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Insider Trading - Raj Rajaratnam and Galleon

Is insider trading really a victimless crime? That was the argument of defense counsel for Raj Rajaratnam, founder and former head of the Galleon Group. The billionaire was convicted of securities fraud and conspiracy, then sentenced in October 2011 to 11 years in prison. He was ordered to pay close to $100 million in restitution. In my view, that's just a small fraction of the total loss to the economy overall.

The Galleon Group closed in 2011 as a result of the fraud. At the time, Galleon was the biggest, most successful hedge fund in history.  How much of that was due to investing acumen, vs. exploiting insider knowledge?

Lawyers at Rajaratnam's sentencing hearing argued that insider trading should not be judged similarly to Ponzi schemes and other frauds, since insider trading is a "victim-less crime".  Their rationale was that sheer volume of these transactions made unwinding them and assessing the damages impossible.  Therefore, if the individual victims' losses could not be identified, it was "victim-less."

Just because we can't trace all the money doesn't mean there are no victims.  I'd argue that the impact of insider trading is more far-reaching than a Ponzi scheme, with many more victims.

Every stock market transaction has a buyer and a seller. Rajaratnam's insider information allowed him to buy or sell stock, knowing the insider information was not reflected in the price he paid.  That meant he bought at a discount, or sold at a premium. The other parties may not have bought or sold if they were privy to the same information. They either overpaid for their purchases, or sold too cheaply.

Those people on the other side of Galleon's trades are victims.  Many of them were people like you or me, retail investors who got stung. But there are many more victims.  When large hedge funds like Galleon buy or sell, they also move the markets in one direction or another, simply due to the sheer size of their trades.  That means everyone else in the market is also potentially over-paying or under-selling. The result? Money that might have otherwise been spent in other sectors of the economy, or saved, is instead lost in the stock market.

If anyone tells you insider trading is relatively victim-less compared to Ponzi schemes, don't believe it. In future posts I'll talk more about Galleon and hedge funds in general.

Read more about fraud and forensic accounting at
Colleen is the author of Exit Strategy, a Katerina Carter suspense thriller available at here or here.