Issue of the week: Wall Street on trial

last updated 8 January 2015

Not just a man but a pervasive “culture of insider trading” went on trial this week in a Manhattan federal courthouse, said Susan Pulliam and Chad Bray in The Wall Street Journal. Raj Rajaratnam, the 53-year-old head of the Galleon hedge fund, stands accused of making $45 million in illicit profits by trading on tips gathered from the ranks of America’s corporate elite. Facing a maximum sentence of 25 years in prison, the Sri Lankan–born billionaire is likely to spend $40 million or more for the services of a nine-person legal team headed by John Dowd, a former Marine whose legal strategy to date has been “combative, even by the rough-and-tumble standards of large criminal trials.” Dowd will have his hands full, said Grant McCool in Reuters.com. The government “could present as many as 173 intercepted mobile-phone audio conversations,” in which, they allege, Rajaratnam’s sources “spilled secrets that helped him gain an unfair edge over other traders.”

The case involves some of the biggest names in business, said Halah Touryalai in Forbes.com. Goldman Sachs CEO Lloyd Blankfein might testify, and jurors could hear about the phone call that Rajat Gupta allegedly made after a board meeting at Goldman, where he was a director until the Securities and Exchange Commission sued him for insider trading last week. Gupta allegedly dialed up Rajaratnam moments after he learned that Warren Buffett would invest $5 billion in Goldman during the financial crisis. Yet “there is something curious” about that call, said Andrew Ross Sorkin in The New York Times. Rajaratnam allegedly made $900,000 trading on the information. But the SEC doesn’t accuse Gupta, the former head of consulting firm McKinsey & Co., of profiting from his tip. Perhaps that’s why he was charged with a civil violation instead of a crime. Or maybe it’s because the government does not appear to have recorded Gupta’s call. If so, one of the prosecutors’ most sensational-sounding charges might be “a little mushy.”

Then again, it might prove what many Street-watchers have long suspected, said David Weidner in MarketWatch.com: that “information-passing among the clubby elite of the financial world is as common as Hermès ties and vacation homes.” For years, “overwhelmed” market watchdogs ground their teeth, convinced that Wall Street insiders were freely swapping corporate secrets with impunity. Now, goaded by critics who said regulators were turning a blind eye to “a rigged game,” U.S. Attorney Preet Bharara has assembled the kind of prosecutorial arsenal usually leveled at organized crime, complete with wiretaps, e-mails, and “Armani-wearing Donnie Brascos.” If he prevails, “the results will shake the financial industry.” Lose, and “the feds will seem like a joke.”