With the SEC recently charging hedge fund manager Raj Rajaratnam and others for insider trading, the debate regarding the scope of insider trading and its (un)desirability in capital markets has resurfaced. SEC’s complaint filed in the District Court in New York indicates that Rajaratnam, through his hedge fund Galleon, had traded in stocks of 10 different companies while in possession of inside information that was provided to him by various tippers. The U.S. Justice Department has also filed complaints in the court. This not only raises issues regarding liability of “tippees” under the relevant laws, but also casts light on various trading practices involved in the hedge fund industry.
As we have noted on this blog earlier, it is quite an onerous task on the authorities to prove insider trading, but the difference in the Galleon case is that prosecutors are armed with court-authorised wire-taps. There is nevertheless a great deal of scepticism about the likelihood of the authorities being able to take matters to their logical conclusion. While some observers find that there is very little to distinguish between insider trading and legitimate market research by hedge funds, others argue that the current complaint may be driven largely by political considerations (given the call to rein in hedge fund industry).