiar with the defense case who declined to be identified because the matter isn’t public.

No Parole There is no parole under the federal prison system.

Rajaratnam claimed a flawed loss calculation was responsible for most of the government’s requested prison sentence. Federal sentencing guidelines, which are advisory, increase the recommended term for financial crimes based on the amount of money lost. Holwell held a hearing Oct. 4 to determine the loss resulting from Rajaratnam’s crimes.

“This court’s role is not to validate a prosecutorial public relations effort, nor is it to single out one man to serve as the whipping boy for Wall Street misdeeds,” Rajaratnam’s lawyers argued in court papers.

Calling insider trading “thievery,” Assistant U.S. Attorney Reed Brodsky argued for a longer sentence.

‘Mockery’ “Insider trading simply makes a mockery of the principle that no one individual has an advantage in the market,” Brodsky told Holwell. “It’s completely wrong that it’s a victimless crime.”

Brodsky also said there are prisoners in federal custody suffering from the same maladies that afflict Rajaratnam, who has known about his condition since 2007.

Rajaratnam, who didn’t take the stand at trial in his own defense, was convicted of five counts of conspiracy and nine counts of securities fraud. He still faces a lawsuit against both him and Galleon by the U.S. Securities Exchange Commission.

The far-flung Galleon scandal may have derailed or damaged the careers of executives who weren’t involved in the trading.

Prosecutors said Rajaratnam’s sources of information included Rajat Gupta, who until last year was a director at Goldman Sachs Group Inc. (GS), and Kamal Ahmed, a Morgan Stanley investment banker who prosecutors said passed tips through a Galleon trader. Both deny wrongdoing, and neither has been charged with a crime in the case.

Lloyd Blankfein Witnesses testifying for the prosecution included Goldman Sachs Chief Executive Officer Lloyd Blankfein, who said Gupta violated the company’s confidentiality policies by allegedly telling Rajaratnam about its earnings and strategic plans.

Robert Moffat, a former International Business Machines Corp. executive, was sentenced to six months in prison for leaking tips to Rajaratnam co-defendant and New Castle Funds LLC analyst Danielle Chiesi. Moffat said he had an “intimate relationship” with Chiesi and said she had “played him” to get inside information.

Hector Ruiz, the former chairman of Advanced Micro Devices Inc. (AMD), also gave inside information to Chiesi, according to prosecutors. Ruiz hasn’t been charged with a crime.

Galleon was once among the 10 largest hedge funds, managing $7 billion at its peak in 2008. Rajaratnam’s net worth of $1.3 billion made him the 559th richest person in the world, Forbes Magazine said in 2009.

Before his arrest on Oct. 16, 2009, Rajaratnam claimed that Galleon analysts had an advantage over rivals because most were trained as engineers and all focused exclusively on research.

‘Marketing Hype’ “They don’t get blindsided by the marketing hype,” Rajaratnam said of his analysts in the book “The New Investment Superstars: 13 Great Investors and Their Strategies for Superior Returns,” by Lois Peltz. At trial, Rajaratnam’s lawyers claimed his trades were based on Galleon research.

Adam Smith, a former Galleon trader, testified that Galleon’s edge came from illegal tips from company insiders. Rajaratnam emphasized “getting the number” -- or learning revenue figures before they became public -- from insiders at Intel, Intersil Corp. (ISIL) and other publicly traded companies, Smith said.

“Research is sort of doing your homework ahead of time,” Smith, who pleaded guilty to insider trading and agreed to cooperate with prosecutors, told jurors. “Getting the number is more like cheating on the test.”

Phone Taps Jurors at Rajaratnam’s trial heard more than 40 recordings of the Galleon co-founder, made by the FBI, where he chatted and joked with sources while getting information about sales projections and mergers.

“They’re gonna guide down,” Chiesi told Rajaratnam on July 24, 2008, after she got an insider’s leak that Akamai Technologies Inc. (AKAM) would reduce its forecast. “I just got a tip from my guy.”

Rajaratnam’s lawyers argued that wiretaps shouldn’t be used at the trial because the U.S. failed to disclose key facts about the investigation. Holwell granted prosecutors the right to use about 2,400 recorded conversations between Rajaratnam and more than 130 friends, business associates and alleged accomplices.

Samidh Guha, a lawyer for Rajaratnam, today said the defense would challenge the government’s wiretaps. He said federal statutes don’t authorize their use to intercept insider- trading calls.

‘Different Danger’ “The defendant downplays the seriousness of the offenses while the government declines to draw any distinctions,” Holwell said today. “Insider trading is insidious but poses a different danger in Enron-type frauds and Madoff-like Ponzi schemes. Some distinction, therefore, is reasonable.”

Born in Sri Lanka’s capital, Colombo, Rajaratnam was educated there at St. Thomas’ Preparatory School before leaving for England, where he studied engineering at the University of Sussex. He came to the U.S. to get his master’s of business administration, graduating from the University of Pennsylvania’s Wharton School in 1983.

Two of his Wharton classmates -- Anil Kumar, who became a partner at McKinsey & Co., and Rajiv Goel, who was a managing director at Intel -- testified against him at the trial, saying Rajaratnam corrupted their friendships as he sought them out as sources of secret information. Both have pleaded guilty.

Rajaratnam’s first job after graduation was at Chase Manhattan Bank, where he was a lending officer in the group that made loans to high-tech companies. In 1985, he joined Needham & Co., a New York-based investment bank that specialized in technology and health-care companies.

Electronics Analyst He started as an analyst covering the electronics industry and rose through the ranks, becoming head of research in 1987, chief operating officer in 1989 and president in 1991. A year later, at 34, Rajaratnam started a fund, Needham Emerging Growth Partners LP, according to Galleon’s marketing documents.

Rajaratnam and Needham colleagues Krishen Sud, Gary Rosenbach and Ari Arjavalingam formed Galleon Group in January 1997. By the end of that year, they were managing $830 million, much of it from technology company executives Rajaratnam had gotten to know throughout his career, according to “The New Investment Superstars.”

Bharara’s office has charged more than two dozen people in cases related to Galleon. In June, Zvi Goffer, a former Galleon trader, his brother Emanuel, and Michael Kimelman were convicted of conspiracy and securities fraud. The three men started Incremental Capital LLC after Zvi Goffer was fired by Galleon in 2008.

Lawyer Tips Trial testimony showed the three used tips on pending acquisitions from two lawyers, then working at the Boston-based law firm Ropes & Gray LLP, to profit on trades in 3Com Corp., Axcan Pharma Inc., Kronos Inc. and Hilton Hotels Corp.

Zvi Goffer was referred to by some of his associates as “Octopussy,” according to the government. The James Bond movie allusion sprung from Goffer’s many tentacles reaching for confidential corporate information, prosecutors said.

At least 15 other people were convicted in Manhattan in a third round of insider-trading cases brought by Bharara’s office since November. They involved so-called expert-networking firms, which match industry experts with fund managers.

Trial testimony showed that some employees at public companies, while moonlighting for firms such as Mountain View, California-base Primary Global Research LLC, passed nonpublic information to fund managers for fees.

