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Insider Trading Scandal Shows the Audacity of Greed
Mortimer B. Zuckerman
Time to get tougher on insider trading
The jury's conviction of the
Rajaratnam, considered a
His competitors had long admired what seemed to be a deep set of contacts that he had cultivated inside
A blow has also been dealt to a second argument that insider trading should not be penalized -- that it is impossible to police. Secret recordings by the federal government, beginning in 2008, reveal the mechanisms of fraud as Rajaratnam and other insiders swapped information, discussed recruiting other corporate insiders to provide information, and plotted ways to avoid detection in unsparing detail.
As for wiretapping, most commonly used before to convict mobsters, it is defensible here, too. The prosecutor put it well: It is "not being heavy-handed, it is being even-handed," for these people were adopting "the methods of common criminals."
The tapes included a discussion of ways to throw off a normal insider-trading investigation, proving that the defendant knew that what he was doing was not only wrong but illegal, in a world in which fortunes could be made betting on the short-term stock moves triggered by events such as surprises in quarterly earnings. Rajaratnam convicted himself with his own words caught on the tapes.
Now, many financial institutions, hedge funds, prime brokerages, and research-driven investors will have to rethink their practices. People want to know that the markets are operating fairly and that the police are capable of catching the bad guys. They have long believed that
Everybody knows the main financial groups and the big hedge funds have a huge comparative advantage over the average investor through relationships in the corporate world that provide them with valuable insights about companies, trends, and potential market-moving events. They have the resources to hire consultants to dig up more information. They can hire expert-network companies, which connect large investors with outside experts, and pay them handsome fees for non-public information on stocks whose share prices can quickly turn on tidbits about forthcoming products or financial performance. Given that the supply chain is now predominantly global in nature, the marketing or the dissemination of such material information is beyond the reach and control of U.S. regulators. An employee of one expert-network company was arrested last year and accused of having a group of
Every reputable company and advisory service, including investment banks, must be horrified by these revelations and will seek to make sure it does not happen to them by revising the rules for their director and compliance standards to avoid the breakdowns revealed in this trial. The cracks in governance are big and intolerable. We may even see greater interest in a revived proposal to lay down trading rules for non-public information collected by congressmen.
Insider trading is not research.
The playing field may never be truly level on
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