ShareThisIf investors, executives, lawyers and others with access to material, non-public information about companies hadn't already gotten the message about trading on inside information, last week's conviction of billionaire hedge fund operator Raj Rajaratnam certainly got their attention.
Rajaratnam, 53, was convicted of making more than $50 million in gains -- or avoided losses -- by trading on information provided by a senior partner at McKinsey & Co., a senior vice president of IBM, a former Goldman Sachs director and others.
The jury's verdict marks the 35th conviction for Preet Bharara, the federal prosecutor in Manhattan, N.Y. Over the last 18 months, his office has brought criminal insider trading charges against 47 individuals.
Dozens of other cases, civil as well as criminal, have been filed by the Securities and Exchange Commission and federal prosecutors in other cities. (The SEC can bring only civil cases, and turns over criminal matters to the U.S. Department of Justice.)
Amy J. Greer, who formerly worked in the SEC's enforcement division, said the Rajaratnam case demonstrated the effectiveness of using wiretaps in criminal cases as well as "a level of cooperation we have not seen before" between the two federal agencies.
The SEC lacks wiretap authority, muscle that federal prosecutors can use to meet the considerable burden of proof required in criminal cases.
"The wiretap evidence gave the jurors a look at what was happening while it was happening," said Stuart Slotnick, an attorney in the New York office of Buchanan Ingersoll & Rooney.
Insider trading involves material information -- something that would cause an investor to change his or her view of a publicly traded security -- as well as nonpublic information. Cases can be brought against those who trade on inside information as well as those who provide it. The definition of what constitutes material, nonpublic information is not as clear as many believe, and the current spate of cases is changing perceptions about how that line should be drawn.
"The definition of what is improper trading changes over time as things work their way through the courts," said Steven J. Huddart, an accounting professor at Penn State's Smeal College of Business.
University of Chicago law professor M. Todd Harrison gave the example of an investor looking for an earnings forecast for a company. The investor could get nonpublic information from a company's chief financial officer, which he said would be illegal. Or the investor could develop his or her own forecast by piecing together small bits of information from company suppliers, former employees and other sources. Prosecution of Rajaratnam and others is giving hedge funds pause about their information-gathering techniques.
"People who are close to the line are going to be scared, and I think that's what (regulators) are trying to do," Harrison said.
Hedge funds that use expert networks -- research firms with experts who provide information on market trends, technology, regulatory issues and other matters investors base their decisions on -- are taking additional steps to make sure they are complying with the law. Greer and Slotnick said that meant investors were asking expert networks for written assurances that the information they are providing is public.
(Contact reporter Len Boselovic at lboselovic(at)post-gazette.com)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
Must credit Pittsburgh Post-Gazette
