Rajaratnam Conviction: A Red Flag for Wall Street

(May 12, 2011) — Industry sources say that the conviction of hedge fund manager Raj Rajaratnam serves as a warning to Wall Street on the severe consequences of engaging in insider-trading.

Yesterday, Raj Rajaratnam, the hedge-fund tycoon and co-founder of Galleon Group LLC at the heart of a US insider-trading investigation, was found guilty of all counts against him.

If Bernie Madoff’s downfall wasn’t enough to frighten the industry over the severe penalties of engaging in illegal activity, the Rajaratnam conviction serves as another reminder. “The Raj Rajaratnam case is causing managers who utilize consultants to review their process and use of consultants and expert networks,” Ron Geffner, vice president of the Hedge Fund Association and a partner at law firm Sadis and Goldberg LLP, told aiCIO. Another outcome of the conviction, according to Geffner, may be a heightened awareness over the use of text and email as communication tools. Federal prosecutors spent more than a month trying to prove Rajaratnam’s guilt. In one case against him, jurors heard Rajaratnam coaching Krish Panu, a Galleon managing director, on how to create a fake email trail to make it look like stock purchases were based on legitimate research and not illegal tips, Fox Business reported.

Rajaratnam faces a prison term of up to 25 years when he is sentenced by presiding US District Judge Richard Holwell.

“Hopefully people are more mindful of how they communicate,” said Geffner, a 20-year corporate and securities lawyer with a history of prosecuting money managers.

Ross Ellie of SEI told aiCIO: “You have to believe that now that the authorities busted Raj so convincingly, they will feel emboldened to go after a lot of others – I suspect many folks will cave and agree to lesser charges to avoid the potential for long prison sentences.”

From brokerage firms to investment advisors, there seems to be a greater focus on regulatory compliance within the asset management industry, largely because the penalty is so high, Geffner said. The severity of the damage to one’s reputation as a result of engaging in illegal activity often serves as an even greater deterrent. “Reputation that was once limited to geography is now readily apparent globally, largely due to the Internet,” according to Geffner.