Employees at Galleon were stunned yesterday when they learned that the hedge fund’s founder had been arrested on insider trading charges.
Officially, the word came from Robert Wood shortly before CNBC’s David Faber broke the news. He walked out onto the trading floor and announced that Raj Rajaratnam had been arrested but that the day would be “business as usual.” The largest hedge fund at Galleon closed the day with its positions slightly down for the day, according to a person familiar with the matter.
Several employees learned of the arrest before Wood made the announcement. neighbours of Rajaratnam had seen the dramatic arrest, which involved dozens of police cars outside his apartment, and told others about it. The word eventually spread to some Galleon employees.
Inside the firm there is some scepticism about the charges against Rajaratnam.
“Why would he cheat to make 20 million when the firm was earning billions each year?” one employee said.
We don’t yet know what inspired Rajaratnam to (allegedly) trade on inside information but the government’s evidence seems pretty compelling. There’s been speculation that Rajaratnam may have just been unable to resist the opportunities to profit from information he learned from insiders. Others have said that Rajaratnam may not have have viewed the trading as illegal.
“He wasn’t doing anything different than everyone else. They’re making an example of him,” a Galleon employee said to us.
There is, of course, another, darker possibility. Although Rajaratnam is only charged with insider trading that returned $20 million, the insider trading may have been much more widespread. It is very typical in criminal cases for the accused to only be charged with a discrete act even if prosecutors believe that there is a much broader pattern of wrongdoing. Career drug dealers, for instance, are typically convicted of discrete acts of possession.
Om Malik yesterday noted that Galleon claimed to use fundamental analysis and trading proficiency to achieve its superior returns. “How do I say it politely? That is all poppycock. For all that analysis was apparently nothing but smoke and mirrors, and instead seems like a case of insider information-based trading,” Malik wrote.
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