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Rajaratnam Guilty of Insider Trading: Chilling Effect or Business as Usual?

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

Billionaire hedge fund manager Raj Rajaratnam has been found guilty on all 14 charges of insider trading, conspiracy and securities fraud. The government says the former head of Galleon Group netted over $63 million in gains on trades based on inside information.

Rajaratnam, who is expected to appeal, faces up to 19.5 years in prison. Sentencing is schedule for July 29.

The ruling caps a far-reaching investigation that began in 2008, when federal agents began tapping Rajaratnam's phone. Recordings of those conversations, in which Rajaratnam seemingly boasted about trades made on insider information, no doubt played a key role in the jury's decision.

The government's investigation led to insider trading charges against 25 defendants alleged to have participated in an network led by Rajaratnam. Prior to today's ruling, 21 of those defendants plead guilty, including former executives at IBM, Intel and Bear Stearns. (An additional 22 people have been charged with insider trading unrelated to Rajaratnam's network and 14 more have been convicted, according to the Manhattan U.S. Attorney's office.)

Because of the widespread nature of the investigation — and the guilty pleas and rulings — the hope is the Rajaratnam case will have a chilling effect on traders who might be inclined to break the rules.

"The message today is clear — there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have," Manhattan U.S. Attorney Preet Bharara said in a statement following the verdict. "We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught."

The government's investigation may make hedge fund managers more careful about what they say on the phone — or via email and instant message — but it's unlikely to materially change behavior on Wall Street, as I discuss with my Breakout colleagues Jeff Macke and Matt Nesto in the accompanying video. The reality is there's too much money at stake, greed is part of human nature and morality can't be legislated, as Macke notes.

We're also skeptical about the ruling's ability to restore investors' confidence in the market, which has been shattered by a decade of burst bubbles, accounting scandals and bailouts. Rajaratnam's impact on the economy and society at large was minuscule compared with that of the CEOs of Wall Street firms and mortgage brokers whose actions led to the crisis of 2008. Unless and until any of those folks go to jail — or at least are forced to disgorge their ill-gotten billions — events like the Rajaratnam ruling are only going to help at the margins, at best.

The fact the ruling comes the same week as Citigroup's reverse stock split and the Treasury Department's sale of AIG stock is a stark reminder of how much work federal investigators have to do - if only they'd get started. (See: There's Another Crisis Coming as Long as Banks Remain Above the Law: Bill Black)

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com