However, the Picture That Emerges from the Charges Is One of a Man Who Cultivated Relationships

October 25 2009

In a classic tipper/tippee insider trading case, the SEC and the Justice Department have charged the principals of the Galleon Group hedge fund with receiving information from insiders that they then used to position themselves profitably in the markets. Called the highest profile case of a generation, it involves the founder and owner of Galleon, Raj Rajaratnam, someone who was known throughout the Silicon Valley and was presumed to preside over a mathematical model that saw his company outperforming others.

However, the picture that emerges from the charges is one of a man who cultivated relationships with young executives at companies in the Silicon Valley and then used them as sources of information from things as simple as which customers and suppliers were doing well to, as alleged, eventually gaining inside information from them. For example, one young executive who was formerly at Intel, Roomy Khan, is identified as an informant in the case and did six months of house arrest in 2002 for passing along inside proprietary information about Intel (where she worked until her termination following the charges of being a tipper then).

Mr. Rajaratnam often paid for the receptions and dinners of young business school graduates in order to gain access to them and whatever information they had. There is a fine line between gathering information and using inside information. For example, a young Hambrecht & Quist trader wrote a letter to the SEC when he overheard a Fidelity broker sharing with a Galleon employee the level of volume Fidelity was trading. The SEC took no action at that time.

Mr. Rajaratnam also apparently ran the same sort of autocratic organization that has been typical of companies such as HealthSouth, Tyco, and others with iconic and charismatic CEOs. He fined traders $25 if they were late to his morning meetings. He called on analysts unannounced to check their levels of preparation on certain companies and then humiliated them if he was not satisfied. In a bizarre incident, he ordered an analyst to buy a black spandex outfit from Lululemon Athletica, something he called research into what was a stock that was really moving. He then made the analyst put on the outfit and walk up and down the conference table as employees laughed nervously. It was only when chief financial officer Rick Scuttle stopped the presentation that the humiliation ended.

The insider trading ring was cracked through informants wearing wires and capturing the exchanges of information in recordings.

What is a tipper? A tippee? What kind of information must be passed?

FOR MORE INFORMATION

Ashlee Vance and Michael J. de la Merced, “Witness in Galleon Case Is Said to Have History of Passing Secrets,” New York Times, October 24 2009, p. B1.

Gregory Zuckerman and Robert A. Guth, “Rajaratname: Relentless Pursuit of Data,” Wall Street Journal, October 24-25, 2009, p. B1.