Goffer Sentence Zvi Goffer was sentenced to 10 years in prison by U.S. District Judge Richard Sullivan. Chiesi was sentenced by Holwell to 30 months in prison. Craig Drimal, a former Galleon trader, was sentenced by Sullivan to 66 months. Jason Goldfarb, who was part of Zvi Goffer’s ring, was sentenced to three years in prison by Sullivan.

Moffat was sentenced to six months in prison by U.S. District Judge Deborah Batts. Mark Kurland, a fund manager at New Castle Funds and Chiesi’s boss, was sentenced to 27 months by U.S. District Judge Victor Marrero.

A former Primary Global consultant, Winifred Jiau, was sentenced in September to four years in prison for passing earnings and other information about Nvidia Corp. (NVDA) and Marvell Technology Group Ltd. (MRVL) to hedge fund managers. Two of those fund managers, Noah Freeman, a former SAC Capital Advisors LP portfolio manager, and Samir Barai, founder of New York-based Barai Capital Management LP, previously pleaded guilty in the case.

Freeman said he made from $5 million to $10 million by trading on Jiau’s Nvidia information.

Portfolio Manager Donald Longueuil, another former SAC Capital Advisors portfolio manager, was sentenced in July to 2 1/2 years in prison for his role in the scheme.

Longueuil admitted that after reading a newspaper article about the probe of Primary Global, he went to his office and took pliers to two drives on his computer, destroying them. Prosecutors said he walked 20 blocks and dumped the parts in four different garbage trucks.

“Chopped it up, chopped up everything,” Longueuil wrote in a text message to Freeman, according to the complaint filed by the U.S. in February.

The case is U.S. v. Rajaratnam, 09-01184, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in Manhattan federal court at [email protected]; Bob Van Voris in Manhattan federal court at [email protected]; David Glovin in Manhattan federal court at [email protected].


[Nov 21, 2010] U.S. Pursues Sweeping Insider-Trading Probe - WSJ.comBy SUSAN PULLIAM, MICHAEL ROTHFELD,JENNY STRASBURG and GREGORY ZUCKERMAN

Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation, according to people familiar with the matter.

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The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.

The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say.

One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide "expert network" services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.

On the Inside

The New Age of Insider Information on Wall Street.

More from the series:

Among the expert networks whose consultants are being examined, the people say, is Primary Global Research LLC, a Mountain View, Calif., firm that connects experts with investors seeking information in the technology, health-care and other industries. "I have no comment on that," said Phani Kumar Saripella, Primary Global's chief operating officer. Primary's chief executive and chief operating officers previously worked at Intel Corp., according to its website.

In another aspect of the probes, prosecutors and regulators are examining whether Goldman Sachs Group Inc. bankers leaked information about transactions, including health-care mergers, in ways that benefited certain investors, the people say. Goldman declined to comment.

Independent analysts and research boutiques also are being examined. John Kinnucan, a principal at Broadband Research LLC in Portland, Ore., sent an email on Oct. 26 to roughly 20 hedge-fund and mutual-fund clients telling of a visit by the Federal Bureau of Investigation.

"Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information," the email said. "(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web."

The email, which Mr. Kinnucan confirms writing, was addressed to traders at, among others: hedge-fund firms SAC Capital Advisors LP and Citadel Asset Management, and mutual-fund firms Janus Capital Group, Wellington Management Co. and MFS Investment Management. SAC, Wellington and MFS declined to comment; Janus and Citadel didn't immediately comment. It isn't known whether clients are under investigation for their business with Mr. Kinnucan.

The investigations have been conducted by federal prosecutors in New York, the FBI and the Securities and Exchange Commission. Representatives of the Manhattan U.S. Attorney's office, the FBI and the SEC declined to comment.

Another aspect of the probe is an examination of whether traders at a number of hedge funds and trading firms, including First New York Securities LLC, improperly gained nonpublic information about pending health-care, technology and other merger deals, according to the people familiar with the matter.

Some traders at First New York, a 250-person trading firm, profited by anticipating health-care and other mergers unveiled in 2009, people familiar with the firm say.

A First New York spokesman said: "We are one of more than three dozen firms that have been asked by regulators to provide general information in a widespread inquiry; we have cooperated fully." He added: "We stand behind our traders and our systems and policies in place that ensure full regulatory compliance."

Key parts of the probes are at a late stage. A federal grand jury in New York has heard evidence, say people familiar with the matter. But as with all investigations that aren't completed, it's unclear what specific charges, if any, might be brought.


The action is an outgrowth of a focus on insider trading by Preet Bharara, the Manhattan U.S. Attorney. In an October speech, Mr. Bharara said the area is a "top criminal priority" for his office, adding: "Illegal insider trading is rampant and may even be on the rise." Mr. Bharara declined to comment.

Expert-network firms hire current or former company employees, as well as doctors and other specialists, to be consultants to funds making investment decisions. More than a third of institutional investment-management firms use expert networks, according to a late-2009 survey by Integrity Research Associates LLC in New York.

The consultants typically earn several hundred dollars an hour for their services, which can include meetings or phone calls with traders to discuss developments in their company or industry. The expert-network companies say internal policies bar their consultants from disclosing confidential information.

Generally, inside traders profit by buying stocks of acquisition targets before deals are announced and selling after the targets' shares rise in value.

The SEC has been investigating potential leaks on takeover deals going back to at least 2007 amid an explosion of deals leading up to the financial crisis. The SEC sent subpoenas last fall to more than 30 hedge funds and other investors.

“Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information.... We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web.” John Kinnucan, of Broadband Research, in an Oct. 26 email to clients

Some subpoenas were related to trading in Schering-Plough Corp. stock before its takeover by Merck & Co. in 2009, say people familiar with the matter. Schering-Plough stock rose 8% the trading day before the deal plan was announced and 14% the day of the announcement. Merck said it "has a long-standing practice of fully cooperating with any regulatory inquiries and has explicit policies prohibiting the sharing of confidential information about the company and its potential partners."

Transactions being focused on include MedImmune Inc.'s takeover by AstraZeneca Plc in 2007, the people say. MedImmune shares jumped 18% on Apr. 23, 2007, the day the deal was announced. A spokesman for AstraZeneca and its MedImmune unit declined to comment.

Investigators are also examining the role of Goldman bankers in trading in shares of Advanced Medical Optics Inc., which was taken over by Abbott Laboratories in 2009, according to the people familiar with the matter. Advanced Medical Optics's shares jumped 143% on Jan. 12, 2009, the day the deal was announced. Goldman advised MedImmune and Advanced Medical Optics on the deals.

A spokesman for AstraZeneca and its MedImmune unit declined to comment.

In subpoenas, the SEC has sought information about communications—related to Schering-Plough and other deals—with Ziff Brothers, Jana Partners LLC, TPG-Axon Capital Management, Prudential Financial Inc.'s Jennison Associates asset-management unit, UBS AG's UBS Financial Services Inc. unit, and Deutsche Bank AG, according to subpoenas and the people familiar with the matter.

Representatives of Ziff Brothers, Jana, TPG-Axon, Jennison, UBS and Deutsche Bank declined to comment.

