Galleon case: US regulator should be lauded for zeal in enforcing insider trading laws
By Goh Eng Yeow 26 October 2009
The arrest of hedge fund kingpin Raj Rajaratnam in the United States two weeks ago on charges of insider trading may sound at first like just another egregious case of corporate shenanigans on Wall Street.
In fact, it raises much wider issues - lifting the lid, potentially, on the murky world of cosy information-sharing, often at very senior levels.
Indeed, without prejudging the case at hand, it touches on grievances long held by small investors far and wide.
They have long suspected that outsized profits made by a few big-time traders are often due more to their use of inside information than to their investing acumen alone.
In our rumour-driven market, it is common for dealers to tell their clients about the latest ‘hot’ stocks in play and the target prices that these counters are supposed to ramp to.
The eventual accuracy of these ‘rumours’ is often quite amazing.
One classic example is Chartered Semiconductor. In September 2002, the company shocked the market by launching a $1.1 billion cash call, only a week after denying widespread speculation that it was about to do so.
Last month, history appeared to have repeated itself when the wafer foundry announced that it had received a buyout offer from Abu Dhabi-owned Advanced Technology Investment Company - only four months after denying that such a deal was in the offing.
More incredible was the uncanny accuracy of the details contained in a market rumour on the Abu Dhabi-owned firm’s then purported takeover deal. This is surely more than lucky guesswork cooked up by traders with overactive imaginations.
No one is suggesting any illegal conduct whatsoever in these local cases.
But the sort of information-sharing alleged in the Rajaratnam case is certainly an eye-opener in terms of what might conceivably occur.
Here are some of the details:
The 52-year old Sri Lankan-born founder of the US$7billion (S$9.8billion) Galleon hedge fund group faces charges of insider trading - which means, quite simply, using price-sensitive information not available at that time to other investors.
The case alleged by US investigators sheds light on the access to privileged information which many big companies give to organisations like management consultancies and credit rating agencies.
This US case is all the more tantalising as it involves ‘big fish’, unlike most insider trading cases which tend to involve relatively junior bankers or lawyers passing on information on deals, or perhaps a rogue insider at a single company.
In this case, the seniority of the people involved as well as the sheer number of big firms where the betrayals allegedly took place are simply breath-taking.
Those charged with supplying him with inside information included Robert Moffat, a senior vice-president of IBM; Rajiv Goel, a director of strategic investments at the investment arm of Intel; and Anil Kumar, a director at management consultancy firm McKinsey.
Rajaratnam was alleged to have traded on a number of companies - Google, Hilton, IBM and Sun Micro-systems - based on the information furnished to him by a wide range of people - management consultants, credit rating analysts and senior management figures.
The resulting court case may turn out to be a watershed in aggressive enforcement of insider trading.
But what makes Rajaratnam’s alleged actions so different from the practices now observed in most stock markets?
After all, it is usual for analysts and investors to routinely call up their contacts in publicly listed firms to pump them for information. There is also strong evidence that many proposed mergers and acquisition deals are leaked before they are announced.
But the US Securities Exchange Commission (SEC) claimed that the line was crossed when trading occurred based on specific information about pending announcements. These had included examples like when Goel allegedly told Rajaratnam that Clearwire would be receiving US$1billion from Intel in exchange for a 10 per cent stake, or when an SEC informant allegedly told Rajaratnam that Hilton was going private the next day at a price in the mid-US$40s per share.
For small investors, the SEC’s tough action raises hope that the playing field will be levelled a little more in their favour. Above all else, it will ram through the message that no matter how enticing the reward may be, using privileged information illegally to trade does not pay.
In our increasingly borderless world, stocks are often listed and traded on more than one bourse, so even if one jurisdiction fails to give small investors the redress they deserve, another jurisdiction may well take up their cause.
In some cases, regulators have successfully enforced penalties on individuals who live outside their jurisdictions.
In 1999, Mr. Raymond Lum, the boss of construction firm Lum Chang, agreed to pay US$2.25 million to settle a case of insider trading brought against him by the SEC. This had related to the buying of shares and call options in California-based shipping firm APL two days before an announcement that it would merge with Singapore’s Neptune Orient Lines.
Similarly, Mr. David Li, the boss of Hong Kong’s Bank of East Asia, was reported last year to have agreed to pay more than US$8 million to settle an insider trading case linked to News Corp’s purchase of US newspaper publisher Dow Jones & Co.
The US SEC should be applauded for the zeal with which it is moving to enforce insider trading laws - and getting its act together again, so soon after having been caught napping on fraudster Bernard Madoff’s US$50 billion Ponzi scheme.
In doing so, it has set a fine example for regulators elsewhere to take a similarly tough stance against insider trading - or risk looking impotent.
The SEC’s action has come amid a big public outcry in the US over the manner in which some bankers and traders are starting to behave like masters of the universe again, unmindful that they nearly brought the global financial system to its knees last year.
It is a striking reminder that no one is above the law - or above suspicion - where insider trading is concerned.
