The insider-trading conviction of hedge fund billionaire Raj Rajaratnam is being hailed as proof the government is getting serious about high-level financial misdeeds. Don't believe it. We heard the same sort of speculation after the Enron and WorldCom scandals. As with those cases, this is a situation where the feds simply found a case too good and too big to be ignored.
Rajaratnam was exactly the right defendant in what for him was exactly the wrong position. He had a long history of questionable trading, dating back to the early days of his career with the investment firm Needham & Co. He had a habit of telling people of a rags-to-riches life despite being raised in wealth. He drove people hard and made enemies, as many people in his position will. He was, of course, wealthy beyond what the average juror could ever imagine.
And he unknowlingly went out of his way to convict himself thanks to endless hours of taped conversations where he said things like, "I heard yesterday from somebody who's on the board of Goldman Sachs (GS) that they are going to lose $2 per share. The Street has them making $2.50."
Caught on tape
As St. John's law professor Anthony Michael Sabino put it, "For more than 30 years, the government has had a spotty history in insider trading cases. ... Not so here, because Raj hung himself with his own words, as caught on tape."
There was also the long list of witnesses against him. Many of them, like Lloyd Blankfein, CEO of the aforementioned Goldman Sachs, were themselves absurdly rich and powerful. Many more of them had worked with Rajaratnam for years. Further, the defense did itself no favors by bringing in witnesses who had all received some form of financial compensation from Rajaratnam.
Given all that, what else could U.S. Attorney for Manhattan Preet Bharara say except, "J'ACCUSE!"
Fun with numbers
Bharara has also made much of the fact that Rajaratnam was the 35th person convicted of insider trading in the Southern District of New York in the past year and a half. Clearly proof of how serious the government has become. Of course, 25 of those came out of this one case. That's hardly a broad-based crackdown.
Instead of actual change, expect to hear a lot about "the message" this sends to Wall Street and how it will make people think twice before ripping off the likes of you and me. This verdict may give some folks second thoughts, but they'll also indulge in some first counting -- like figuring exactly how many people have been convicted for insider trading and comparing that to the number of zeros in one hundred million.
The legal way to do insider trading
The inside work will continue. In many ways it already is, now with a legal veneer. How else to describe SecondMarket and other such "shadow market" operations?
Not to fear. Out of concerns about insider trading Facebook, LinkedIn and other such privately held companies going the shadow route are restricting employees from buying stocks before the public can. See! All is on the up and up. Of course, while this does prevent what is traditionally defined as insider trading, it also allows only favored investors to buy before the companies go public.
So, we're only going to tell our friends about it.
Image: Getty Images
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