The strange Raj Rajaratnam case

The Feds actions against Raj Rajaratnam are disturbingly suspect. After missing the Ponzi scheme of the century with Bernie Madoff, how do the Feds choose a pudgy and brown immigrant who has done extremely well to be their poster child of hedge fund insider trading. The New York and Connecticut hedge fund markets are full of well known, highly interconnected managers and traders who push the edges of legality all the time through collusive trading, well placed lies(referred to politely as rumors), and anything else that they can get their hands on through intimidation and just ahead of the market information from brokerage and trading vendors. The Rajaratnam case stinks of race and immigrant fear exploitation, of throwing the public a bone that they will love to chew on without disrupting the political opinion and funds flows from the corrupt and manipulative powers within the industry that have great influence.

Apart from that, the case as presented appears shaky for several reasons. First, insider trading requires that the accused be trading on material non-public information. Proving that information is non-public is the issue here. Information that comes from someone within a company that is known by some but not widely disseminated is the company's problem, a violation of RegFD. Insider trading generally requires that someone related to the company is exploiting "inside" information for their benefit, not a complete outsider who acts because, in fact, the information has become public through a company's violation, inadvertant or not, of the RegFD standard. It is completely unclear whether Rajaratnam has broken any law even if his firm's actions seem to be based on an unfair advantage relative to the broader public. Second, the government's case revolves largely around an analyst who is not directly related to the firm, Danielle Chiesi. She appears to be an industry hustler who is scrapping to be relevant in some way. At both her current residence and her prior one over the last few years she has been sued for non-payment of fees and maintenance. Relative to the many in the industry who have power and influence, she is a minor and unstable player. Third, Rajaratnam has not been accused of defrauding his clients in any way. Finally, in the aggregate he lost money on the "insider trades" that he is accused of benefitting from.

With the "strength" of that evidence, the Feds have acted and destroyed Galleon's business. More than one billion dollars of withdrawals from the Rajaratnam funds have already been requested and most observers have suggested that virtually all funds not invested by Rajaratnam and his employees will leave. The business is destroyed and it is not because investors have an opinion about guilt or innocence. They simply know that once the government decides to destroy someone no good will come of it.

This case stinks. The truly corrupt bullies within the hedge fund industry must love it, a sacrificial lamb on the altar of public opinion now and they can continue business as usual.

As more information or if more information becomes available, aspects of the opinion stated here could change but the overall suspicion voiced here will not.


Postscript---next day news---Roomi Khan, witness #1, is compromised on many fronts by illegal activities, a perfect foil for the Feds