Category Archives: Insider Trading

Alleged Insider Traders Bauer and Kluger Arrested- Skadden Arps, Cravath, and Wilson Sonsini Names Tarnished: Are All Traders Criminals? —  WOW! The FBI has just arrested two more people for alleged insider trading, and this is a big one, replete with burnt cash, prepaid cell phone destruction, wiretaps and all.  All that is missing is a great nickname like “Octopussy”.

According to CNBC, a trader named Garrett Bauer is alleged to have made over $32 million trading on tips recieved from Matthew Kluger, a lawyer who has worked at some of the worlds most pretigious law firms over a seventeen year legal career.  According to US Attorney Paul Fishman, Mr. Kluger, currently a Washington, D.C. based mergers and acquisiton lawyer with Wilson Sonsini Goodrich & Rosatii PC, allegedly “stole trusted secrets” and passed along the stolen information to an unknown tippee, who passed the information on to Mr. Bauer.  Kluger allegedly obtained the prized deal information by seaching the law firms’ computer systems.  According to Mr. Fishman, before Wilson Sonsini, Mr. Kluger previously stole and passed along inside information from two of the world’s most prestigious mergers and acquisition law firms:  Skadden, Arps, Slate, Meagher and Flom, and Cravath, Swaine & Moore.

If  this is all true, Kluger and Bauer (hey, isn’t that a great name for a law firm?)  are big-time criminals, and certainly deserve to rot in prison.  Time will tell with these two guys.  I ask myself, is this just the tip of the iceberg?  Sure seems that way if you believe what you see on televison and read in the papers.   Can there be any doubt that we will soon here about another expert network arrest, or the unwinding of another big hedge fund unable to survive investor redemption requests after being raided by the F.B.I?   All of this begs the question:  Why are so many hedge funds managers and traders being arrested for insider trading?

In my opinion, this battle to clean up Wall Street is being led by S.E.C. Chairman Mary Schapiro and her Director of Enforcement Robert Khuzami.  To win the propaganda war, and to secure the necessary funding it needs for further enforcement actions, the average Joe on Main Street needs to believe this scourge of Wall Street is rampant, and believe that it somehow threatens his livelihood.  Enter U.S. Attorney for the Southern District of New York, Preet Bharara, who is continuing to wage war against traders, hedge funds and other proprietary trading shops.   According to Mr. Bharara (derisively referred to as “Tweet Piranha” by those who believe that his trademark tenacity and seeming voracious appetite for Wall Street trader meat has gone a bit too far), “illegal insider trading is rampant and may even be on the rise”.  Consequently, Mr. Bharara is on a self-professed mission to catch all those modern day Gordon Gekko’s, and prove to the world that, in fact, “sometimes, greed is not good.”

I simply cannot agree with Mr. Bhahara’s contention that insider trading is rampant and on the rise, notwithstanding today’s arrests.   To me, that is a specious claim which both defies logic and smacks of politics.  As a simple matter of supply and demand, there are substantially less traders today, and the demand for all kinds of trading-related information has decreased as a result of both increased enforcement and vague laws.  Moreover, legislation emanating from the financial crisis of 2008 has made it much more difficult for firms to deploy capital and engage in proprietary trading, though as Michael Lewis has pointed out, poor drafting and loopholes in the Dodd-Frank bill have allowed the big banks to skirt the legislative intent, and continue to make their massive bets on the markets.   While big banks such as Goldman Sachs and Morgan Stanley may be able to figure out ways to continue to make enormous and risky bets, the legislation and increased scrutiny of trading has dramatically affected the livelihood of smaller proprietary traders and hedge funds (eg, the guys being arrested for insider trading).

The fact is, the short term proprietary stock trading business is rapidly going the way of the dinosaur.   Over the past three years, scores of traders have left the business, unable to compete with the black boxes and unable to gather the requisite market information (ie, material public information) needed to make a living trading.  Many traders have been fired for losing money, and now count themselves amongst the structurally unemployed.   The harsh reality of the proprietary trading business was driven home last year by Steven Schonfeld, a pioneer in the day trading industry (and a billionaire with his own “personal” not “private” golf course).  His firm fired the majority of his proprietary traders because it was “getting much tougher for traders to make a living…” and he noted that “the direct competition from black boxes, stat arb (sic) and high frequency trading which continue to grow at exponential rates is here to stay”.   Trust me on this one Mr. Bharara, for most short-term proprietary day traders, day trading is truly dead.

With respect to the hedge funds, market data clearly demonstrates that stock picking as an investment strategy is rapidly declining, and that traditional long/short equity funds, while still popular, have had difficulty generating excess returns without additional risk.  This makes perfect sense, since without the free flow of information it is that much more difficult for markets to react to changes in underlying fundamentals.  In sum, markets are less efficient.

