Issue of the week: A blockbuster insider-trading case

“Echoing the 1987 movie Wall Street,” wiretaps and informants wearing hidden microphones were employed by federal investigators to ensnare billionaire hedge-fund manager Raj Rajaratnam, said Susan Pulliam in The Wall Street Journal. Rajaratnam, CEO of the Galleon Group of hedge funds, was arrested last week and charged with insider trading, along with two executives of another hedge fund, an IBM executive, an Intel executive, and a consultant with McKinsey & Co. They’re accused of illegally sharing inside information on some of corporate America’s biggest names, including Google, Intel, and Hilton Hotels. (All the accused say they’re innocent.) Prosecutors charge that Rajaratnam, 52, pressured high-ranking contacts at technology and health-care companies for information about upcoming earnings reports, merger announcements, and other data not available to ordinary investors. “Galleon is always looking for that little bit of extra edge,” said one of Rajaratnam’s former traders. “That’s what the firm is about.”

Clearly, this guy plays hardball, said Alex Berenson in The New York Times. Galleon employees who failed to deliver the edge Rajaratnam was seeking quickly found themselves out of a job. But that doesn’t necessarily mean that Rajaratnam was trafficking in illegal inside dope. In a business in which “the most precious commodity is information,” the line between “buying legitimate research, trading rumors and gossip, and illegally paying for market-moving information” is a thin one. Prosecutors will have their hands full proving that Rajaratnam knew that the information provided by his sources “was valuable and that he should not be trading on it.”

But at least prosecutors are finally getting serious about insider trading, said David Weidner in Marketwatch.com. Wall Street has been rife with “naked abuses” for years, with well-informed traders exploiting their knowledge advantage over their small-fry customers, “who are too overwhelmed by their daily lives or impotent to effect change.” Between April 2007 and February 2008—“the height of the deal-making boom”—I tracked 17 separate instances of suspicious trading in takeover-related stocks. “Most of the cases disappeared as quickly as they were pointed out.” Now, it seems, prosecutors and regulators have dropped their “ho-hum attitude” toward insider trading and are hunting big game. One high-profile case won’t change Wall Street’s corrupt culture. But it’s a start.

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Maybe, but so far we’ve heard only one side of the story, said The Wall Street Journal in an editorial. As prosecutors often do when unveiling a big case, U.S. Attorney Preet Bharara disclosed selected bits of damning evidence, including a recording of one of the accused saying that she’ll “be dead if this leaks.” But we’ve seen splashy insider-trading cases fizzle out before. In bringing these charges, the Justice Department seems to be pandering to the public’s anti–Wall Street mood. “When political calls for scalps are in the air,” the wisest course is to demand that the government “prove it in court.”