The Galleon Verdict

http://www.futureofcapitalism.com/2011/05/the-galleon-verdict

A professor of law at the University of San Diego, Frank Partnoy, has a piece in the Financial Times about the guilty verdict against Raj Rajaratnam:

it isn't clear from this case what insider trading even is. Many business people do not understand why Mr Rajaratnam committed crimes related to Intel's acquisition, yet it was apparently legal for David Sokol to buy Lubrizol shares just before it was acquired by his company, Berkshire Hathaway. There is no clear dividing line.

There are muddy questions of "materiality". And insider-trading law strangely requires someone (not necessarily the person who bought shares) to have breached a fiduciary duty to the source of the information. The US Supreme Court has called this convoluted requirement a judicial oak that grew from a legislative acorn. The focus on breach of duty makes the law maddeningly vague, and the links between trader and breacher can be attenuated. It is no surprise that Mr Rajaratnam's jury took 12 days.

Prosecutors might hope vagueness will deter, but instead it erodes respect for the law.

I respect the jury's decision in this particular case, but it's also easy to see in some of the press coverage the same kind of class-warfare tone that appeared in the SEC's original press release announcing charges against "Billionaire Hedge Fund Manager Raj Rajaratnam." From the New York Times article on the verdict:

Galleon brought Mr. Rajaratnam great wealth. Forbes magazine pegged his net worth at $1.3 billion. He owns a second home in the wealthy suburb of Greenwich, Conn., and a condominium at the Setai Hotel in Miami Beach. During the trial, Mr. Rajaratnam's former friends told the jury about lavish vacations including, for his 50th birthday, chartering a private jet to fly dozens of family and friends to Kenya for a safari.

One starts to wonder when owning a second home in "the wealthy suburb of Greenwich, Conn." became an indictable offense, or when the Times started slapping such labels on parts of its home circulation area. In any event, I've written that I think the Forbes estimate of Mr. Rajaratnam's wealth may be high. Condos at the Setai reportedly run anywhere from $425,000 for a one-bedroom to $5.6 million for a three bedroom, three bath unit. They always get you, or try to, on the birthday party, though. Just ask Steve Schwarzman or Dennis Kozlowski Barbara Amiel. I guess the lesson is keep it small and understated and only invite your real friends. But I don't know that we need to use criminal law in this country to enforce small and understated birthday parties.

by Editor  |  May 12, 2011 at 11:33 pm Related Topics:  Capital Markets Regulation, Education, SEC receive the latest by email: subscribe to the free futureofcapitalism.com mailing list