The end result for traders who work hard and spend a great deal of time and money following markets is that there is no “edge”, and generating alpha (ie, making money) has become nearly impossible.  As a consequence, many of the biggest hedge funds have decided that they are better off focusing their time and capital on the global macro investment arena, where there is most definitely still a discernable “edge”.   In this investment space, hedge fund managers are free to make leveraged bets on all aspects of the global macro economy using a wide variety of instruments including currencies, commodities, interest rates and derivatives.

In sum, the practical result of stepped up enforcement, together with notoriously ambiguous insider trading laws themselves (which regulators refuse to adequately define) is that most equity traders are petrified to exchange any information whatsoever.  This has made a difficult and stressful profession even harder.  We are scared (or prevented by our compliance departments) to exchange tidbits of information that historically was the lifeblood of the trading arena.  We don’t send as many instant messages about the goings on of the marketplace, we don’t gather as much research, we don’t talk to as many people (heaven forbid we had a contact who was part of the dreaded “expert networks”), we don’t even share funny YouTube videos or sexy Barstool Sports pictures anymore for fear that somebody in those videos or pictures may have some connection to a company or a stock we might trade, and we might find ourselves woken up early one morning by a team of FBI agents eager for some fresh Wall Street meat.

The end result is that the proprietary trading business is not only less profitable, it is also much less fun than it used to be.  In fact, it really stinks.  Traders are, for the most part, miserable.  While prosecutors like Mr. Bharara and Mr. Fishman occasionally arrest notorious and flagrant insider traders like Raj Rajaratnam and Garrett Bauer, they are certainly guilty of selectively enforcing the insider trading laws.  If they continue to view all traders as criminals, and round up all those traders who dance along the grey area of extremely vague statutes, one day all that will be left are high frequency trading shops obsessed with capturing fleeting price discrepancies using collocation and other arguable illegal trading strategies –think FLASH CRASH. The Government may be winning the public-relations battle, but may ultimately lose the war.

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Same old story    A new day begins, but the same story is repeated in the Galleon trial. Former employee of Goldman Sachs is accused of laundering information to Raj Rajaratnam, head of galleon group. This trial has been going on for some time and no saying when it will come. Recently, the CEO of Goldman Sachs, Lloyd Blankfein, testified in the trial. He tried to play it safe when it came to his former employee Rajat Gupta and his main investor, Raj Rajaratnam. He was asked questions if Goldman Sachs knew of the suspicious behavior and he tried to talk away from allegations. He doesn’t want Goldman Sachs in trouble for this insider trading problem. Blankfein rather have it that one employee get in trouble, than the whole organization for trade fraud. The future holds the key, but judging by the court system, it will a slow future.


Rajaratram Saga continues — Today the duel begins with one of the titans of the hedge fund industry, going against basically the United States and its future enforcement on insider trading. Rajaratram was accused of using corrupt team to get an edge on the market. In his defense, his lawyer says, if the accusations are true, the profit they would have earn on those insider trading news would be minimal to their yearly profit. It seems like both teams have good point and good evidence about the case and they situation is likely to go either way. As mentioned before in the previous blogs, this determines what happens with the SEC and its control on insider trading in the future, so lets all wait and watch the show.

Raj and Charlie Sheen Can Both Be Winners!

HedgeFundLIVE.comOpening Scene: :  Camera pans into the huge office of attorney John Dowd, where he is trying to have a last minute strategy session with his client, Raj Rajaratnam.

HFL Disclaimer: This is an entirely fictitious account of possible trial preparation.  Please do not sue us.

