Monday, October 17, 2011

Eleven years for what?

Can someone please explain to me exactly what Raj Rajaratnam did to merit a sentence of 11 years in federal prison?

I understand he was convicted of insider trading. I understand that he made an obscene amount of money - some of which may have been due to his having access to information that other folks didn't have.

But why is what he was accused of doing bad? Why is it a crime? Who is the victim?

Mr. Rajaratnam received information from corporate insiders that he used to buy and sell securities for his hedge fund. If he was buying it was a good bet that the price of the security was rising. If the price of the security was rising then anyone else who held shares was making money. If he was selling it was a good bet that the price was headed downward. But his sale of shares didn't harm other shareholders - the price was going down regardless of whether he sold or not.

We're all looking for someone who has access to inside information. Defense attorneys who used to be prosecutors want every potential client know that they used to work on the other side. Why? Because someone might think that attorney has access to certain deals that no one else does.

Looking to get into the stock market? I bet you're going to look for a broker who claims to have knowledge that no one else does. Maybe it's because of the hours he spends poring over earnings reports (doubtful). Maybe it's because of the software he has that analyzes technical trends in the market. Maybe it's because he knows people who know people.

Mr. Rajaratnam didn't manipulate the market. He didn't run a Ponzi scheme. He made trades based on the information he was given. How does that differ from the person researching Company A to see what makes it a better buy that Company B?

No, we don't all have access to the same information. But for those who invested in Mr. Rajaratnam's hedge fund, they had access to it. They made money. He delivered exactly what he promised to them.

Equity markets have never been about everyone having the same information. Prices move up and down because of inefficiencies caused by imperfect information. Someone is always going to know something that you don't. If that weren't the case, share prices would never fluctuate.

Mr. Rajaratnam broke the law. That's what a jury said. But did anyone in that courtroom question why what he did was a crime?

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