(photo credit: Courtesy)
One of the most famous insider-trading scandals occurred in 1905, when a US
Department of Agriculture employee was found to be surreptitiously signaling the
level of cotton production to trader Louis Van Riper through the use of a window
blind. All observers agreed that this was a clear case of insider trading,
though the laws in those days were not as strict as today. Van Riper ultimately
got off with a small fine.
But surreptitious does not seem to describe
the character of hedgefund nabob Raj Rajaratnam, founder of the Galleon
Rajaratnam was not at all secretive about the huge and far-ranging
list of contacts in his Rolodex. What after all is the value added of a great
trader if not his advantage over others in the ability to collect and assimilate
the mountains of bits of information that move markets? So Rajaratnam’s
conviction Wednesday on 14 counts of security fraud raises interesting question
regarding the narrow line, in law and in ethics, between a superior ability to
process public information and illegal and unethical use of private
The New York Times editorial summed up the unique approach
of Rajaratnam: “The classic insider case involves one person tipping another in
Mr. Rajaratnam created a network of tipping
networks that seemed cynically designed to go to the edges of the law on
obtaining insider information without breaking it. By providing him with a
mosaic of information from many sources, his defense contended, no single source
or piece of information was material to a decision to invest even though, added
up, they gave him a vital edge as an investor.”
The description makes
Rajaratnam sound like someone who made a cynical and ultimately unsuccessful
attempt to tiptoe around the boundaries of the law in order to violate its
spirit but not its letter. The problem is that it could equally make him sound
like someone who is doing successfully what traders are supposed to be doing,
and getting paid for: making sure asset prices accurately reflect asset values.
Why aren’t the people who are keeping inside information secret the ones being
prosecuted? The problem is in many ways the same as that of intellectual
If I know how to cure a disease, or make a better mousetrap, or
play a better symphony, why should I be able to keep that knowledge to myself?
The information should be made public so that everyone can benefit, at no cost
The problem is that without intellectual-property protection, far
fewer people will invest money and effort in innovating new cures, devices and
Likewise, it costs money and effort to sniff out
undervalued firms to buy out. If the information is leaked, then the target will
no longer be undervalued and markets will be less, rather than more, efficient;
the undervalued firm will never be properly evaluated.
companies would invest huge, and ultimately wasteful, sums in enforcing
security, much like the large, wasteful investments made in personal security by
wealthy people in countries with weak law enforcement.
This is where the
jury found that Rajaratnam crossed the line. He was paying people to disclose
information that their employees were paying them to keep secret.
much different than paying people to unearth information that other people are
not skilled at finding or interpreting.
It has been said that even though
no one can say precisely when day ends and night begins, the two are nonetheless
The same can be said about legitimate gathering of
market information and insider trading. There is certainly a perplexing gray
area, but some traders clearly cross the email@example.com
Asher Meir is research director at the Business Ethics Center of Jerusalem, an
independent institute in the Jerusalem College of Technology (Machon Lev).