  • Raj: I need a reservation for sixteen at Tao on Wednesday at 7 pm, a table for 13 at Lavo on Thursday at 7 pm, and a table for 12 at  Il Mulino’s at 8 pm on Friday.
  • Dowd: Raj, can you please get off the phone so we can get back to work. I understand that it is restaurant week here in New York, but this is the largest hedge fund insider trading trial in history. Your life is on the line here.  Dinner reservations can wait!
  • Raj: I wonder if  Il Mulino still has that yummy pasta special that I love? You think I hit the bid for Lavo at 6pm or hold out for a later table? Let the market come to Raj, baby. HAHAHAHAHAHAHAHAHA.
  • Dowd; Raj, please forget about food for five minutes. Jury selection for your trial begins this week, and you are facing very serious charges, perhaps thirty years in prison, or even worse, if you lose you might be sent back to Sri Lanka.
  • Raj: Nonsense, Mr. fancy pants lawyer. This entire case is a load of crap. I am the King of Kings. I will rise again. The Government has absolutely nothing on me. NOTHING!
  • Dowd: With all due respect Mr. Rajaratnam, this may not be the slam dunk victory that you believe it is. The US District Attorney’s office has many talented lawyers working on this case full time, they have over fifteen thousand wiretaps, damaging tapes of you talking to 130 of your friends and peers, numerous cooperating witnesses ready to sing like canaries.
  • Raj. Their entire case is a fabricated mish-mosh of flimsy circumstantial evidence. “He said this, she said that, she spoke to him, he knew that”.  This, my friend, is what we Sri Lankans call a no brainer.
  • Dowd: That is an interesting take on this trial. Most experts think your odds of winning are more like two percent. This is very risky business, Raj.
  • Raj: Please shut your high priced mouth.  I will win this case.  I am a winner, like Charlie Sheen.  We are both winners, baby.  In any case we better win this damn case, Mr. dream team lawyer.  I have spent forty million dollars defending this case.  Do you know how many good trades it takes to make 40 million dollars?  Money talks, bullshit walks.  Case closed, HAHAHAHAHAHAHA!!!
  • Dowd:  The Government has secured 19 guilty pleas. It claims that you made tens of millions of dollars on 37 illegal insider trades while working at The Galleon Group. They have boatloads of evidence, and very strong witnesses. For Christ’s sake, Lloyd Blankfein will be testifying for the Government against you.
  • Raj: I know the charges, I read the New York Post. I love it when I am on Page Six, but I look so chubby in pictures. Anyway, I am not scared of that bald dirt bag Blankfein. I have more money than him, by a lot.
  • Dowd: Raj, this is not about who has more hair or more money. This is a very serious trial, and we need to prepare.
  • Raj: Would you happen to know whether Pastis is doing the twenty dollar lunch special this week?  That is one hell of a deal. I just adore their steak fries. You simply cannot get that quality of beef in Sri Lanka.
  • Dowd: Sir, I really don’t give a damn about the lunch specials around town. I have not eaten lunch away from my desk since October, 2009 when you were arrested at your home and called me to represent you.
  • Raj: Well I don’t blame you, if I were making $1000 an hour I would eat at my desk too. You lawyers are the damn criminals. I wish the FBI would come arrest you, save me some damn money.
  • Dowd: Sir, the FBI arrested you for insider trading. That’s what we need to focus on.
  • Raj: I remember that day as if it were yesterday. Damn clowns with guns drawn and those silly FBI jackets with the big letters. It was just like you see on television. They burst into my penthouse while I am having my tea, enjoying a fine Cuban cigar. It really pissed me off because I was on an important call with Danielle Chiesi, Anil Kumar and my good friend Roomy Khan.
  • Dowd: These people were not your friends. Many of them are informants, preparing to testify against you at your trial.
  • Raj: Really?  Wow!  That is a total bummer. I must remember to take them all off my Christmas card list.
  • Dowd: Have you been preparing your testimony?  You will be our key witness. You will need to discredit all the informants, explain all the wiretapped calls, explain the trades that made you millions, somehow convince the jury that you did not know that the information provided to you was material nonpublic information.
  • Raj: I did not become a billionaire because I am a moron. Leave this to me. By the time I am done telling my story to the jury they will not believe a word of what they hear on the tapes, all those traitor informants will be exposed as liars. Even Hedge Fund Live will reject their blogs.
  • Dowd: I need to know what you will say, Raj. I cannot be surprised up there. I have my reputation at stake
  • Raj:  If you must know, I will testify that I was conducting business as usual. I am quite familiar with all aspects of the Mosaic defense.  I will let the jury know that I sought information about the companies I invested in on behalf of my clients, and sifted through and extracted the information I deemed important.  I did my homework and made money the old fashioned way.
  • Dowd: I am impressed, Raj, you really have done your homework.  I thought you were doing nothing but eating and partying the last 18 months while I busted my ass trying to keep you out of prison.  I think we have a great chance to win.
  • Raj:  Mark my words;  I will destroy those bastards who betrayed me.  They will never work again.  Raj will be the WINNER, baby.  Now can we please go get lunch? I am starving.

Raj Rajaratnam - Money Can Buy A Great Defense - After being convicted, Raj Rajaratnam quickly turned defensive and hired a top notch defendant as his lawyer. He hired John Dowd, a lawyer who defended stars like Pete Rose during the gambling charges. This shows that money is capable of buying almost everything. Mr Rajaratnam is worth a over a billion dollars and it is obvious that he plans on spending all he needs to prove that he is not guilty. If he is convicted of insider trading, he will be sent to prison for about 20 years and the government will seem to be doing its jobs. If things do not turn out as planned, well then the government loses it touch and other insider cases will be hard to battle in the future. So as it can be seen, most of the little things that people take as granted are caused by one verdict. If government wins, people are more confident investing and insider trading is limited. If not, things go back as they are not while government tries its best to take the big investors down with minimal results.