Raj Rajaratnam Fallout Begins In Earnest, Galleon Potentially Sinking
It looked like hedge funds were beginning to claw back the profits and respectability they lost during the banking crisis, albeit with a few scumbags still spoiling the party. Now the industry has been tainted once more by Raj Rajaratnam, who was charged last week in what could be the biggest ever insider trading scam involving hedge funds.
A brief explanation: a big company will make an earnings call every quarter, half or year-end, and if it’s done well for itself, then it’ll be seen as a better investment, people will buy their stocks and the stock price will go up accordingly. Rajaratnam used information given to him by insiders at these companies to “trade ahead” – buy up stocks before the earnings call, and then sell them off once the price had gone up. They also played the same trick ahead of big mergers, acquisitions and joint ventures. The timing of these trades, made just before extremely high-visibility market changes, is so obviously sketch that they were picked up by even the cloth-eared types at the SEC, who often don’t notice a scam even when miscreants deploy a skywriting plane to announce their wrongdoing.
After Rajaratnam bought 400,000 shares in Hilton right before it got bought out by private equity group Blackstone, the SEC clocked him, and spent the next two years assembling a case. Rajaratnam, described as an “extremely likeable fellow” by former classmate and Black Swan author Nassim Taleb, is meanwhile protesting his innocence.
The news had time to percolate through to investors over the weekend, so yesterday, once everyone got back to work, Rajaratnam’s company Galleon was duly scuttled – $1.3bn of the $3.7bn assets under management have been removed by investors. Galleon are now scrambling to find cash to give them, selling off stocks and other assets. “This may shutter Galleon”, one lawyer told Reuters; Bloomberg says that Galleon staff are polishing their CVs in readiness for departure, while other cry.
But while Rajaratnam has got the headlines, thanks to his record $100m bail and links to the Tamil Tigers, the scandal affects many more people. Some of the informants, from intermediaries like Moody’s or the actual companies like AMD and Intel, have already been charged, while managers at fellow hedge fund New Castle have also been charged as part of the same case. At least 10 more arrests are planned.
It’s also another blow for Rajaratnam’s former business school, Wharton, which became known in the late 80s as the “Wharton Hall of Shame” for its churning out of future insider traders. And Sri Lanka’s stock exchange is tanking after the news about their richest son – Rajaratnam may have funded AIDS projects and helped the tsunami relief effort there, but now he’s doing them no favours.
And outside of those getting busted and losing face, there are murmurings that the loss in confidence that the case provokes could lead to over-stringent regulation. This week, US legislators are putting forward a bill that will demand all hedge funds register with the SEC, so the watchdog can monitor their activities and see whether they’re just one big crap-shoot. Couple that with the clamouring about the sector not being socially useful, and it’s clear that despite their recent rising profits and adoration from the man upstairs, the public and the government are still extremely ambivalent about the role of hedge funds.
Posted by Ben Beaumont-Thomas in Hot Money | October 20, 2009 12:22PM |