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2011-03-03 11:01:01
Insider trading
Mar 2nd 2011, 10:46 by The Economist online
HEDGE funds are often fatefully named. Long-Term Capital Management, a hedge
fund that had to be bailed out in 1998, had a notoriously short lifespan. More
recently the Galleon Group, a large hedge fund named after an old-fashioned
sort of sailing ship, has dramatically sunk. The boss of the fund, Raj
Rajaratnam, and 21 other people have been charged in a sweeping insider-trading
case that has allegedly led to at least $85m in illicit profits.
On March 1st, the Securities and Exchange Commission (SEC) brought charges
against Rajat Gupta (pictured), the former boss of McKinsey, a consultancy. He
is the highest profile corporate executive to be ensnared in the case so far,
having served as a former board-member of Goldman Sachs, a bank, and, until
yesterday, Procter & Gamble, a giant consumer-goods firm.
Mr Gupta was an investor in Galleon and a friend of Mr Rajaratnam, which is why
he tipped him off, on multiple occasions, according to the SEC. For example,
after Mr Gupta found out about Warren Buffett s $5 billion investment in
Goldman Sachs in 2008, he supposedly called Mr Rajaratnam, who bought 175,000
shares in Goldman. All told, Galleon raked in around $15m and avoided losses of
around $3m thanks to Mr Gupta s tips, the SEC alleges.
Mr Gupta fiercely denies the charges and vows to fight them. But the
allegations will permanently tarnish his reputation, and may cause fallout at
the companies he worked. McKinsey, for example, prides itself on advising
bosses discreetly, and rarely even divulges its clients identities. This case
against a former boss won t be good for business. Goldman Sachs, already having
settled a lawsuit with the SEC last year for allegedly duping clients into
buying mortgage-backed securities without enough information, doesn t need to
give investors another excuse to question how information flows on Wall Street.
Mr Rajaratnam, who claims innocence despite the guilty pleas some of his
colleagues have already put forward, is set to face trial on March 8th. With
his day in court so soon, the timing of the SEC s charges against Mr Gupta
probably aren t coincidental. The SEC may be trying to scare Mr Rajaratnam into
a settlement while also bringing down the ultimate corporate insider. It s one
thing to topple a hedge fund manager, but it s quite another to bring down a
major figure in corporate America.