The Galleon Group,a hedge-fund firm, was busted last week for insider trading. A co-founder,Raj Rajaratnam, a Sri Lankan and 5 others were rounded out after wire-taped conversation sanctioned by the courts put paid to their wile ways. Rajaratnam and five others were detained and charged last Friday with involvement in a ring that allegedly traded on nonpublic information involving International Business Machines Corp., Google Inc. and other big companies.
Federal prosecutors Friday charged Rajaratnam and three others not at Galleon with securities fraud and conspiracy, and two others with conspiracy. All six also face civil insider-trading charges leveled by the Securities and Exchange Commission.
Known to be a hard taskmaster in corporate intelligence gathering, the Galleon Group will not tolerate failures. Traders who do not make the mark were berated and let go.
What was the magic formula that made the Galleon Group one of the biggest traders on Wall Street?
Historically , Galleon made its name investing in tech stocks in the 1990s. In that era, analysts and favored clients got early looks at analyst reports, tips about corporate earnings and allocations of hot initial public offerings. That world ended after the tech bubble burst in 2000 and new rules -- dubbed Regulation Fair Disclosure -- barred companies from disclosing information selectively.
So what made Galleon the darling of investors up to this date?
Chiefly,it has an asset-that web of contacts among technology and health-care executives and some of whom have been investors in the firm's hedge funds. Their constant good performance attracted the billionaire investor along the way.
The modus operandi and strategy at Galleon was and is always the same. Get exclusive information, aggressively pursue rumors and used every resource to get it. Pressure was more intense on traders and analysts especially about up-coming corporate earnings.
Galleon, a fast-moving firm, makes about 1,000 trades a day. Its position as a big commission generator encourages brokerage firms to dole out favors. For instance, the fund firm has been a big recipient of IPOs, generally bestowed on the best clients.
Rajaratnam once told an employee he couldn't know where the broad market was going but he could make money if he could get a 'sense' of what a company's earnings might be. So you have to get an edge or you're gone."Galleon is looking for that little bit of extra edge. That's what the firm is all about."
Just like Galleon, aggressively pursuing information is the mainstay and very much commonplace on Wall Street. The case against Rajaratnam will likely hinge on whether he crossed the line and profited from information obtained illegally. As of now, his lawyer says he did nothing wrong and will fight the charges.
"I get thousands of calls a week with people pitching ideas," Raj Rajaratnam said in a rejoinder to one friend on Saturday. He said information he obtained was just another piece of the puzzle that Galleon assembles before conducting buying or selling stocks.
Well, he seems to be the biggest fish caught on Wall Street to date. How it will unfold is anybody's guess.
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