Case 12: Insider Trading at the Galleon Group

1. Are information gathering techniques like Rajaratnams common on Wall Street? If

so, what could regulators, investors and executives do to reduce those practices?

The exchange of money, gifts and opportunities for the purposes of gathering non-
public information to obtain an unfair advantage in the business market is unethical,
illegal and defined as insider trading [CITATION SchoolBook \p 81-82 \l 1033 ]. These
practices are so prevalent in Wall Street that according to a study by the S.E.C. there have
been 102 unique cases between January 1990 to December 2013 involving insider
trading, with another study by professors at N.Y.U. and McGill University increasing that
number to 207 (Sorkin, 2014). The ethical culture on Wall Street is egoism, or the belief
of individuals to make decisions to maximize their own self-interest, and hedonistic
behavior which is the idea that the most moral action maximizes pleasure over pain
[CITATION SchoolBook \p 157-159 \l 1033 ]. CEOs and hedge fund managers primary
goal is to maximize profits and some, like ex-CEO Raj Rajaratnam, will use acts such as
bribery and fraud to advance their endeavors.

To reduce the instances of insider trading occurring on Wall Street, regulators

such as the S.E.C. should modify the tactics used to catch companies involved in insider
trading and other illegal activities. The Securities Exchange Act of 1934 was the initial
law created to regulate securities trading but without enforcement of these laws no
changes can be made. Investors should ensure to regularly check on their investments and
if necessary have a secondary review process of their investments to ensure accuracy.
Executives can help to reduce these practices by implementing and/or re-enforcing
company principles and values that incorporate integrity, ethical behavior and fairness.

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?

The laws against illegal insider trading are documented under SEC Rule 10(b) 5-1
which provides that manipulative and deceptive devices are strictly prohibited in business
(Wallin, 2014). The implications of sharing confidential information range to civil and/or
criminal charges, financial failure of the company and instability of the market leading to
financial infrastructure changes to society as a whole. Raj Rajaratnam received 11 years
in prison for being convicted of 14 counts of illegal insider trading [CITATION
SchoolBook \p 519 \l 1033 ]. His actions destroyed the Galleon Corporation and took
many business leaders down with it. The implications of illegal insider trading would
definitely make me more cautious with the information I use to make decisions regarding
stock transactions. I would not want to violate any law that could possibly end with a
lengthy prison sentence.
 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 non-public information?

I believe that illegal insider trading is one of the easier laws to commit and even though
the Galleon Group received heavy convictions for their crimes, not enough convictions
have been seen to cause a major deterrence. John P. Anderson an associate professor of
law at Mississippi College of Law believed that even though consequences of the laws
against insider trading were stiff, these laws failed to encompass many aspects of illegal
insider trading activities (Anderson, 2015). It can be difficult for business leaders to avoid
actions that constitute as illegal insider trading if the actual laws that govern them are in
themselves vague and unclear.

Anderson, J. (2015, March 27). Solving the paradox of insider trading compliance. Temple Law

Review, 88 (2), 273. Retrieved from

http://www.templelawreview.org/article/solving-the-paradox-of-insider-trading

Ferrell, O., Fraedrich, J., & Ferrell, L. Business ethics (10th ed., pp. 476-480). Stamford:

Cengage Learning.

Sorkin, A. (2014, June 17). Number of insider trading rogues worse than thought. The New York

Times. Retrieved from

http://www.cnbc.com/2014/06/17/study-asserts-startling-numbers-of-insider-trading-

rogues.html

Wallin, M. (2014, June 9). Consequences of insider trading charges. WK Law. Retrieved from

https://www.wklaw.com/insider-trading-charges