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Galleon’s edge
The arrest of hedge fund millionaire Raj Rajaratnam on charges that he and his $7 billion Galleon Group hedge fund profited from illegal insider trading will no doubt feed suspicion in some corners about the way hedge funds generate fat profits.
But for anyone to assume that all hedge fund managers owe their success to getting information on the sly is unfair and wrong. The overwhelming majority of hedge funds are only as good as the quality of the research performed by their analysts and traders.
And the truth is the vast majority of hedge funds are rather ordinary. If the majority of hedge funds managers were so crafty, not so many funds would have gone bust last year–or lost bundles of money for their wealthy investors.
The true standouts in the industry are a real minority. Anyone can put together an offering statement, call themselves a hedge fund manager and go out and raise money. That’s one reason why wealthy people and pension funds who throw money blindly at hedge funds without doing adequate due diligence are being plain foolish.
Still, the charges against Rajaratnam and five co-defendants are disturbing. Hubris and greed are powerful motivators. And some hedge funds will stretch, even break the rules to get an edge–even if it’s to book just another $20 million for a fund with nearly $7 billion in assets.
Indeed, it’s worth noting that this isn’t the first time Galleon has been accused of skirting the rules to get an edge.
In 2005, Galleon paid an $800,000 fine to the SEC to settle a civil investigation into allegations it improperly profited from shorting 17 stocks. The SEC alleged the hedge fund violated securities rules by using shares obtained in a secondary offering to cover, or close out, a pre-existing short position on a stock. Regulators claimed that impermissible strategy called “collapsing the box” essentially was a risk-less one and generated $1 million in trading profits for Galleon.
A Goldman trading scandal?
Did someone try to steal Goldman Sachs’ secret sauce?
While most in the US were celebrating the 4th of July, a Russian immigrant living in New Jersey was being held on federal charges of stealing top-secret computer trading codes from a major New York-based financial institution—that sources say is none other than Goldman Sachs.
The allegations, if true, are big news because the codes the accused man, Sergey Aleynikov, tried to steal is the secret code to unlocking Goldman’s automated stocks and commodities trading businesses. Federal authorities allege the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major “financial institution” generate millions of dollars in profits each year.
The platform is one of the things that apparently gives Goldman a leg-up over the competition when it comes to rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and uses top secret mathematical formulas to allow the firm to make highly-profitable automated trades.
The criminal case has the potential to shed a light on the inner workings of an important profit center for Goldman and other Wall Street firms. The federal charges also raise serious questions about the safeguards Wall Street firms deploy to protect their proprietary trading systems.
The criminal case began to unfold on the evening of July 3 when Aleynikov was arrested by FBI agents at Newark Liberty Airport, after returning from Chicago. Aleynikov had just started a job with another firm in Chicago, after leaving the big firm in NY in early June. It appears the financial institution allegedly victimized by Aleynikov had alerted federal authorities that its former employee might be up to no good.
On July 4, Aleynikov was processed on a “theft of trade secrets” charge in a criminal complaint that was filed in federal court in Manhattan. As of this afternoon, he was still being held in federal custody pending posting of bail.
This type of activities supports global recession. Definitely we need a system who will responsible for auditing suspicious activities in trading system.
Regards
http://www.quagnitia.com
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The Wall
I am not pointing any fingers until this plays out. I would say that a hedge fund manager/owner better have some honest people and better know that he is responsible for all his people. Also the officers and board at IBM is responsible for what occured and must be willing to take the responsibility for their employees action. We complain about high corporate salaries. Now it is time for the high salaried people to start earning their money and root out their dishonest employees.