Among hedge-fund managers whose trading in takeovers is a focus of the criminal probe is Todd Deutsch, a top Wall Street trader who left Galleon Group in 2008 to go out on his own, the people close to the situation say. A spokesman for Mr. Deutsch, who has specialized in health-care and technology stocks, declined to comment.

Prosecutors also are investigating whether some hedge-fund traders received inside information about Advanced Micro Devices Inc., which figured prominently in the government's insider-trading case last year against Galleon Group hedge fund founder Raj Rajaratnam and 22 other defendants.

Fourteen defendants have pleaded guilty in the Galleon case; Mr. Rajaratnam has pleaded not guilty and is expected to go to trial in early 2011.

Among those whose AMD transactions have been scrutinized is hedge-fund manager Richard Grodin. Mr. Grodin, who received a subpoena last fall, didn't return calls. An AMD spokesman declined to comment.

Write to Susan Pulliam at [email protected], Michael Rothfeld at [email protected], Jenny Strasburg at [email protected] and Gregory Zuckerman at [email protected]

Rosalind Rossi Newton

It is about time someone watched Wallstreet more closely. The current market rules and practices were not made for the current high speed computer manipulation. Back in the late 1980s and early 1990's there were analysts warning of what was to come. Insider trading has always been a problem I wonder if they are out for another Martha Stewart while overlooking the main manipulators.

Laura Smyser:

The amount of dishonesty in our society is frightening. I hope they all go to jail for a very long time.

Jeffrey Hatmaker :

We all hope they go to jail for a very long time, but they won't!

Lazar Andreev:

Goldman Sachs are the KINGS of the insider trade. How do you think they make their money? People come there for merger advice, then some trader on the other side hears the whispers floating over the very porous Chinese Wall, if not outright tips and lo' and behold the trading unit is raking in GREAT profits. Then everybody else on Wall Street is wondering "These Goldman traders are so smart! I want to be like them." and of course Goldman enhances their aura by hiring a couple A students from Indian origin in IT so that they can appear "smart", "global" and "politically correct". What a charade!

Until that company is split in half the American investor is routinely getting screwed.

Karen Powell:

It is good to see investigations like this.

I hope every crook is uncovered and prosecuted to the maximum extent of the law. If the law does not go far enough to prosecute with more than what amounts to an insignificant punishment, I hope for a change in law to make penalties so severe that they effectively work to keep dishonest people honest.

While changing the law to include stiffer penalties, I think we should also change it to include insider trading within our Congress. We need to crack down on those crooks, and their insider trading based on information gained while serving in the legislative body too! Our legislators should not be outside the reach of law due to their service roles in government that also gives them “inside information”.

The financial services sector needs cleansing. It is filthy and rife with corruption. Yet, it serves a valuable role to society. We rely on this sector for banking, pensions, IRA’s, 401k’s, 403b’s, Health Savings Accounts, 529 plans, and various other instruments intended to build financial security for specific current and future needs. George Bush proposed giving Americans greater freedom over investing our Social Security payroll withholdings, a good thing in my opinion. However, given the corruption in NYC and on Wall Street, we cannot help but recognize that Americans take on huge risks when using the very investment tools given us, solely because of the corruption on Wall Street, the very corruption that brought on the problems with the mortgage industry, insurance industry, AIG, and trading of mortgage-backed securities and credit default swaps.

There is no way that Americans can obtain security over their investments as we plan our futures when corruption is so rampant within the very sectors that give us the tools we need. Thus, let us clean it up…and in a BIG way! While purging the filth from banking, health care, insurance, and mortgage industries, sweeping Wall Street clean of corruption, let us also engage our Congress to ensure that ample regulations, enforcement, and penalties are in place to give Americans greater freedom over our own lives and futures. Let us ask our Congress to revisit George Bush’s proposal to allow us to direct our own Social Security payroll withholdings to investments we choose. Let us push them to give every American the right to own Health Savings Accounts and purchase private health insurance rather than relying on employer-provided group plans during our working years and on the federal government during retirement. Let us require maximum enforcement of maximum penalties needed to restore America to the integrity it needs that enable the country to give the people our personal freedom without jeopardizing our personal security.


Rajaratnam alert Be afraid, be very afraid by Gwen Robinson

Oct 19 | FT Alphaville

Are we talking about mobsters or investors - or an Elmore Leonard potboiler?

Much was revealed over the weekend about the circumstances leading to Friday’s arrest of billionaire investor and founder of the Galleon Group, Raj Rajaratnam, and various associates.

For obvious reasons, we’re not commenting on the veracity of the charges. But what is really worth noting is the unprecedented - and extensive - use of wire taps and other gum-shoe methods so beloved of Hollywood vice-and-action movies - to ensnare Rajaratnam and others.

And just like mobsters who squeal when the screws are tightened, the operation by US prosecutors also relied on crucial co-operation by associates and former colleagues, some of whom taped conversations with Rajaratnam.

As the FT adds: US investigators are now seeking to bring high-profile targets to book in the manner in which they targetted Wall Street rule-breakers such as arbitrageur Ivan Boesky or so-called junk bond king Michael Milkin in the 1980s.

Still smarting from the storm of criticism over their slowness to bring Bernard Madoff and his mega-Ponzi scheme to trial, US prosecutors are clearly anxious to trumpet their Rajaratnam bust and use it to warn other wrongdoers that this time, they mean business - and they have teeth.

Indeed, Bloomberg reports that US federal investigators are now poised to file charges against a wider array of insider-trading networks, some linked to the criminal case against Raj.

The pending crackdown, based on at least two years of investigation, targets securities professionals including hedge- fund managers, lawyers and other Wall Street players, the people said, declining to be identified because the cases aren’t public. Some probes, like the one that focused on Rajaratnam, rely on wiretaps. Others stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments

Sensational stuff eh? More arrests, more bugging. This Wall Street meets the The Wire!

But taking a different tack, the Wall Street Journal, asks in editorial whether this really is anything more than a garden-variety insider trading case. (Emphasis ours).
(U.S. Attorney Preet) Bharara made much of the fact that the case was broken with the help of wiretaps, which are more typically used against the mob or terrorists. The U.S. attorney’s implication is that Wall Street ought to watch out because prosecutors are now treating hedge funds like the mafia. This will play well politically given the public’s anti-Wall Street mood, yet probable cause to justify the wiretaps seems to have been provided thanks to the oldest method in law enforcement—a so far unidentified informant who once worked at Galleon.

And notes that information is the lifeblood of share trading.

Information is the lifeblood of professional stock trading, and the kind that most people exchange is entirely legal. We will be looking in particular to see in the coming weeks how intimately the men from Intel, IBM and McKinsey were involved in the alleged conspiracy. We remember from the Boesky case that prosecutors weren’t above interpreting ambiguous statements as proof of criminal intent.

However, the Rajaratnam case has revealed  a fascinating picture of how prosecutors built their case against Rajaratnam using extensive wire taps and tip-offs from associates.

And then there is the intriguing matter of costs; the investigative operation, using teams of investigators and a variety of surveillance methods, would not have been too distant from the estimated $20m value of the alleged insider-trading ring.

