Insider Trading: Regulation and Impact

This assignment delves into the multifaceted issue of insider trading. It explores various aspects, including legal definitions, regulatory frameworks implemented to curb this practice, and the economic implications associated with insider trading. The analysis also touches upon ethical considerations surrounding insider trading and its impact on market efficiency and investor confidence.

Corporate Business Ethics and Social Responsibility 1
COMPARATIVE BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
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Corporate Business Ethics and Social Responsibility 2
Comparative Business Ethics and Social Responsibility
Executive Summary
Raj Rajaratnam gained incredible riches in the excess of over $40 million from his
engagement in illegal trading activities. Due to such riches, Raj Rajaratnam was living lavish
lifestyles that included throwing money around, and this was questioned by the authorities
prompting the subsequent investigations. In one particular instance, Raj even offered to pay
$50000 to any member of his team who could use a stun-gun to shock themselves. Notably,
Raj Rajaratnam decision to accept an approximately $20 million payment to resolve and
shelter a $52 million that was under Federal investigated started to land him into numerous
problems. Raj Rajaratnam also sanctioned a $2 million payment to Galleon to help in settling
an SEC analysis into its stock dealing activities (Singh and Kumar, 2014). Specifically, Raj
colluded with other Intel personnel and facilitated the leaking of important information on
sales and production to influence market or stock trading activities.
Therefore, in the analysis of the case of insider trading at Galleon, this report gives a
detailed understanding of the present company situation. The report further explains different
information-gathering technique that Raj used and whether such methods are common in
Wall Street and relevant course of action by different stakeholders. In addition, the report
explores various implications of sharing data and information that are supposed to be
confidential and how such materials can influence the trading of securities. Lastly, the report
examines the impacts of Rajaratnam’s convinction that was conducted through secret
investigations, and whether such actions can deter present and future illegal trading activities.
Current information on the company and situation
Introduction

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According to Benny (2006), insider trading refers to the unlawful practices of trading
securities to fit certain personal aspirations and desires of individuals by getting undue access
to data and information that are considered confidential. In most countries, there are
comprehensive legal systems that aim at curtailing this kind of business activity. Ideally, it is
unfair in very sense to possess vital information that could possibly shift market
competitions. This is because according to Acharya and Johnson (2007), insider trading can
potentially raise the cost of capital for stock issuers and this may disrupt other economic
processes. Thus, in many jurisdictions such as the United States, insider trading is prohibited
and trading is strictly monitored to help in leveling the playing field.
However, the rules central to illegal information sharing can be challenging to
implement given the increased sophistication in doing business. In the case of Raj, insider
trading were detected through wiretaps and this led to his conviction. While in other
jurisdictions, there can be little or even no information on existence of insider trading making
it hard to prosecute individuals.
Galleon Network discussed in the case was a privately owned hedge fund company
providing different services and viable information on investment opportunities (Driggers,
2012). The company was established in 1997 and attracted competent employees from well-
established corporations such as Goldman Sach’s and Needham. The company was reputed
for its inherent ability to carefully identify and select the best stocks to invest in further
attracting the interest of various players in the market. Raj Rajaratnam who had initially
worked at Needham as an analyst for approximately 11 years prior to his switch to Galleon
Group was very instrumental in overseeing the successes of Galleon (Singh and Kumar,
2014). This is because he was able to successfully lure several employees and clients from his
previous company Needham. With a senior managerial position, Raj Rajaratnam nurtured a

Corporate Business Ethics and Social Responsibility 4
flashy style of governance that further helped in attracting and retaining more clients and
employees to the organization.
Having worked as an investment analysis with companies such as Needham, Raj
Rajaratnam had the ability establish intimidating networking and note-taking research
approaches. Such abilities enabled Raj to make unique and accurate market predictions on the
anticipated financial conditions. Overall, Raj’s committed illegal trading acts that included
wire frauds and stocks amounting to approximately $63.8 million (Driggers, 2012). The
investigative authorities established that Raj had obtained inside data and information from
companies that Galleon was networking with and released such information for monetary
gains.
Specifically, Raj Rajaratnam used his deep network of associates he had made from
his past stints at companies such as Needham and Goldman Sach’s that he used to execute his
illegal information sharing practices. Raj was later subjected to intense investigations
alongside other twenty-six people and found to have committed fraud and sedition (Singh and
Kumar, 2014). He was subsequently convicted and found guilty of 14 counts of illegal
information sharing, con and treachery (Driggers, 2012). The downfall of Galleon, a
company that was evidently blossoming in its hay days can be accredited to Raj Rajaratnam’s
unethical business practices described above.
Question one
Indeed, the stipulated information gathering methods that are the same as those that
Rajaratnam used in the case are very prominent on Wall Street. Some of the information
gathering techniques that facilitated Rajaratnam’s activities included the use of headset calls
meeting, and short texts messages. While these are some of the predominant methods that we
frequently use to pass data and information, they can be easily tracked back to the sender who
is involved in illegal activities (Ledford, 2013). Consequently, business executives, investors

