Galleon co-founder Raj Rajaratnam’s conviction on insider trading violations raises a number of questions and concerns for the investment community, but should one of those be about whether an investors keeps profits gained as a result of these kinds of activities?
Fred Wilpon, who the trustee investigating the Madoff fraud, has said owes investors about $1 billion in profits, is shopping a minority stake in the Mets as he and his partners defend themselves against the allegations.
One of the potential buyers of that stake is Steve Cohen, whose firm SAC Capital, is now bogged down in an insider trading investigation involving former employees.
So with federal prosecutors claiming that Rajaratnam, a Greenwich resident, pocketed more than $63 million in profits from his insider trading scheme, should Galleon investors worry?
Attorney Rick Slavin, head of Cohen and Wolf P.C.’s securities group and a former SEC litigator, said probably not from the government, but a private lawsuit might arise.
“Using the reasoning I’ve been using with Madoff, it’s an ill-gotten gain,” Slavin said. “When you can show one investors lost everything and one who got paid because he win first, it’s an easy argument that the one who got paid should pay back the illegal profits.”
Bernard Madoff ran a $65 billion ponzi scheme that wiped out a lot of money, but early investors apparent got paid. And that’s what the trustee says Wilpon was.
In effect, you can see who lost money and who gained.
In the Galleon case, it appears investors made money with Rajaratnam. But are those profits ill-gotten.
“Investors of the fund benefit from his trading,” Slavin said. “It’s certainly possible the fund becomes a defendant in a civil action.”
That requires a party to show some harm was done.
In Galleon, Slavin said it was the market that was harmed and ultimately, investors in the stocks that weren’t privy to the same information that Rajaratnam had.
There are a lot of interesting arguments to be made in regards to who should pay for insider trading.
Should an investor who didn’t know about the insider deals, be penalized? Certainly there was no intent or action to do wrong.
But should ignorance serve as a defense when people profit off of illegal activity?
If the government really wants to stop insider trading, wouldn’t going after profits from investors accomplish that? Certainly investors would be more diligent about who gets their money to invest if they might face a federal investigation and possibly losing profits?
Ultimately, Slavin said he didn’t think the fund will face fines.