That said, support for the prosecutors, however, is coming from some unexpected quarters. As hedge fund blogger Cassandra  - no stranger to the world of hedge-fund investing -  noted at the weekend  (his emphasis, not ours):
Innumerable traders, hedge fund managers, even entire mutual fund groups use dubious weight-of-money strategies, subvert the market by goosing the marks of existing positions - monthly, quarterly, annually, while corporations continue to surf the line of the ethical to hit numbers, subvert competition - in vain attempts to emulate Raj, or just make a few extra bucks to keep the balls of an unsustainable way of life in the air. The system is built upon it.

However, mark my words: rooting out less-than-salubrious market behaviour will promote entropy and make the market more efficient to the long-term benefit of the greater good. But … they should take heed that entropy works both ways, and those who employ similar tactics should similarly be culpable (were I Sheriff).

We’re not quite sure if “entropy” is the right word here, but we get the general message behind Cassie’s view.


 “I’ll be like Martha ……. Stewart” - FBI cracks alleged Rajaratnam ring by Paul Murphy

Oct 16 | FT Alphaville
Okay, this looks like a big one. The FBI and other US enforcement agencies on Friday moved against an alleged insider dealing ring stretching from Wall Street to Silicon Valley, by way of Bear Stearns, IBM and even a Moody’s analyst.

The court documents are here in the Long Room.  But running through the details quickly…

Mark Kurland and Danielle Chiesi worked for an entity called New Castle Partners, a $1bn equity hedge fund that sat within Bear Stearns Asset Management.  Chiesi was allegedly getting information from one Robert Moffat, who was a senior vice president at IBM.

Their main focus was Advanced Micro Devices, the chip maker, and Akamai, a web application firm.

They are now facing charges after an FBI wire-tapping operation that included flipping at least two alleged insiders, described in court documents as CW-1 and CW-II - these rats cooperating witnesses agreed to hold rigged conversations with various of the accused over tapped lines.

Chiesi is said to have garnered confidential information from unnamed sources at both Akamai and AMD, while she also got inside information on AMD, IBM and Sun Microsystems from Moffat.  She then shared the information with Kurland, and together the two proceeded to trade on it.

Chiesi also shared her info with Raj Rajaratnam, founder of the Galleon hedge fund in Manhattan, whose personal wealth has been put at $1.3bn by Forbes.

Rajaratnam, in turn, is said to have shared what he had on AMD and other companies with the Bear Stearns people. But with Rajaratnam’s phone also tapped by the FBI, a number of his direct associates have also been swept up in the investigation.

The AMD-related trading was linked to AMD’s decision back in June 2008 to start discussions with certain Abu Dhabi-based investors  over spinning out its manufacturing business. People at IBM knew about this because AMD needed certain permissions from IBM concerning technology licences.

Here’s a couple of random selections from the transcripts:

Chiesi:  “You just gotta trust me on this. Here’s how scared I am about what I’m gonna tell you on AMD…September…I swear to you in front of God…You put me in jail if you talk…I’m dead if this leaks. I really am…and my career is over. I’ll be like Martha Fucking Stewart…”

Rajaratnam: “I think you should buy and sell, and buy and sell…On Akamai or IBM, anything, be radio silent. Like, you know, I get shit on lots of companies…”

One point to note here is that this group appear to have been trading away merrily while the whole financial system was going into what looked like a death spiral. Indeed, their alleged profits were severely constrained by the wider market plunge during September and October last year.

It may prove to be the case, however, that they were subsequently caught through their trading in Sun Microsystems around April this year, when CW-I and CW-II were staging monitored calls with the accused.

Meanwhile,  Rajaratnam at Galleon has found himself facing charges relating to his trading in Google, Hilton Hotels, broadband group Clearwire Corp,  and Polycom, a video conferencing specialist.

Allegedly snared in this side of the case are Rajiv Goel, who was a director of strategic investments at Intel Capital, the investment arm of chip maker Intel, and also Anil Jumar, a director at management consultants McKinsey.

With the help of another rat cooperative witness, the FBI raised questions over Galleon dealings going back to January 2006. Goel, meanwhile, used a brokerage account at Charles Schwab.

The Moody’s angle concerns Hilton Hotels.  In early July 2007, a Hilton executive told an unnamed Moody’s analyst that the hotels group would be taken over by Blackstone. The Moody’s analyst then tipped off someone who is acting as one of the FBI’s witnesses who then, in turn, allegedly informed Rajaratnam.

This co-operative witness then allegedly paid the Moody’s analyst $10,000 for the Hilton info.

Next to be snared in all this was Market Street, an investor relations firm which worked for Google. The FBI’s witness claims he/she was tipped off about Google missing analyst forecasts in the summer of 2007 - information that was allegedly passed on to Rajaratnam.

Similar dealings, garnered from wire taps and flipped witnesses are detailed in the court documents, copies of which are available here.

But one other thing worth noting:  the US authorities seem to have moved now because they thought Rajaratnam was about to flee the country.  Monitoring by the FBI indicated he thought a former employee of Galleon might be wearing a wire .

Then, on Thursday, it emerged that a plane ticket from New York to London in Rajaratnam’s name  had been purchased for travel today…

Related links:
Galleon founder charged with insider trading
- FT
Galleon’s Rajaratnam Charged in Insider Trading Scam
- Bloomberg
Camo-Loving Raj Rajaratnam Sold Out By Ex-Employees?
- Dealbreaker
Raj Rajaratnam, Founder of $3 Billion Galleon Group Hedge Fund, Arrested
- Clusterstock


The devil made me do it Shpigelman claims he was “intimidated and flattered” into spilling info to insider trading ring Wall Street Folly

Stanislav Shpigelman, the former Merrill Lynch analyst at the center of an insider-trading ring, is arguing that he was "deceived, intimidated and flattered" into providing the illegal information to his cohorts, according to a recent legal filing.

The former mergers and acquisition analyst – long one of the most sensitive posts on Wall Street – Shpigelman was sentenced to 37 months in prison last month for his role in a wide-ranging insider trading plot.

He provided the tips for collaborators and former Goldman Sachs analysts David Pajcin and Eugene Plotkin to trade on.

In papers filed last week seeking clemency, Shpigelman’s lawyer paints a picture of a man whose initial mistake in providing illegal information was compounded when his associates in the ring used intimidation and deception to draw him in further.

Where, oh where is David Pajcin The former Goldman analyst - Eugene Plotkin’s insider trading ring co-conspirator may or may not have fled the country Wall Street Folly

Submitted by WSF on 11/04/2008 One Comment

It's been ages since we've heard anything about any of the guys from the insider trader ring that included former Harvard
educated ballroom dancer extraordinaire
and wannabe
Eugene Plotkin, who was one of the masterminds of the well
publicized global insider trading ring uncovered in 2006 featuring strippers,a Croatian seamstress, a U.S. Postal worker, BusinessWeek employees and a Russian bath house.  Plotkin was sentenced in January of this year to serve 4 years and nine months in prison, along with a $10K fine and forfeiture of $6.7 million in ill gotten gains.