Corporate Business Ethics and Social Responsibility 5
and other important stakeholders should stress on confidentially and safeguard against
possible leakages to unauthorized parties. It is right to argue that most people in the business
world would predominantly wish to be exposed to such data and information that may give
them competitive edge in a market. Therefore, Wall Street is not different as the common
objective in any marketplace is to increase earnings (Massoud et al., 2011).
Irrefutably, the primary objective of every business operation is to maximize profits
and make as much money as possible through every means possible (Acharya and Johnson,
2010). This explains why some businesses are occasionally tempted to engage in illegal
activities such as insider trading. According to Davidowitz (2014), and in the context, insider
trading may refer to such processes involved in introducing unexpected changes on stock
prices and aggregating peculiarly large amount of cash in an organization among other
suspicions and unjustifiable activities to make more money. However, some businesses can
be overwhelmed with the idea of maximizing gains and lose sight of practicing acceptable
and legal practices. The insider trading practices are not unique to Galleon network, and is a
problem that is likely to continue for a very long time (Massoud et al., 2011). This because
most organizations especially in Wall Street that are practicing such illegal trading are
devising more clever ways of hiding their activities instead of looking for viable solutions.
There are limited options that stakeholders can assume to eradicate or control insider
trading in organizations. However, advanced oversight may help ban these activities or
altogether stop them from spreading further. Undeniably, there is an innate need to eliminate
insider trading or any other illegal information gathering system that may create unfair
market competitions (Acharya and Johnson, 2010). Correspondingly, there well-established
and high moral standards that every business professional is required to adhere to, and
violations attracts possible legal redresses (Ferrell and Fraedrich, 2015). To ensure sanity in
the business world, insider and related activities must be halted at the very start to avoid any

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further serious impact in the market. Most importantly, businesses relies on the individuals’
ability to stick to the business ethical principles and resist any attempt to allow such illegal
information to leak irrespective of the pay-out.
Controlling or reducing insider trading and related activities can be extremely
challenging and requires absolute commitment from the relevant authorities (Nardo, 2011).
For instance, in the case of Galleon network, relevant fiscal authorities can keenly assess the
existence of this type of information gathering. Secondly, employees in organizations such as
Galleon network should be informed that they risk facing serious consequences that may
include legal redresses if they are found engaging in insider trading or any other unlawful
information gathering.
Also, constant reminder to the employees of the business ethics and required
standards of behavior may also help in eliminating insider trading (Sarkar, 2010). In the case
study, constant reminder of such principles could have helped Raj to maintain an ethical
mind-set allowing him to concentrate on his equally lucrative analyst position. He could have
still made a decent living while helping the company to remaining competitive and avoiding
such illegal acts such insider trading. Moreover, based on strong ethical principles and
professionalism, Raj could have also remained loyal to his former company Needham.
Employees should also be introduced to professional and ethical implications of their
behaviours (Del Guercio, Odders-White, and Ready, 2013).
Question two
Indeed, insider trading or illegal information sharing techniques have numerous
negative impacts both for investors and markets as can be derived from the analysis of
Rajaratnam case. Consequently, there must be severe repercussions of sharing confidential
material information in viable organization (Marin and Olivier, 2008). Precisely, most
institutions prohibits the illegal sharing of information that is not in the public domain and

