The Historic Verdict Of The Galleon Trial – OpEd


After two weeks of deliberation, a jury in Manhattan agreed on a verdict against the billionaire hedge fund manager Raj Rajaratnam, formerly of the Galleon Group, finding him guilty on all 14 counts of insider trading, carrying a possible maximum sentence of 25 years in prison.  The audacious and surprisingly harsh verdict has already become a media sensation, helped in no small part by a public meltdown by his defense attorney.

Rajaratnam is seen as a symbolic trophy by prosecutors, who in wake of the financial crisis have been zealously investigating Wall Street (the prosecutor’s case featured no fewer than 2,400 secret wire taps), opening up an ideological battle between US Supreme Court and the Securities and Exchange Commission.  The rising star prosecutor Preet Bharara, U.S. Attorney for the Southern District of New York, is proudly certain that justice has been served.  The New York Observer has gone as far as describing him as “gloating” following the conviction.

“The message today is clear — there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have,” he said.  The prosecutor Reed Brodsky echoed these comments: “The defendant knew the rules, but he did not care.  Cheating became part of his business model.”

But even the most dedicated dedicated crusaders against financial crime acknowledge that certain features of the way the Galleon investigation and trial were conducted have send shivers down the spine of Wall Street, blurring the line between sensible enforcement and state interference in the business sector.
Last time I checked in on the Galleon trial for The Huffington Post, I argued that the tactics the government deployed in building the case against Rajaratnam will force a fundamental transformation of how the hedge fund industry manages its compliance and business practices. The Galleon case even had a “Minority Report” aspect:  the investigation started before the crimes were committed.  The trial placed Galleon’s “mosaic” strategy of collecting information through complex expert networks under scrutiny.

All investment ideas will now have to bear detailed paper trails, and electronic communications, from phone calls to emails to text messages, are likely to decrease significantly with a major impact on productivity.  If compliance weren’t already a big issue, it will now be a burdensome cottage industry.  Perhaps worst of all, in the pursuit of enforcement and cracking down against corruption, prosecutors and the elected representatives behind them have indulged in the politics of “greed,” giving the hedge fund industry several big reasons to move offshore.

Let’s be clear that insider trading represents an enormously damaging threat to markets, one that should be more aggressively pursued by the authorities.  The many victims of the criminal ponzi scheme of Bernard Madoff have rightly argued that the SEC failed in its duties. The jury rendered an entirably reasonable and welcome verdict, especially given some of the evidence presented by the capable prosecutors (there was even testimony concerning a tip-off Mr Rajaratnam received from a then board member of Goldman Sachs shortly before Warren Buffett invested $5bn in the Wall Street bank – however his defense lawyer was keen to emphasize that he lost money on other insider trades).  Nevertheless, it is very important that the U.S. government develops good practices in the enforcement arena that prevent these abuses in the financial sector, but without discouraging ethical and proper traders who might find operating in another country much more attractive.

Overwhelmingly, U.S. legislation on financial crime has been historically reactive.  After Enron blew up, we got Sarbanes-Oxley, subsequently transferring a huge load of IPOs over to the London Stock Exchange.  After the 2008 mortgage backed securities meltdown, we got the Dodd-Frank Act and other instruments.  Many of the new laws might make for good politics, and prosecutions like the Galleon case make for good headlines, but unthinking reactive moves don’t necessarily contribute to greater economic security for Main Street, much less to cleaner business practices on Wall Street.  Giving the regulators the ability to wiretap just about anybody and powers to raid offices at a moment’s notice might be good for satisfying public anger, but at what cost to competition?

I’ll share some more thoughts tomorrow when I get a chance, but for now, it should be entertaining to watch the media circus get to work on vilifying Mr. Rajaratnam as a contemporary version of Gordon Gecko.

Robert Amsterdam

Robert Amsterdam is an international lawyer and founding partner of the law firm Amsterdam & Peroff.

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