Now, it seems, his partner in crime, David Pajcin, a former Goldman analyst has gone missing and is in violation of his probation agreement; it's suspected that he may have left the country. Maybe.  Pajcin had pleaded guilty, cooperated with prosecutors, and was also sentenced in January to around 2 years in prison –  time he'd already served.  So if he's fled, it's unclear why, since he wasn't facing more jail time.  Bizarre.  There's gotta be more to this story.  According to Bloomberg:

Pajcin, who according to prosecutors has family in Croatia, was required to remain under supervision of a court probation officer for three years after being released. In a letter yesterday to a judge in a related civil case by the Securities and Exchange Commission, Scott Black, an SEC trial lawyer, said the U.S. Attorney in New York told him that Pajcin “is in violation of his probation.''

Prosecutors and Pajcin's criminal lawyer, Jesse Siegel, “believe he is no longer in the country,'' Black wrote in the letter to U.S. District Judge Kimba Wood.

“I have no idea where he is,'' the attorney said, adding that Pajcin faces additional jail time for violating his probation. Siegel said he never said that Pajcin had fled the country.

How ironic and embarrassing: 2 SEC lawyers are probed for insider trading

Let everyone use what Wall Street knows Insider trading

International Herald Tribune

R. Foster Winans
International Herald Tribune
A quarter-century after the U.S. Securities and Exchange Commission's chairman, John Shad, declared that he was going to come down on insider trading with hobnailed boots, the practice continues to flourish. Earlier this month, we heard that a band of Wall Streeters pocketed $14 million in allegedly illegal profits based on inside information, and that unnamed traders may have made more than $5 million knowing ahead of time about a buyout offer for Texas Utilities.The SEC should stop pretending it can maintain fairness in the markets. There are other ways to punish criminal behavior on Wall Street.People invest in the market ...

Former Broker Sentenced to 5 Years for Insider Trading -

Published: February 24, 2009

A former trader who admitted to participating in an insider-trading scheme that made millions was sentenced Tuesday to more than five years in prison.


David Tavdy, 40, pleaded guilty to conspiracy and securities fraud a year ago after he admitting to buying tips from a former UBS executive who sold him nonpublic information about the bank’s stock recommendations. Mr. Tavdy worked for Assent, a broker-dealer.

“I made a mistake, and I regret it,” Mr. Tavdy told Judge Deborah A. Batts of Federal District Court in Manhattan before she sentenced him to 63 months.

Mr. Tavdy and the former UBS AG executive, Mitchel S. Guttenberg, were among 13 people charged in 2007 in what authorities then called one of the most pervasive insider trading rings since the 1980s.

It included former employees of Wall Street businesses such as the Bank of America Corporation, Morgan Stanley and Bear Stearns. All 13 pleaded guilty.

In handing down the sentence, Judge Batts noted that from 2002 to 2006 Mr. Tavdy made “millions of dollars for himself and others by abusing insider information.” She added, “this is not a case of an isolated incident.”

Mr. Guttenberg, a former institutional client manager in the equity research department at UBS, was sentenced to six and a half years in prison last November for informing Mr. Tavdy and another trader early of analysts’ stock recommendations, including suggestions for shares of Caterpillar and the Goldman Sachs Group.

Mr. Tavdy used the information to execute hundreds of securities transactions, earning $10.3 million in illegal profits, which he agreed to forfeit at the sentencing.

The judge ordered him to begin his sentence by April 21 at a minimum-security federal prison in Miami.

A summary in an earlier version of this article misstated the length of the Mr. Tavdy’s sentence. It is five years, not six and a half.

Top Wall Streeters charged in 'pervasive' insider trading ring - Kitco Forums

Submitted by cpowell on 03:14PM ET Thursday, March 1, 2007

By Larry Neumeister
Associated Press
via Yahoo News
Thursday, March 1, 2007

Husband and wife lawyers and 11 top Wall Street workers were charged Thursday with making more than $15 million in illegal trading profit through an alleged federal securities fraud scheme, authorities said.

(If they're found guilty, I hope they each receive the the full 25 years for undermining and damaging investor confidence in an already suspect American Stock Market.)

The crime and opportunity thesis [in Casino capitalism Insider trading in Australia]

Australian studies in law, crime and justice

Published in:
Casino capitalism? Insider trading in Australia / R Tomasic
Canberra : Australian Institute of Criminology, 1991
ISBN 0 642 15877 0
(Australian studies in law, crime and justice series) ; pp 69-78

You can succeed by relying on fundamentals but inside information beats fundamentals.
(A Sydney broker)

The reasons for the apparent proliferation of insider trading both in Australia and overseas are manifold. The recent rash of insider trading activity is often attributed to the level of greed which is said to drive the securities industry. This factor should not be discounted, but it is clear that other factors are also at work not the least of which has been the unprecedented range of opportunities for insider trading in recent years. The relationship between crime and opportunity is well established within the criminological literature but little has been written about how this relationship arises in the context of insider trading, a crime theoretically punishable theoretically until recently by five years goal and/or a $20,000 fine in the case of individuals and a fine of $50,000 in the case of corporations.

Likely insider trading situations

Almost exclusively, brokers said that insider trading would take place in the market for shares and not in the options market. The range of opinions about the types of shares involved was very wide. On one view, it would depend on "what was flavour of the month". The most commonly identified risk groups were mining, speculative, exploration and gold shares. Various explanations were put forward as to why mining stocks attract insider trading. One broker said that insider trading is most likely to occur in this broad area because "there are all sorts of people on the site". Other reasons were that this is "where there are things like drilling reports" and "a leak from a geologist could create insider trading". Also, "drillers and assayers know and word filters through". As the mining boom of the late 1960s and early 1970s showed, there is ample scope for mine site workers to insider trade or to act as agents for brokers and others in transmitting the latest data.

Among the less specific opinions was one that insider trading is more likely in new, up and coming super stocks which involve newer players". It was said to occur "in less professional areas where there are more opportunistic stocks". A Melbourne broker said that it is more likely in relation to "smaller less frequently researched stocks, rather than larger [company securities]". An obvious point often referred to is that for insider trading to be successful, it is necessary to move the price and in this respect gold mining stocks were described as the most reactive to any information. Where the companies have lower capitalisation insider trading will have greater effect on prices and it is easier to move prices of these stocks. Shares in entrepreneurial mining companies, described as Western Australian cowboy companies, and perhaps in high technology companies, are said to be tightly capitalised and likely to move quickly on a rumour. The number of people in a company was also said to be a factor as "insider trading tends to occur more in smaller companies controlled by one or two people" or in second board stock "which is more tightly held by a small group of people".

There was no consensus amongst brokers about whether insider trading is more or less likely in second board stock. But despite their differences on this point most brokers shared an uncomplimentary opinion of second board companies. However, the financial advisers agreed uniformly that the area of the market where insider trading is most likely to occur seems to be in the lower quality stocks, such as the speculative, mining and second board stocks. An interesting observation was that originally insider trading was limited to tightly held stock, but in the last two years vast amounts of money have been available and this leads to more insider trading. Cross directorships, trading on rumours, stocks that respond to good news, and stocks whom players are share trading to enlarge their business profits, were seen as situations which led to insider trading. There was no common view among Stock Exchange officials on this matter.

