CASE 12
Insider Trading at the Galleon Group
CASE NOTES FOR INSTRUCTORS
The federal investigation and prosecution of members of the Galleon Group is the largest insider trading
case in U.S. history. Over two dozen people were implicated, and Raj Rajaratnam, an eccentric
it has yet to be seen if the technique will work on other insider traders.
Since the Galleon case also covers an example of rampant criminally unethical activity, it is a natural to
be paired with the Ponzi and pyramid schemes case in this book. Students can examine and compare the
types of misconduct, the punishments, and the influence of those involved on their personal and
professional networks.
of the fund’s gains in a given year. For example, if a client invested $100,000 and the fund earned 40
percent in one year, the additional fee would be $8,000, or 20 percent of the investor’s $40,000 gain. The
performance fee was Galleon’s main source of revenue. The fees associated with hedge funds can
generate massive wealth for hedge fund managers, as is shown in Table 1 (on the next page).
Because hedge funds are not sold to the general public, hedge fund managers have not been subject to the
Table 1. 2009 Top Fund Manger’s Earnings
1. David Tepper, Appaloosa Management, $4 billion
2. George Soros, Soros Fund Management, $3.3 billion
3. James Simons, Renaissance Technologies, $2.5 billion
4: John Paulson, Paulson & Company, $2.3 billion
5: Steve Cohen, SAC Capital Advisors, $1.4 billion
6. Carl Icahn, Icahn Capital, $1.3 billion
6. Edward Lampert, ESL Investments, $1.3 billion
8. Kenneth Griffin, Citadel Investment Group, $900 million
8. John Arnold, Centaurus Advisors, $900 million
10. Philip Falcone, Harbinger Capital Partners, $825 million
required hedge fund managers holding more than $150 million to register with the SEC as investment
advisers. Hedge fund managers with less than $100 million in assets are subject to state regulations.
Dodd-Frank requires hedge funds to provide information about trades and portfolios so that the Financial
Stability Oversight Council can monitor and regulate systemic risk.
QUESTIONS AND DISCUSSION
1. Are information gathering techniques like Rajaratnam’s common on Wall Street? If so, what could
regulators, investors, and executives do to reduce the practice?
The simple answer is yes, these practices are common. To help students understand the complexities of
insider trading, the instructor may wish to explain the current methods of collecting information.
2. What are the implications of sharing confidential material information? Is it something that would
affect your decision about how to trade a stock if you knew about it?
According to the Sarbanes-Oxley Act, there are many severe legal consequences for trading confidential
information. Punishments include heavy fines and many years in prison, depending on the violation.
A lively discussion can center on what the government says regarding punishments for white-collar
crimes, and what actually happens to offenders. The most recent sentencing data from the Sentencing
3. Do you think the secret investigation and conviction of Rajaratnam and other people in the Galleon
network will deter other fund managers and investors from sharing nonpublic information?
The answer is probably yes, but much will depend on the outcome of similar cases. Insider trading cases
can be complex and difficult to unravel. They can also be hard to prosecute because insider trading is
ADDITIONAL RESOURCES