Friday, December 17, 2010

The Galleon Net Widens – Insider Trading or Witch Hunt?

NEW YORK - DECEMBER 21:  Danielle Chiesi, an e...Image by Getty Images via @daylifeIt started on October 16, 2009, when six individuals were arrested for securities fraud and conspiracy. Those accused included executives from New Castle Partners, IBM, Intel, and McKinsey, who have since pleaded guilty.

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?

4 comments:

Carol Kilgore said...

I totally agree with you about punishing the guilty and also about witch hunts. I haven't kept up with this, but I think there is a muddy line on what is illegal and what is immoral. Sometimes they're the same; sometimes not. At trial, it will depend on which legal team presents the best case.

Colette said...

Good point Carol. I fear that this area will become over-regulated and yet it's so fuzzy today.

Anon_e_mouse said...

Not being an expert on the financial industry, I won't comment on whether or not the investigations have gone too far. What is clear to me - from both this scandal and from other situations that I have observed over the years - is that morality seems to be something that was little valued in our society during the past 20 years, and is still not exactly a high priority for many. Perhaps that is one reason why fraternal organizations with a moral focus, such as the Masons (in which I am quite active), have experienced a significant decline in membership in recent decades, and why - as a reaction by many of our younger people who are now coming to value moral conduct - their membership has begun to stabilize, as the number of new members begins to rise (although total membership is still declining).

Carol, I agree that there is a muddy line in terms of what is illegal and immoral, but my approach to that is never to stray over the line between moral and immoral. Then I generally don't have to worry about the legality of what I'm doing, beyond ensuring that I am complying with SOX, 21 CFR part 11, and/or the speed limit (OK, that last one... let's just say that, here in New Jersey, I'm the one being passed on both sides, regardless of which side of the speed limit I'm travelling on). I've turned down one job offer, despite a long stretch of unemployment, because it was clear that I was going to be asked to set my moral compass aside, and I've withdrawn from consideration for a couple of other opportunities for the same reason. But I can live with myself, knowing that I have done the right thing.

Colette said...

Anon e mouse, Good for you for not taking a job that would have compromised your values! I am a firm believer of taking the high road and you are setting a great example!