The general view among the market observers was that insider trading is more likely to happen in lower quality stock. One observation was that insider trading occurs across the whole spectrum but another was that "it is less likely in trading bank stock. It happens on a bulk scale in speculative stock. The second board is an invitation to misbehaviour". A journalist said that "insider trading occurs even in reputable companies and share dividend schemes using options are the likely methods". The views about the second board were as conflicting here as they were amongst other groups. On the one hand "the second board is not deep enough", and on the other, "insider trading occurs in the second board, but not exclusively".

It was rare to find lawyers saying that insider trading was likely to be found in industrial or blue chip securities. The nearest exceptions to this occurred when they were speaking of takeover stocks generally, although it seemed likely that "insider trading will occur in relation to anything which is volatile". Generally, the lawyers considered that insider trading would be most likely to occur in relation to speculative, volatile, mining, second board, or lower quality securities, or in respect of securities in smaller companies where there was a high level of ownership by a relatively small number of shareholders. To this extent, their expectations were similar to those of the brokers. The regulatory community saw speculative, mining, takeover, high technology and low price/high volume stock as the most likely areas. Gold stocks in particular were often identified. Many of the regulators took the view that insider trading was prevalent "over the whole range of market activity".

It seems likely that insider trading occurs throughout the whole of the Australian securities market, but it is more likely to occur in certain specific areas than in others. The market's evaluation of particular classes of securities, such as mining and exploration stock during the late 1960s mining boom, and high technology and takeover stocks in the early 1980s, gave rise to insider trading which suggests strongly that insider trading is often a matter of opportunity. The extent of insider trading can also be influenced by the volatility of the stock in question and the degree to which the ownership of securities is tightly held amongst a relatively narrow group of shareholders. This is not to suggest that insider trading does not occur in relation to the "blue chip" securities of large public companies, but it is more likely to be successful in moving market prices in lower quality stocks. The likelihood of insider trading occurring in large Australian public companies should not be discounted, especially in takeover situations.

Opportunities for insider trading

Insider Trading has been described as an opportunistic crime. It is carried out when an opportunity presents itself and by persons who take advantage of the opportunity. The difficulties of quantifying the extent of insider trading and perhaps in detecting it, might be due to the opportunistic and random nature of the practice. It was therefore of particular interest to find out what opportunities existed for insider trading. The first questions on this topic asked interviewees about the frequency of conflicts of interest arising from access to price sensitive information. The brokers reported that conflicts of interest were a constant factor in the industry or, at least, that they were very common. They were said to arise especially when a broker is engaged in corporate advisory work. It was claimed that these conflicts were usually resolved properly. In the context of conflicts it is useful to refer to comments with respect to the treatment of information gathered in the course of research, especially information provided to brokers by listed companies. A Melbourne broker explained that in his firm, "any research undertaken by the firm goes back to the company first". The same practice is followed by another Melbourne firm where "the research information is kept secret until it is checked with the company and then it is published".

It was of interest to establish whether there is any house trading by brokers on the information collected by them in the course of research. Several brokers explained the position in their firms and at the same time described the process of gathering information. A Sydney broker responded, "some companies refuse to see brokers; they rely on section 128 to avoid them. Others, with less market status, are anxious to see them to build up the share price. Of those who talk, it is amazing what they say, but some companies do not tell the truth. There is a great deal of monitoring of companies these days. Here, there is no house trading but some institutional analysts are not prevented from trading". Another perspective on the practice was obtained from a senior broker who said that "market research is done in the hope that it picks up price sensitive information. This is only ever done on a formal basis; it does not disclose inside information. The information is ultimately used by the firm to disseminate to its clients. The firm does not trade on this information but we will pass it on early to institutions. Trading on research information is common elsewhere, especially in those stocks where a small amount could move the price".

Another explanation of how research information is dealt with was provided by a broker who responded that "research obtains price sensitive information but how often is it inside? At presentations the companies should be more guarded. Information that is not generally available to the public comes out. The information then goes to clients. In this firm advisers would not go out and buy shares; the house would buy shares and disclose to clients that it is selling as a principal. It is more likely in small firms for brokers to trade on research information". An enigmatic statement was that "companies are always giving information but it is not insider trading. The research reports go to clients. Trading by the house before advising clients could go on but the information could be wrong or your interpretation wrong. Profit forecasts do not affect prices much".

Another insight into industry practices came from a Sydney broker who asked, "how often is information from research price sensitive?" He pointed out that "high level executives do not give much away" and asked, "is it inside information or smart analysis?" In his firm, "there is no house trading on this information - it goes to the client first. It would be stupid to breach trust. Not many brokers have the same degree of self-control. This firm is always aware of surveillance and the potential danger to its business". Perhaps the frankest exposition of the treatment of information gathered from companies came from a broker who told us that he sees companies "at least once a week and gets superior information. Some managements talk freely and you get price sensitive information from them. With research information we either trade for the house or send it to institutions. We trade in big companies only if it is inside information from leaks from banks or advisers. It will be a problem with screen trading. All companies try to bull the price of their shares". When financial advisers were asked about the frequency of conflicts of interest, the overwhelming view was that it was a common event. There was little comment about the way in which such conflicts were resolved but it was interesting to note that the accountants made similar replies to the effect that, "professionals don't find it a problem". The merchant bankers suggested that they can handle conflicts better than brokers.

The response to this question from the Stock Exchange officials suggested that they are not close enough to the daily workings of the market to be able to comment accurately. On the subject of the use of research, one official felt able to tell us that "in section 128 terms, brokers do engage in insider trading but some of the information could be found out by individuals". He admitted having "some difficulty with the practice of trading first before passing on the information to clients. It is unwise and unethical". From what the market observers reported, it seems that conflict of interest is ever present. When asked about the treatment of price sensitive information gathered during market research, the answers provided were varied. One observer reported that he was "not able to say how often price sensitive information is given out by companies". Another of the group was of the opinion that "brokers obtain price sensitive information but it is not devastatingly inside information. They probably trade on it and then pass it on to the client. Small investors are not treated as well. Some brokers are subsidiaries of the companies whose shares they are ramping". A more emphatic response was that "research is used before it is made public". But even stronger was the explanation that "analysts quite often get price sensitive information; boards tell them what they want to tell them; circulars are speculation, puffery, to get the price up. Larger companies are better scrutinised and much cleaner in insider trading terms. I would not be surprised if there is house trading nor if there was passing on to affiliates. This is consistent with the ethical standards in the broking world". An authoritative explanation came from the ex-broker who reported that "talks with companies are directed at getting sensitive information. A skilful broker will get it wittingly or unwittingly. Brokers do house trade on it. They buy shares to provide them to persons who are acting on their recommendation".

The lawyers were able to appreciate the issue of conflicts better than other groups in the study. Their views were that conflicts of interest are a particular problem for persons in company management who trade in shares. Brokers were also identified as a group for whom conflict situations were common and several lawyers pointed out that brokers tend not to be able to manage such situations well. While the regulators considered that conflicts were not likely to arise in CACS, they tended to the view that conflicts would be common in the private sector for merchant bankers, advisers and within companies. One assessment was that "such conflict is probably quite frequent, it depends on the opportunities which arise".

