At the center of the Galleon insider trading ring are Raj Rajaratnam, Galleon founder, and Danielle Chiesi of New Castle Partners. Chiesi is said to have formed closed personal (and sometimes intimate) relationships with executives to gather inside information. Rajaratnam alledgedly used that information illegally for business and personal gain. These two have pleaded not guilty, and will face trial in 2011. Bloomberg reports that Rajaratnam’s trial will start February 28th, while Chiesi’s trial starts April 25th.
Of particular interest in this case was the use of wiretaps by the Feds to gather evidence against the defendants. Lawyers for Rajaratnam and Chiesi were trying to get the wiretap evidence thrown out, but on November 24th, NY Times Dealbook reported that the judge ruled that the wiretap evidence was obtained lawfully, and would be allowed in the case. Score one for the good guys.
Those same wiretaps have been instrumental in leading to further arrests, including the arrest of Don Chu, a consultant at Primary Global Research, on securities fraud and conspiracy charges. Primary Global Research links corporate executives and industry insiders with investment managers. At least three hedge funds, including Diamondback Capital Management, Level Global Investors, and Loch Capital Management are also being investigated. These financial institutions need a market research arm, like the services Chu’s firm provides. But are they doing anything wrong?
It seems there is a very fine line between research and conspiracy. One man’s due diligence is another man’s fraud.
Consider this discussion as reported by the New York Times, with experts Jay Fahy and Michael Driscoll. While the speakers are careful to state that the prosecutors must believe they have a solid case, Driscoll notes that these kinds of investigations are cyclical in nature, and that the pendulum is swinging towards more scrutiny of the financial industry.
While those who have followed my coverage of the Galleon scandal know that I have taken a hard line with respect to punishment for those guilty of sharing confidential secrets, I do wonder – are we so desperate to find villains that we are willing to hang anyone who works in the financial industry?
Have the insider-trading investigations gone too far? What do you think?