They got him. A US jury has convicted Raj Rajaratnam, the billionaire co-founder of the Galleon Group, on all 14 counts of insider trading. The disgraced hedge fund manager now faces up to 20 years in jail.
It emerged that his edge was not gained by rigorous top-down and bottom-up analysis, but by cheating. What does his dishonour mean for Asian hedge funds?
If you had a dollar for every insider trading conviction in Asia, you would still be poor. This could imply one of two things: firstly it could be a sign that Asian investors are believers in old fashioned honest hard work and would never trade on insider information; secondly, it could mean they aren’t paragons of rectitude and that someone who could be taking steps to clean them up isn’t doing his job properly.
In the Rajaratnam case, the defence tried to establish a distinction between "confidential" information (on which it is acceptable to trade) and "non-public" information (on which it is not). If that defence had succeeded it would have made it even more difficult to prosecute other cases in the USA. It would have been a matter of enormous frustration had he gotten away with his villainy.
That complication would not arise in Hong Kong, because "relevant information" (inside information) is information which is "not generally known" to the persons who are accustomed or would be likely to deal, says Hong Kong-based Greg Heaton of law firm Deacons.
“It should be easier to demonstrate that information is 'not generally known' than that it hasn't entered the public domain at all. The Hong Kong insider-dealing tribunal has said that persons who are accustomed or would be likely to deal include small and unsophisticated investors. So in Hong Kong it is clear that it can still be an offence to trade on information that's been disseminated to institutional investors but is not known to the wider investing public.”
He went on to say that information can't be regarded as 'generally known' if it is incomplete or doubtful (such that some investors can't be sure whether it is genuine or only speculation or rumour).
Another complication that would not arise in Hong Kong is whether the source of the information benefitted by disclosing it. In the Galleon case, prosecutors argued that insiders gain a benefit even if it is only the benefit of enjoying giving a gift (the inside information) or enjoying the friendship of the person they give it to. In Hong Kong, tipping is an offence irrespective of whether the tipper obtains any benefit.
More broadly, is this case liable to cast accusations of greed and an indecent love of money that exceeds fair play upon the integrity of the hedge fund sector?
"Asian regulators are likely to see the conviction as justifying closer review and regulation of hedge fund managers trading in Asian markets," says Chris Wells of White and Case in Tokyo. "The case will enhance the view expressed by some hedge fund critics within Asian regulators that foreign hedge fund managers can't be trusted. It could put a damper on development of the hedge fund industry in Asia generally.”
Although Rajaratnam's illegal trading activities were "over the top", Asian fund managers will need to study the case closely to understand where the dividing line is between illegal insider trading and "event-driven" strategies that depend on anticipating major market events based on market knowledge and participant behaviours.
The success of the Rajaratnam prosecutors in the case is likely to spur further enforcement activities not only in the US but also around Asia.
There may well be more cooperation among regulators to identify and stamp out trading on inside information, even if gained accidentally. For example, some fund managers in Hong Kong have noted that placing agents and brokers often appear to give away too much information too early to potential subscribers, which therefore renders them an insider.
The moral of the story is: don’t participate in insider trading, and/or don’t get caught.