Insider trading and corporate control

A view is sometimes put that traders deliberately build up their holdings in order to obtain price sensitive information to assist them in their trading. The almost universal view amongst brokers was that traders would not seek a place on the board solely as a method of obtaining price sensitive information. The main reasons for such a view were that "it is an expensive way of doing it; a long way for a quick trade" as one broker put it. Once on the board, "your hands are tied" said another broker. Those who did not dismiss the possibility said that "it could happen" and that "it is not common but it certainly happens" or that it might happen "in smaller companies".

The qualifications to some responses provide insights into the process of obtaining information. A Melbourne broker responded that "boards do not necessarily know everything; the information flow is controlled by CEOs and accountants. It is not an efficient way of obtaining information". A Sydney broker explained that "a lot of information is wrong. Banks get better information than brokers; auditors get better information; lower level people get information probably before the directors do". The ease of obtaining price sensitive information was referred to by one broker when he responded that "some brokers might take this approach but it is too expensive. Non-brokers can obtain information and do research without going on to the board" Just how easy this was, was demonstrated by the comment that "brokers can go to the company and get information".

This question also yielded some insights into how insider trading is conducted. A Sydney broker responded that "most is unplanned, it depends on information falling into your lap". According to a Perth broker "it is easier to insider trade off the board [of directors]" and according to another "it is sometimes better not to go on to the board". A Perth broker expressed the opinion that "going on to the board does not give rise to an insider trading problem, it is more a long-term propositions.

Most of the financial advisers thought that it was not common to build up holdings in a company merely in an effort to obtain access to price sensitive information. Going onto the board was either a very expensive way of obtaining information or a means of achieving other goals such as the control of the company. The majority view of the ASX officials was that this does not happen, "[b]ut, a person would be dumb not to use a position on the board or to ignore information".

The market observers had similar views to other groups. A wide range of views were provided by them. It was said to be "quite common" or "routine", that "it happens in second board and lower main board companies" and that "it often occurs". A different view was that "it is done mainly to get control and participate in the company". Another observer repeated the point that "it is a very expensive way of doing it. The board is the last place to do it". One of them responded that "they don't really need to, they can use contacts as Boesky did".

Some lawyers shared the view that "some people who have got on to major company boards have only paid lip service to insider trading controls", but the more common view was that it would be a very expensive way of trying to obtain price sensitive information and that "there are usually better ways of getting price sensitive information". The regulators likewise felt that getting onto the board for this purpose would be rare because, as one regulator observed, "persons who insider trade can obtain the inside information without being on the board". Once on the board, additional constraints upon the traders are seen to operate - "... once a person is on the board he is an insider and the risks of being caught increase".

Is price sensitive information necessary for success?

For the most part, brokers believed that it was possible to succeed without access to price sensitive information and that success comes from relying on fundamentals. A Sydney broker thought that "price sensitive information is just a help. It is not vital". Another of his colleagues went so far as to say that "it is probably better not to rely on it". One surprising view was that "inside information is not important at all" to success in the stock market. Price sensitive information was, however, generally seen as valuable, particularly as fundamentals are of more long term importance. Price sensitive information is seen to be very important for making short term profits but over the long haul, success is seen to be based on the fundamentals. Access to price sensitive information, but not necessarily inside information, will enhance the prospects of success. For quick profits, it appears necessary to have access to price sensitive information.

The almost unanimous view of the financial advisers was similar to that of the broke price sensitive information is not necessary for success. Good research, astuteness, and relying on the fundamentals were mentioned as the factors for success. It was pointed out by some that price sensitive information is not necessarily inside information and that if a person has access to such information the chances of success are greater. Likewise, the most common view of the market observers was that success is possible without price sensitive information and that the approach of relying on fundamentals was the best method for success. The view that price sensitive information was not essential was also held by most of the lawyers.

The general view amongst Stock Exchange officials, predictably, was that success is possible without price sensitive information. One view was that "you can succeed without it. The Stock Exchange runs not on facts but on fashion - there is always good value stock that is ignored. Success does not depend on insider trading". The regulators' majority view was that it was possible to succeed without access to price sensitive information, but some had serious qualifications and there were a good proportion who doubted the possibility of success without it, especially in the long term.

Market conditions and insider trading

The overwhelming view within the broking group was that insider trading was more likely to occur during periods when the market is very active in a bull market and when there are takeovers. Most brokers felt that takeovers were more likely to occur during bullish market conditions. A bull market was said to be the most likely time for insider trading to occur because, "there is more activity" and "more people are interested". A development of this theme was that in a bullish period, the level of activity means a lower chance of detection. Special events, such as "during periods when there are takeovers and discoveries, special breakthroughs or sudden developments" were seen as likely to contribute to the level of insider trading. A comment consistent with the majority view was that insider trading "will occur in any market, but it can be pin-pointed more in a bear or drifting market".

The financial advisers said that active markets and periods during which takeovers and major reconstructions were taking place were more likely to sustain insider trading. One fund manager thought that it was more likely to occur in "a bear market where assets have been undervalued". A merchant banker summarised the conditions in which insider trading is likely to be found as follows: "in a bull market, when there is good news, and in a bear market, when there is bad news". The Stock Exchange officials were once again unable to express a single community view. "It is more likely in an illiquid market" said one. Another replied that "I cannot say whether it would be a bull or bear market". Insider trading appears likely to be most prevalent during periods of heightened market activity, such as ill a bull market, takeover situations and in situations where major discoveries or innovations were known to have occurred. It was also evident however that insider trading could occur in a bear market, when there was bad news about to break. The level of volatility in the market could also be important in encouraging persons to insider trade. Volatility in prices is a critical factor in undertaking a successful insider trading operation.

Takeovers and insider trading

It has often been said, and other research tends to show, that there is a distinct relationship between takeover activity and the level of insider trading. Participants in the study were asked whether they could think of takeovers where they suspected that insider trading had taken place. Most brokers at least suspected that insider trading is associated with takeover activity. According to one, "takeovers are a great example of insider trading. The majority of cases involve leaks. This is the easiest form of insider trading to prove". Takeovers are regarded as the special events that are likely to move prices and create the climate for insider trading. The basis for this widely held suspicion is the movement in prices prior to the announcement. One broker considered it "interesting that share prices lift pre-takeover". An explanation commonly referred to was the fact that in just about every takeover, there are so many people involved. It is very rare that the price does not move and part of that movement comes from insider trading". According to a Sydney broker, "some merchant banks leak, especially on West Australian deals". Of course, it is possible that share prices move upward in the pre-takeover period because takeover targets are often identified in the course of market analysis and because prices tend to move on rumours of takeovers An interesting feature of this phase of the interviews was that even though participants were not asked to do so, it was not uncommon for them to name specific takeovers where they thought that there had been insider trading and, in fact, discuss chapter and verse the insider trading that took place.

