Raj Rajaratnam and Insider Trading

Group-3 Kamlesh Kumar -11002540 Anu jain-11009726 Md. Abdulla Hoque-11005070 Akeshy Argelwar-11008047

Introductiony In October 2009, the Justice Department charged Raj Rajaratnam, a New York hedge fund manager, with fourteen counts of securities fraud and conspiracy. y Rajaratnam, who was found guilty on all fourteen counts on May 11, 2011, had allegedly cultivated a network of executives at, among others, Intel, McKinsey, IBM, and Goldman Sachs. y These insiders provided him with material nonpublic information.Preet Bharara, the government s attorney, argued in the case that Raj Rajaratnam had made approximately $60 million in illicit profits from inside information.

Cont dy Rajaratnam s conviction in fact falls into a larger post-

recession crackdown on insider trading undertaken by the SEC and the US Justice Department, led by Preet Bharara. y Raj Rajaratnam was the 35th person to be convicted of insider trading of 47 people charged since 2010. This effort to prosecute insider trading has been marked by more aggressive tactics such as wiretapping to prosecute insider-trading cases, which might otherwise be difficult to prove.

THE PLAYERSy Raj Rajaratnam was the Sri-Lankan manager of the

hedge fund Galleon Group, which managed $6.5 billion at its height. y Rajat Gupta is a former director at Goldman Sachs and head of McKinsey consulting. He also served on the board of Procter & Gamble. y Warren Buffet is the CEO of Berkshire Hathaway, an investment company. y Preet Bharara is the United States Attorney for the Southern District of New York.[8]

Facts and Claimsy Facts:------On September 23, 2008, Warren Buffet agreed to pay $5 billion for preferred shares of Goldman Sachs. This information was not announced until 6 p.m., after the NYSE closed on that day. Before the announcement, Raj Rajaratnam bought 175,000 shares of Goldman Sachs. The next day, by which time the infusion was public knowledge, Rajaratnam sold his shares, for a profit of $900,000. In the same period of time financial stocks as a whole fell

Cont dy Claims:------

Rajat Gupta had called Rajaratnam immediately after the board meeting at which Warren Buffet s infusion had been announced, and told him of the money Goldman expected to receive. This information was material to the price of Goldman stock, thus inciting Rajaratnam to make the trade, something he would otherwise not have done.

Insider Tradingy Insider trading may be defined as any form of trading

based on nonpublic information relevant for the fundamental value of a company .Thus, it is an activity founded in asymmetrical information. Section 10b of the Securities and Exchange Act of 1934 governs U.S. insider trading rules. According to Engelen and Liederkerke, Based on this authority, the SEC enacted Rules 10b-5 and 14e-3] Insiders are only liable if they breach a fiduciary duty to the source of the information.

Ethical Analysisy Several academics, including Milton Friedman, have

argued that insider trading ought to be legal. Several other commentators have renewed that argument in articles over the past year, often citing the Rajaratnam case. Their arguments are as follows: y It is difficult to prosecute. y It is a victimless crime. y It increases the information in the market, thus increasing market efficiency.

Insider trading is difficult to prosecute.y This is an empty argument that does not address the

ethics of insider trading and could be used to justify any unethical behavior. Recent empirical evidence demolishes this argument. y The government s new aggressive investigative techniques have made insider trading easier to successfully prosecute. Although Rajaratnam s defense lawyers resorted to the mosaic argument, contending that Galleon s trades were made not on the basis of illicitly obtained information, but hours of diligent research, the jury nonetheless found him guilty

It is a victimless crime:y Trades are almost always made on asymmetrical

information, because not all investors have equal time and money to devote to market research, there is a significant difference between information. Insider trading is therefore not a victimless crime, but rather one in which certain investors lose money by virtue of their inability to access certain information

It increases the information in the market, thus increasing market efficiencyy Instead of making the markets more efficient as

insider trading proponents argue, insider trading makes markets LESS efficient in the long term. Legalizing insider trading has a deleterious effect on market efficiency.

Insider Trading is Illegal and Unethicaly It is unfair. Insiders have access to information that is

not given to the public. Unequal possession of information is an advantage that cannot be competed away because this advantage depends on a lawful privilege to which an outsider cannot acquire Access. y On a utilitarian basis, the greatest good for society is not achieved in the long term. It is true that insider trading may increase market efficiency in the shortterm. Yet, insider trading may in fact, decrease efficiency in the long term.