2 comments:
Lifting lid on murky world of info-sharing
Galleon case: US regulator should be lauded for zeal in enforcing insider trading laws
By Goh Eng Yeow
26 October 2009
The arrest of hedge fund kingpin Raj Rajaratnam in the United States two weeks ago on charges of insider trading may sound at first like just another egregious case of corporate shenanigans on Wall Street.
In fact, it raises much wider issues - lifting the lid, potentially, on the murky world of cosy information-sharing, often at very senior levels.
Indeed, without prejudging the case at hand, it touches on grievances long held by small investors far and wide.
They have long suspected that outsized profits made by a few big-time traders are often due more to their use of inside information than to their investing acumen alone.
In our rumour-driven market, it is common for dealers to tell their clients about the latest ‘hot’ stocks in play and the target prices that these counters are supposed to ramp to.
The eventual accuracy of these ‘rumours’ is often quite amazing.
One classic example is Chartered Semiconductor. In September 2002, the company shocked the market by launching a $1.1 billion cash call, only a week after denying widespread speculation that it was about to do so.
Last month, history appeared to have repeated itself when the wafer foundry announced that it had received a buyout offer from Abu Dhabi-owned Advanced Technology Investment Company - only four months after denying that such a deal was in the offing.
More incredible was the uncanny accuracy of the details contained in a market rumour on the Abu Dhabi-owned firm’s then purported takeover deal. This is surely more than lucky guesswork cooked up by traders with overactive imaginations.
No one is suggesting any illegal conduct whatsoever in these local cases.
But the sort of information-sharing alleged in the Rajaratnam case is certainly an eye-opener in terms of what might conceivably occur.
Here are some of the details:
The 52-year old Sri Lankan-born founder of the US$7billion (S$9.8billion) Galleon hedge fund group faces charges of insider trading - which means, quite simply, using price-sensitive information not available at that time to other investors.
The case alleged by US investigators sheds light on the access to privileged information which many big companies give to organisations like management consultancies and credit rating agencies.
This US case is all the more tantalising as it involves ‘big fish’, unlike most insider trading cases which tend to involve relatively junior bankers or lawyers passing on information on deals, or perhaps a rogue insider at a single company.
In this case, the seniority of the people involved as well as the sheer number of big firms where the betrayals allegedly took place are simply breath-taking.
Those charged with supplying him with inside information included Robert Moffat, a senior vice-president of IBM; Rajiv Goel, a director of strategic investments at the investment arm of Intel; and Anil Kumar, a director at management consultancy firm McKinsey.
Rajaratnam was alleged to have traded on a number of companies - Google, Hilton, IBM and Sun Micro-systems - based on the information furnished to him by a wide range of people - management consultants, credit rating analysts and senior management figures.
The resulting court case may turn out to be a watershed in aggressive enforcement of insider trading.
But what makes Rajaratnam’s alleged actions so different from the practices now observed in most stock markets?
After all, it is usual for analysts and investors to routinely call up their contacts in publicly listed firms to pump them for information. There is also strong evidence that many proposed mergers and acquisition deals are leaked before they are announced.
But the US Securities Exchange Commission (SEC) claimed that the line was crossed when trading occurred based on specific information about pending announcements. These had included examples like when Goel allegedly told Rajaratnam that Clearwire would be receiving US$1billion from Intel in exchange for a 10 per cent stake, or when an SEC informant allegedly told Rajaratnam that Hilton was going private the next day at a price in the mid-US$40s per share.
For small investors, the SEC’s tough action raises hope that the playing field will be levelled a little more in their favour. Above all else, it will ram through the message that no matter how enticing the reward may be, using privileged information illegally to trade does not pay.
In our increasingly borderless world, stocks are often listed and traded on more than one bourse, so even if one jurisdiction fails to give small investors the redress they deserve, another jurisdiction may well take up their cause.
In some cases, regulators have successfully enforced penalties on individuals who live outside their jurisdictions.
In 1999, Mr. Raymond Lum, the boss of construction firm Lum Chang, agreed to pay US$2.25 million to settle a case of insider trading brought against him by the SEC. This had related to the buying of shares and call options in California-based shipping firm APL two days before an announcement that it would merge with Singapore’s Neptune Orient Lines.
Similarly, Mr. David Li, the boss of Hong Kong’s Bank of East Asia, was reported last year to have agreed to pay more than US$8 million to settle an insider trading case linked to News Corp’s purchase of US newspaper publisher Dow Jones & Co.
The US SEC should be applauded for the zeal with which it is moving to enforce insider trading laws - and getting its act together again, so soon after having been caught napping on fraudster Bernard Madoff’s US$50 billion Ponzi scheme.
In doing so, it has set a fine example for regulators elsewhere to take a similarly tough stance against insider trading - or risk looking impotent.
The SEC’s action has come amid a big public outcry in the US over the manner in which some bankers and traders are starting to behave like masters of the universe again, unmindful that they nearly brought the global financial system to its knees last year.
It is a striking reminder that no one is above the law - or above suspicion - where insider trading is concerned.
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