Corporate Business Ethics and Social Responsibility 7
violating such organizational directives can attract serious implications. This explains why
Galleon network sanctioned the prosecution and subsequent jailing of its employee
Rajaratnam who was found guilty of such illegal actions. There are numerous effective laws
that prohibits organizations from participating in illegal information sharing (Grégoire and
Coupland, 2016). Correspondingly, insider trading can have irredeemable impacts on the
reputation of companies accused of harboring such activities.
Besides, having access to data and information that are not yet made public is an
unfair business practice that should be tolerated. Raj had a lawful privilege to access and
possess information that could influence the market outcomes. The implications of Raj’s
actions are pretty obvious from the case study of Galleon Company. Another implication of
insider trading is that potential and existing investors may opt to stay out of the market and
look for other secure alternatives such investing in government bonds. For instance, such
unlawful activities may meaningfully violate the rights of various market stakeholders who
are the primary owners of certain vital data and information. . Thus, Galleon’s insider
trading injured the general reputation of other companies operating in similar line of business
(Cheng, Yeh, and Tu, 2008).
Practically, attaining certain organizational objectives can be challenging and takes
much more time to accomplish. This explains why some organizations, even those in Wall
Street are being tempted to engage in illegal information sharing without considering the
implications of such actions. Such organizations perceive insider trading as a feasible process
that they can use to speedily attain their long-term objectives. Yet, such illegal activities may
in fact adversely contribute to the decline in long-term organizational efficiency (Grégoire
and Coupland, 2016). Unfair business practices are myopic options that can only serve to
derail the very precept of ethical behaviours of humanity.

Corporate Business Ethics and Social Responsibility 8
Another implication of insider trading is possible loss of jobs and time wastage in
long judicial procedures to prosecute the culprits (Betzer and Theissen, 2009). Also, Raj and
his associates deserves the consequent prosecution and sentencing to jail terms in addition to
reimbursing fines and legal fees. From these well explained implications of involving in
unfair information sharing, no organizational employee should be tempted or even coerced to
make such bad decisions (Huddart and Ke, 2007). Also, if an individual was exposed to such
unfair information, he should immediately report to the investigative authorities instead of
trying to use such materials to influence market operations.
From the Galleon case, it is expressively detailed that Raj endorsed the sharing of
confidential information without obtaining the permission from relevant stakeholders such as
investors (Peress, 2010). As such, Raj breached the secrets and techniques that are the very
foundation of confidential market and businesses practices. Such information are perceived to
be of high value and can expressively breach the long-term trust of various shareholders
(Huddart and Ke, 2007). Insider trading propagated by Raj also resulted into severe monetary
implications particularly on companies operating in the same market as Galleon due to
tattered confidence among the shareholders. I believe that Galleon had business agreements
with other companies and market players and subsequent violations deserves severe
implications (Cheng, Yeh, and Tu, 2008).
Insider trading may also contribute to the downsizing of the market resulting into
detrimental effects on major market players such as companies (Beny, 2006). As already
sparingly mentioned, when investors suspect or prove insider trading or any other illegal
information sharing activity, they will vacate the market en masse resulting into the supposed
downsizing. As such, the primary implication that can be derived from engaging in insider
trading as explained in the Galleon case is that it is a risky and unethical affair that cause

Corporate Business Ethics and Social Responsibility 9
unprecedented troubles. For instance, when confidential information on the securities market
are shared with the media before being publicly traded, the stock prices be influenced based
on such information.
Of course if insider trading was not illegal, it could significantly shape decisions about how
to trade stocks are traded if such information are made public (Cheng, Yeh, and Tu, 2008).
Individuals and businesses would relish the idea of possessing vital knowledge of the best
stocks to trade, the most appropriate market move and decisions. However, every business
decision should be guarded by the set ethical guidelines, values and beliefs (Acharya and
Johnson, 2007). Moreover, such illegal activities are not supported by any justice system and
may only land an individual and company into trouble with the law enforcement agencies.
Therefore, possessing such illegal knowledge should never influence or coerce an individual
or an organization to oblige. It is an extensive concept that embraces business-related secrets
as well as general information. This therefore is definitely an issue that would affect my
decision on trading a stock (Marin and Olivier, 2008).
Question three
The investigation into Galleon insider trading allegations was successfully conducted
using wiretaps and aimed at deterring other fund managers and stockholders from sharing
information that are not yet in the public domain (McGee, 2010). The case was considered to
be the biggest hedge fund scheme and the extensive use of wiretaps was a direct warning to
other players in the business that there were new ways of being caught in the act. While Raj’s
actions can be accredited to his exceptional greed for money and quick success, his
subsequent prosecution and conviction was a significant milestone and a step in the right
direction in the fight against illegal information sharing (Ferrell and Fraedrich, 2015).

