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
millionaire and head of Galleon, was convicted of 14 counts of securities fraud and conspiracy.
Additionally, Rajat Gupta, a man of high influence as Director of McKinsey & Co., was convicted for
participating in the scheme and was sentenced to two years in prison. The investigation ushered in a new
era in white-collar crime prosecution because wire taps and other techniques were used to secure
convictions.
Since the Galleon case covers an example of rampant criminally unethical activity, it is a natural to be
paired with the Frauds of the Century case in this book. Students can examine and compare the types of
misconduct, the punishments, and the influence of the people involved on their personal and professional
networks.
To understand this case, students need to understand some key terms. A hedge fund is a combination of
assets bundled together with various strategies that minimize risk. It is created as an unregistered
investment management company and is meant to maximize returns while minimizing risk or exposure.
Hedge funds invest in a broad range of assets, including equities, bonds, and commodities. Only investors
who meet criteria set by regulators can participate in hedge funds. At its peak, the Galleon Group invested
$7 billion.
112 Case 12: Insider Trading at the Galleon Group
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.
Securities fraud occurs when a person or company misrepresents or misuses information that investors
utilize to make their financial decisions. The types of misrepresentation involved in securities fraud
include providing false information, withholding key information, offering bad advice, and offering or
acting on inside information. In Galleon’s case, it was found to be engaging in insider trading.
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.
Information gatherers and their companies acquire what is called competitive intelligence (CI). Their
purpose is to monitor competitors and, if possible, determine what business rivals will do before they
do it. CI companies also develop different profiles on competitors, threat potential, and competitor
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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.
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 defined so vaguely. The law merely says you cannot buy or sell a stock based on “material,
non-public information.” Certainly the government’s use of wiretaps could encourage prosecutors and
regulators to become more aggressive.
ADDITIONAL RESOURCES