NYT: Thin Line Separates Insider Trading and Research

The NYT makes some good points about the Rajaratnam case:

A close reading of the two criminal complaints filed so far, and an associated civil complaint filed by the Securities and Exchange Commission, suggests a web in which hedge fund managers, analysts, corporate executives, and consultants and other people outside Wall Street traded tips — sometimes for money, sometimes for other tips, and sometimes for little more than the promise of unspecified future favors.
Not every trade that the complaint outlines was profitable. In fact, Mr. Rajaratnam’s hedge fund, the Galleon Group, lost millions of dollars buying shares of Advanced Micro Devices, the computer chip maker, after learning that the government of Abu Dhabi planned to invest in A.M.D., according to the complaint. The investment did occur, but A.M.D. stock plunged between August 2008, when Galleon began buying, and October 2008, when the deal was announced.
At other times, Mr. Rajaratnam received information from an unnamed witness who is cooperating with the government investigation. But the complaint does not state whether Mr. Rajaratnam knew the ultimate sources of the information he received from the witness. Nor does it allege that Mr. Rajaratnam paid the witness for the information.
Still, the existence of a cooperating witness — along with the fact that prosecutors wiretapped some of Mr. Rajaratnam’s conversations — gives them a great advantage in the case, said David S. Ruder, a law professor at Northwestern University and a former chairman of the S.E.C. The conversations may help show that Mr. Rajaratnam knew the information was valuable and that he should not be trading on it, Mr. Ruder said.
“It gets you around the mens rea, or state of mind question,” he said. “If you know it’s coming from an insider, or if you have strong reason to believe it’s coming from an insider, you’re in trouble.”

Posted by on October 19th, 2009 at 11:05 pm


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