Corporate Business Ethics and Social Responsibility 10
As such, based on the evidence that were gathered through wiretaps, I believe that a
lot of people will avoid such unethical practices. Raj believed that that he was invincible, and
that he had the ability to outsmart the authorities but was ultimately reprimanded. Raj’s
confidence in his invincibility was captured in one of testimonies that allowed in court. In a
statement issued to the court, a witness who was also an employee at Galleon asserted that
Raj had instructed employees to create secure emails that could be used to hide his illegal
sources of information and other illegal practices. So I believe given that Raj was caught
despite his massive influence in the market and association with other influential will deter
other new companies from engaging in similar actions (Tamersoy et al., 2013).
However, those companies that are already engaged in these illegal and unfair
practices are likely not stop (Langevoort, 2014). Instead, they might even develop more
sophisticated ways of conducting insider trading to reduce the probability of getting caught in
the act like Raj’s Galleon. In fact, according to Tamersoy et al. (2014), the number of insider
trading is on a rapid rise, and he attribute this to an increasingly technological savvy market
that is it even harder to nab these fraudulent companies. Most of these corrupt fund managers
believe that the perceived benefits outweighs the possible risk of being caught. As a result,
the conviction of Raj is may not influence other managers to back out of insider trading
(Skaife, Veenman, and Wangerin, 2013).
I am certain that once the findings of the Galleon case were made public, many
companies that were directly involved in insider trading did not halt their illegal acts but
instead became more sophisticated. For instance, many such companies must have attempted
to filter out any suspicious individual who they could have suspected to be an undercover
officer (Tamersoy et al., 2013). Similarly, other similar companies became extra attentive to
their surrounding and develop other ways of communication rather than using Raj’s short text
messaging and phones that could be traced. Such companies who were already practicing

Corporate Business Ethics and Social Responsibility 11
insider trading could not afford to allow infractions hence the need to be extra careful in their
dealings (Lee et al., 2014).
In the long-run, I believe Raj’s conviction is not likely to change other fund managers
who have developed unquenchable greed for quick extra money from sharing illegal
information. Certainly, there will always be a few bad influence in the business world and
Wall Street is not an exception (Hillier, Korczak, and Korczak, 2015). Even employees are
being involved in insider trader and this is evident from the increased number of ordinary
workers who are currently owning stock options. The most important thing that can be
derived from the Galleon case is that the justice system at least made a mark and
communicated strongly that they will ultimately catch other unscrupulous fund managers.
Therefore, other than secret investigations and convictions, there are other effective
methods that can be used to deter hedge fund managers and other stakeholders from engaging
in insider trading. For example, authorities can insist on the usage of stamped watermarks to
reduce the probability of authorized users passing the same information in the imprints to
other unauthorized players (Hillier, Korczak, and Korczak, 2015). Fund managers can also
cooperate with federal and internal investigators to establish the existence of illegal activities
and prosecute culprits. In exchange for cooperation and disclosure, the federal government
can offer the managers protection as a witness to the crimes being investigated. Overall, the
business world relived on the intrinsic ability of hedge fund managers to make ethical
decisions that may ultimately shun illegal information sharing (Ferrell and Fraedrich, 2015).
Conclusion
From the analysis of Galleon group, it is evident that insider trading or any other
illegal information sharing techniques can have negative consequences on a company’s
reputation and sustainability. Notably, such illegal information gathering techniques that were
propagated by Rajaratnams are quite common on Wall Street. As such, there is an intrinsic

Corporate Business Ethics and Social Responsibility 12
need for market regulators, investors, and company executives to take decisive actions aimed
at reducing or eliminating such practices. Indisputably, some organizations are gaining
insatiable appetite for money and are developing unique schemes to swindle the public
through involvement in illegitimate information sharing practices. Just like Raj, such
organizations always believe that they are smarter than the authorities but are ultimately
discovered and prosecuted (Singh and Kumar, 2014).
Ultimately, authorities discovered Raj Rajaratnam’s fraudulent activities and trade
secrets leading to his conviction of insider trading. Notably, Raj Rajaratnam could have used
his skills and experience he acquired from working with other big companies such as
Needham to help Galleon to grow further in status. Instead, Raj Rajaratnam was involved in
unethical conspiracies with other firms aimed at discussing vital information about stocks and
other business processes that were not meant for public consumption at the time. Therefore,
the Galleon case clearly shows that insider trading can result into the termination of a
company’s activities and legal redresses (Singh and Kumar, 2014). Raj Rajaratnam’s position
at Galleon required him to remain ethical given that he owned the consumers a duty of
discretion on certain stocks and products especially if such information held risks and
possible harm.

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