Financial advisers said that there is a link between takeovers and insider trading. Some said that they knew of specific cases while others suspected that there was a link. This question inspired a mixed reaction from the ASX officials. Some quite clearly doubted that there was such a link, but one replied that "in takeovers it is hard to believe that there is no insider trading". The observer group most strongly suspected that insider trading took place during takeovers. One respondent said that "it is frequent and it is demonstrated on graphs". An even more emphatic response was "hell yes-just look at the price movements and turnover a month to two weeks prior to a takeover. The leaks are in the targets - [from their] clerks, lawyers, CACS, bankers and accountants". On the subject of leaks, another view was that "the leaks vary. Sometimes they come from the board but more often well below the board in the advisory groups where there is terrible chicanery". One person who has been associated with many spectacular takeovers reported that it was common for members of the advisory team to be encouraged by directors to engage in share trading. The attitude of lawyers to this link was probably best summarised by a Sydney lawyer who explained that, "you often wonder about some large takeovers. Insider trading need not only occur in small corporations, but associate and warehousing questions are more common in takeovers". The regulators on balance believed that there was a relationship, although there was once again a problem of hard evidence of insider trading being available. It seems clear that there is often a connection between insider trading activity and takeovers. Those closest to the market, such as brokers and merchant bankers, were particularly certain of the existence of this relationship and most other groups on balance also saw a link. Only the ASX officials seemed to question the existence of this linkage. Their views need to be treated with caution in this regard in view of the preponderance of industry opinion to the contrary.

Takeovers were pin-pointed as likely insider trading situations due to the profits which could be made by buying shares ahead of a takeover and because of the long chain of advisers and other persons who are involved in preparing the takeover.

Insider trading as a crime - how serious?

One might speculate whether, if insider trading is not regarded as a serious matter by people within the securities market, it is tolerated more than if it were seen to be serious. It was found that insider trading is generally not regarded by brokers to be serious or as significant as other forms of market conduct. A Melbourne broker responded that he could "think of many more examples of forms of abuse other than insider trading". The more significant forms of conduct were market rigging, which is "more serious and easier to do"; manipulation by false rumours; corporate fraud; churning of clients; staff malpractices; linked advisers; ramping; warehousing, and "other rorts such as loans to directors, and asset purchases by directors in smaller listed companies. The public is being ripped off left right and centre by these rorts". Perhaps the comment that best reflected the brokers' view was that "within the industry we are laid back about insider trading. Warehousing, circumventing the Takeovers Code and the actions of the big players are serious matters. Insider trading is one of a number of imperfections in the market".

Only one of the financial advisers was prepared to describe insider trading as a serious problem but a number shared the view that "in terms of its frequency, insider trading is a small matter but it has the potential to destroy the market". None of the Stock Exchange officials ranked insider trading highly as a problem. One described it as "no more serious than other abuses". On the scale of market abuses one official observed that "insider trading is comparatively minor. Ramping is much more serious for shareholders than insider trading, as many shareholders are likely to suffer. Insider trading gets undue attention because of the public perception. We are very concerned about unenforced legislation or poorly written legislations. The lawyers generally did not rank insider trading as the most important form of market abuse but they acknowledged that it was often a difficult assessment to make. One explained in these terms, "it is hard to say how important insider trading is. Honesty is an important thing about securities markets. Emphasis should be placed upon making people tell the truth. Insider trading is in this category".

It appears that the industry view of insider trading was that it was not as quantitatively serious as other examples of market abuse but that it was perhaps potentially more serious. Some of the evidence that emerged from the round of post1987 corporate collapses supports the view that there are forms of illegal and undesirable activity which are more common. Indeed, the example set by the high profile business identities could encourage insider trading. If it is not regarded as a serious matter in the range of things that happen in the market, where the opportunity arises to engage in insider trading, why not take it? When account is taken of the risks of being prosecuted, the attraction of insider trading is even greater.


The opportunities for insider trading in Australia have been, and continue to be, extensive. This is not simply a matter of greed but the result of a complex web of values, market conditions and professional or peer group tolerance of insider trading. As the Chief Manager of the AMP's Investment Operations Research Division said in evidence before the Griffiths Committee, "(t)he people who would have the clearest idea of what is happening are the people in the broking firms who are taking the orders. Of course, they have to be careful that they do not spoil any good business that they have by dobbing anybody in" (Griffiths Committee, Hansard, p. 207).

The frequency and extent to which conflicts of interests occur within the securities industry are such that many cannot handle these conflicts well. This was particularly said of brokers, especially those who do not have a great deal of background and training in the industry. Price sensitive information gained on a selective basis from corporations seems to be widely used for principal trading especially by brokers and financial advisers, who not infrequently trade in this way before making such information public or releasing it to clients. This is an institutionalised opportunity for insider trading. Insider trading is not likely to be the main motivation for those seeking positions on the company boards. There is considerable pressure within the securities industry to obtain access to price sensitive information as mere good market analysis is often not enough to attract clients. Spectacular gains and quick profits are more easily achieved by insider trading but over the longer term the fundamentals are the more reliable route to success.

One of the more blatant opportunities for insider trading arises from the readiness of companies to selectively divulge price sensitive information about their corporation to brokers, institutions and large shareholders. Often there may be good reasons from the company executives' point of view for doing this, but it is nevertheless grossly unfair and is contrary to the notions of a properly informed market. It has been all too convenient for brokers and others who receive such information to argue that the availability of this information does not guarantee a profit or that this information is often misleading or that it is research. Attempts to explain efforts at obtaining such information as the product of good research, are merely rationalisations. There is room for greater control of the release of corporate information to ensure that all investors are given an equal opportunity to take advantage of the market opportunities which this information creates.

The market operates upon the basis of the comforting myth that success comes from market analysis; so long as your market analysis is correct or you study the fundamentals, you will be able to succeed. Brokers clearly have an interest in perpetuating this abstract, theoretical view of markets. Whilst it is true that this method is likely to bring success in the longer term, particularly with blue chip stock, most interviewees acknowledged that resort to inside information is superior to reliance upon fundamentals, particularly in the shorter term. In an over-analysed and competitive market, the temptation for financial intermediaries to obtain inside information is enormously attractive. Ironically, it is industry insiders, those who are arguably in the best positions to undertake analysis of fundamentals, who rely most upon inside information, rumour and herd instincts. Perhaps this is inevitable to a certain degree, but it seems that too much reliance may be being placed upon such short-cut methods for the market to be healthy and for the public to have confidence in it. Many in the industry seem to share this view. More timely disclosure of price sensitive information would reduce the premium value of that information and would reduce both the opportunity for and the scope of insider trading. Such disclosure would, as well, contribute positively to greater market efficiency.

It is no surprise to find that situational factors in the market such as technological and mineral discoveries and company takeovers provide major opportunities for insider trading. A bull market, especially where share prices are highly volatile and there is a great deal of activity, provides many easy opportunities for insider trading. Finally, the apparent tolerance of insider trading and peer group support for insider traders who have not been convicted are important factors in enlarging the opportunities for insider trading. When this is associated with the perception of many market professionals that insider trading is not necessarily the most serious problem facing the market, the risks for insider traders seem to be much reduced. Although insider traders would not concede the point, insider trading is a more significant issue than most other forms of market abuse, because of the potentially devastating effects on market confidence and market participation of perceived widespread insider trading.



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