Saturday, October 17, 2009

Hedge Fund Manager and Cronies Busted!

Hedge funds exist in a shadow world, unseen by all except for those few who can afford to be part of them.  The extent of their success, compared to the rest of the market reeks of impropriety.  Collecting sufficient evidence against them to bring charges usually takes years, so this indictment has been the works for a long time.

hedge fund bust Reporting from Los Angeles and New York - Federal authorities shook the often secretive world of hedge funds with the arrests Friday of the billionaire founder of a major New York operation and five others on charges they engaged in extensive insider trading that allegedly netted more than $20 million in illicit profits.

After taking the unusual step of using wiretaps in the investigation, authorities accused Raj Rajaratnam, the founder of the $7-billion hedge fund Galleon Group, two executives at California companies and three others of multiple counts of conspiracy and securities fraud.

It's the biggest criminal case involving hedge fund insider trading, said Preet Bharara, the U.S. attorney for Manhattan, and is believed to be the first time that court-authorized wiretaps have been used in insider-trading cases.

"This aggressive use of wiretaps is important. It shows that we are targeting white-collar insider trading rings with the same powerful investigative tools that have worked so successfully against the mob and drug cartels," Bharara said.

Jacob Frenkel, a former federal prosecutor now in private practice, noted the trend: "In the aftermath of the financial crisis, we're seeing a re-direction of criminal enforcement attention toward Wall Street using aggressive methods," he said.

Hedge funds are open only to institutions and wealthy individuals and employ a wider range of trading activities than other investment funds.

The defendants included Rajiv Goel, 51, of Los Altos, managing director of strategic investments in Intel Corp.'s treasury division, and Anil Kumar, 51, of Santa Clara, a director at management-consulting giant McKinsey & Co.

Among the stocks the defendants traded in, according to authorities, were Google Inc., Advanced Micro Devices Inc. and Hilton Hotels Corp.

Separately, the Securities and Exchange Commission filed a civil complaint against the defendants. Together, the federal actions portray a cross-country ring in which highly placed executives passed on chunks of information gleaned from their jobs.

At the center was Rajaratnam, one of the world's wealthiest men. He is worth $1.3 billion and is the world's 559th richest person, according to Forbes magazine. His allegedly illegal trading earned $12.7 million for Galleon, authorities said.

"What we have uncovered in the trading activities of Raj Rajaratnam is that the secret of his success is not genius trading strategies," said Robert Khuzami, the SEC's enforcement chief. "Rajaratnam is not a master of the universe, but rather a master of the Rolodex."

An attorney for Rajaratnam couldn't be reached for comment… [emphasis added]

Inserted from <LA Times>

I wondered how it was that the Bush/GOP Justice Department, notorious for their hands off approach in dealing with the very rich, happened to zero in on this particular individual.  The reason was not hard to find.  Mr. Rajaratnam, it turns out, donates to Democrats and not to Republicans.  He was a Hillary Clinton supporter, but after Obama won the nomination, he gave $30,800 toward his election.

Frankly, that does not matter to me.  The Obama administration could have used their influence to stop the investigation, and I’m glad they opted not to do so.  I hope that more investigations are underway against all the hedge fund managers who are breaking the law, regardless of whom they support politically.

While we’re on the subject of hedge funds, several issues require immediate reform.  First, hedge fund managers, who are mostly billionaires, pay taxes on their income at the lower capital gains rate due to a loophole in the tax code.  That loophole must be closed, despite GOP opposition.  Why should billionaires have lower tax rates than the office workers in their employ?  Second, transparency legislation must be enacted so we can know what investments are in their portfolios, and who their investors are to reveal conflicts of interest, despite GOP opposition.  Third, the secret stock markets on which they trade must either open up their activities or be shut down, despite GOP opposition.  All investors from workers managing their IRA to billionaires must share a level playing field.

Do you agree?


the walking man said...

What pisses me off the most was that if I rob you I will be held in jail because of an unreachable bond, none of these bastards ever saw the inside of a cell and most likely will not.

People do not realize that hedge funds control the commodity markets through their whip[sawing investments which drives the price of everything consumers use up. Make a commodity, say oil, look like it is rising in price and by temporarily parking large sums of money in there, then take the profit when the smaller funds and individuals flow to it.

Hedge funds use to before greed is good deal with a specific commodity to lock in a future price, now that market has become as volatile as Wall Street. simply another form of robbery of what's left of the middle class wealth.

TomCat said...

Thanks Mark. I fully agree. That's why transparency is so important. Once their secrecy is stripped away, they lose moist of their manipulative power.

Distributorcap said...

there is a reason there has been zero movement on regulatory reform...

and there wont be.

TomCat said...

there better be.