Who will regret giving insider minnows free lunch?

December 17, 2010

The widening U.S. insider trading probe brought more arrests on Thursday. Three were technology firm employees who, together with another, earned over $400,000 moonlighting as expert consultants. That kind of gig sounds a bit too good to be true. And they are now alleged to have shared inside information with hedge funds and others. But the key question is still which bigger fish the enforcers are after.

Preet Bharara, the U.S. attorney for Manhattan, alleges that staffers at Dell, AMD, Flextronics and TSMC distributed inside information. They got their consulting work through Primary Global Research, a California firm that boasts a network of such experts.

As the scale of the investigation into insider trading becomes clearer, it would be an anti-climax if mid-level executives at tech firms were the ultimate targets. But it’s not clear who is. An absence of evidence isn’t stopping the popular vote going to Steven Cohen of SAC Capital, a big enough fish to own Damien Hirst’s pickled shark as part of a probably unmatched collection of cutting-edge contemporary art. But the reality is that nothing so far goes directly to SAC’s Jeff Koons-adorned lobby.

Perhaps lower profile funds are big enough catches on their own. One known target was Galleon Group, whose founder Raj Rajaratnam was charged more than a year ago with insider trading. Others could be the likes of Diamondback Capital Management and Level Global Investors, two Connecticut funds run by SAC alumni and raided by the FBI last month — though neither has been accused of anything, and they are among many funds, including SAC, who have received requests for information.

It might even be that Bharara fancies changing the way financial business is done, in much the same way former New York Attorney General Eliot Spitzer did with bank research. The use of expert networks may be standard practice these days but it isn’t hard to make it look bad, especially when it involves current employees of the companies being researched. It would, however, be much tougher to make the broader case that piecing together a picture from disparate nuggets of legally-obtained information is shady.

Whether eventually proven to have broken the law or not, the arrested tech experts may now be wishing they’d looked more skeptically at their consulting windfalls. Hedge fund managers may be relieved it wasn’t their turn this time — but they should remember that the best fishermen are usually very patient people.

Comments

It is a case of `Matsanyaya’ matsya means fish nyaya means justice, where big fish swallows the smaller ones. I agree with you, Hedge Fund managers may feel lucky this time but they are always vulnerable, waiting for the tsunami with patience. But please address the issue direct – what’s wrong in getting the insider information and what’s the need for insider probe? The system provides for such misfeasance. It is like match fixing. The team member is bribed to act in a manner the fixer walks away with the loot in a speculative market.

What’s the solution? Fix the system. Correct the situation at the core corporate level. We allow legally loopholes within a balance sheet and then yell about the misuse. It has happened before and continues to happen i.e. Intangible Asset, an oxymoron. This in my opinion singly sucked all the money in the banking system to unproductive enterprises creating a bubble of speculative transactions. Hedge Funds is the outcome of the intangible asset enterprise stoking the fire of greed.

IASB-IFRS is repeating the same error, like the person who sold Eiffel Tower twice, to introduce Hedge Accounting. Please see Exposure Draft Hedge Accounting http://wp.me/p18MVb-5u and comment upon it directly to IASB.

My suggestion is to bring the inside information out, twice over to the public arena by Governance Reporting on a real-time monitoring basis identifying the critical areas: Please see HACCP of Governance http://wp.me/p18MVb-5i and other areas I have covered in my blog.

I do not know whether giving reference to my blog would be considered by Reuters as infringing the House Rules. If so, please do not hesitate to advice me for my knowledge.

Jayaraman Rajah Iyer

Posted by jayaribcm | Report as abusive
 

Wall Street cannot function without “insider” information. It never has and it never will.
The Feds are writing a script for their own morality play. No surprise her. But, changing the rules of the game in mid-stream to keep fines and settlements flowing is making capitalism look bad. Justice is getting even more expensive. And, far too judgmental.
Now, if they decided to go after the originators of the CDO-CDS fraud — the biggest conspiracy in American history — that would be a worthy target.

Posted by Downtowner | Report as abusive
 

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