Galleon Group…Tip of the Iceberg?

by Jacob Zamansky on October 20th, 2009 at 11:08 am : Comments 001

One of the reasons hedge funds have commanded their stratospheric fees is the widely held belief that the people overseeing them are decidedly more brilliant than run-of-the mill institutional or individual investors.   But it has become increasingly clear in recent years that many of the supposedly legendary investor titans aren’t quite as smart as they purported to be.  Turns out, many have figured out a way to rig the system and see everyone else’s proverbial cards before playing their own.

To a layman, this is known as cheating.  On Wall Street, it’s called insider trading.

Trust me on this, the arrest of hedge fund mogul Raj Rajaratnam for allegedly netting $20 million trading on non-public information is just the tip of the iceberg.  Other major hedge funds also have been implicated in insider trading allegations and suspicions have surfaced about some very prominent Wall Street executives.  It’s well known that if you are a big trading macher on Wall Street, you gain access and insight that just isn’t available to even mid-sized institutional investors.  You get Wall Street’s equivalent of the Glengarry Glen Ross real estate leads: the Goldman Sachs weekly “huddle.”

There is sometimes a very fine line between market “color” and “inside information,” and based on the allegations against Rajaratnam and his indicted cohorts, on the surface there appears little doubt that the government has a very compelling case of criminal wrongdoing.  Indeed, the wiretap evidence reveals that some of Rajaratnam’s co-conspirators were clearly aware they were breaking the law; one of them openly feared she would end up like Martha f….g Stewart.”    The U.S. Attorney’s Office is to be commended for bringing this case, and let’s hope that if the accused get convicted, they get put away for considerably longer than the measly 22 months of incarceration meted out to legendary insider trader Ivan Boesky.

Unfortunately, the U.S. Attorney’s office has finite resources and therefore must focus its efforts solely on bringing Rajaratnam and his co-conspirators to justice. What’s needed is a far-reaching Congressional investigation examining how hedge funds garner their information.  Even if you take Goldman Sachs at its word that its weekly “huddle” is merely an exchange of market “color” for the firm’s best customers, the fact remains that hedge funds generating the highest volume of trading commissions invariably get access to the best analysis and insight.  It would be interesting to know if Rajaratnam, or someone from his firm, participated in Goldman’s weekly “huddle”.  If that proves to be the case, then Rajaratnam’s supposedly $20 million of ill-gotten gains likely helped him achieve tens of millions more in “legitimate” profits.

The current laissez-faire treatment of hedge funds by Congress and regulators is reminiscent of what led to the Wall Street Crash of 1929.  All sorts of fraudulent acts were committed by the unregulated banking industry and it wasn’t until Ferdinand Pecora and his famous Pecora Commission exposed the rampant, ongoing fraud that laws were reformed and the SEC itself was created.  Later in his memoirs, Mr. Pecora wrote about the lack of disclosure that led to the crash: “Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies.”

We need a modern day equivalent of the Pecora Commission.  The indictment of Raj Rajaratnam badly underscores the fact that wrongdoing on Wall Street today is likely far more pervasive than ever before.

Filed under Hedge Funds, Investment Fraud, SEC, fraud