Financial Institutions and Risk Management

This assignment delves into the crucial interplay between finance, risk management, and ethical considerations within financial institutions. It examines topics such as hedge fund operations, operational due diligence, and the prevalence of fraud within the industry. The analysis extends to encompass ethical dilemmas in finance, including case studies and perspectives on responsible business practices.

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COMPARATIVE BUSINESS ETHICS AND SOCIAL RESPONSIBILITY
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Executive summary
Stock exchange markets are one of the main sources where a large number of
individuals obtain earnings. Through them, highly intelligent traders have managed to earn
millions, while at the same time many people have attained significant losses in the trading
activities. This aspect reveals that individuals with knowledge and understanding of how
trades occur have significant chances of earning a fortune from the same. A large number of
organizations have recently been established to help investors trade their money and obtain
significant gains. An important aspect of consideration with these trades is the aspect of
information and knowledge. The ability to predict the future occurrences correctly simply
differentiates between individuals that obtain a lot of gains from the stock exchange markets
to the individuals that do not. There is however the acceptable ways and methods which are
allowed for individuals to obtain and use information regarding stock exchange, and there is
also certain methods that individuals in wall-street use which are not acceptable. This paper
assess the case of insider trading which took place in Galleon Group that was being led by
Raj Rajaratnam. It analyses the ethical implications of the case and the recommended
operations which could have been better in the case of the individuals in question.
Introduction
Wall Street trading is considered to be one of the main sources of money where
individuals manage to obtain wealth of massive amounts within a very short period of time.
The ability of the analysts and traders to make decisions that will provide them with
monetary returns is dependent on their ability to predict possible occurrences and changes in
stock and currency in future. The information that these individuals have regarding the
organizations that they trade is very crucial and also determine whether they will have the
ability to make profitable trades and provide gains for their investors. With this regards

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therefore, the role of trade analysts which is mainly to gather information regarding the
different firms whose stock the organization trades is significant and determines the
profitability of the organization generally. Being the leader of galleon group, Raj Rajaratnam
is one of the individuals that managed to obtain significant gains from the trading of stock
and funds in the stock exchange markets. He however utilized unacceptable and unethical
methods of obtaining information that helped him gain an advantage over other traders, an
aspect which resulted in his being arrested and convicted for 11 years in prison and fined a
large sum of money (West, 2014).
Case explanation
Raj Rajaratnam is one of the highest skilled data analysis, capable of gathering and
analysing data to give advice on the best way to trade and make important hedge funds
decisions. He attained his MBA degree in the year 1983, in which he specialized in the
computer chip industry. He was later hired in the investment banking boutique organization
known as Needham & Co. this organization significantly influenced Raj Rajaratnam and
made him completely understand how the hedge fund trading organizations work. He was an
analyst in this organization when he was initially being hired, until he began moving up the
ranks and eventually managed to become the president of the organization. As president of
the organization, Rajaratnam managed to make significant achievements with regard to
aspects about returns on the investments and he became the individual that was relied upon
by many individuals. This aspect however, later became a concern for many individuals in
the organization. His personality and role in managing the organization, fund managing and
stock analysing led to many conflict situations in the organization. Concerns for his
personality led to a negative aspect towards the organization. They, for example, led to the
organization not to continue merging with the Webber and Co organization which had an
interest in the accusation of the Needham organization (Ferrell, Fraedrich, 2012).

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Rajaratnam later left Needham organization and went to set up his own organization
which he called the Galleon Group. He took with him a number of employees from
Needham, whom he began the organization establishment with. The Galleon organization
was also a hedge fund organization, which was aimed at investing money for investors and
giving them returns for their investments as profit. By this time, Rajaratnam had managed to
establish a reputation for himself and for his firm. He has attained a network of employees
and executives of the large organizations in the world among which include Intel, IBM,
Hilton and Sun Microsystems among others. He was also found with a number of unlawful
operation in his firm, occurrences that eventually led to law suits by certain individuals and at
the same time caused significant amounts of fines to the organization. The organization, was
for example forced to pay a large sum of money due to an issue regarding tax evasion which
it was accused of having involved in (Ferrell, Fraedrich, 2012).
The main issue which led to the conviction of Rajaratnam, however was when it
became possible to prove that he was obtain confidential information from individuals in
different organizations and utilized that information to trade more wisely. SEC lawyers
explain this as fraud of the highest level, mostly because it gives the trader an advantage over
the organization and other traders, thus allowing him or her to win trades unlike other less
informed traders who simply relies on their prediction skills to place their trades and hope for
the best. The investigators in his case realized that Rajaratnam had managed to establish a
network of individuals in the major firms and thus through them, he managed to attain
information regarding the firm and other individuals involved and then utilize it to make wise
trades and achieve significant gains. With this understanding, it is clear that
Are information gathering techniques like Rajaratnam’s common on Wall Street?

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Wall Street is simply the trading arena where traders meet to place their trades with an
aim of attaining significant gains from the trades that they place. A large number of traders
place trades from the information that they predict and believe will occur. When a trader is
able to predict a stock increase or decrease, he or she attains the chance to gain significant
funds and benefits from this prediction. The trading practice taking place in the Wall Street is
completely different from how the organizations whose stock is traded operate. These
organization aim to ensure that they remain completely capable and effective in the activities
that will benefit them and their investors. They therefore make decisions regarding increasing
and decreasing stock depending on other factors like the market and the supply demand
aspects of the those markets.
Traders in Wall Street observe these factors and utilize that information to predict the
actions that these major firms will take. Any positive and correct prediction of this aspect
attracts a significant reward, depending on the amount that the trader was also willing to risk
from this investment. Wall Street trading activities are important and considered significantly
beneficial to a large number of individuals who have the ability to predict and analyse these
factors and thus manage to make significant gains from the same. The individuals trading in
Wall Street are, in some occasions, former employees of the organizations that they trade in
this market. With this regard, these individuals have connection and ability to obtain
information on decisions that organizations make earlier before those decisions are executed
an aspect that would give them an advantage in the trading ground and thus make it simple
for them to attain significant gains in an easy way.
Organizations operate in a systematic way, before any organizational important action
that may involve stock is made, a decision to make take the action first requires to be made.
There is also a short period of time before the organization makes that decision and
announces it to the public as it is also being executed. If such information was to be given to

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a trader before it is announced to other individuals of the public, the trader would have the
ability to make an extremely wise trade, bearing in mind that a certain change is likely to
occur an aspect that would result in the positive change in his or her favour. Since as
explained earlier, most individuals trading at Wall Street have contacts and friends from the
large organizations, they sometimes get tips about certain organizational changes and thus
they make trades depending on these tips. This form of gathering and analysing information
is similar to the method that Rajaratnam utilized in the case, except the fact that Rajaratnam
utilized this method on a large scale. It is therefore correct to express that similar methods of
obtaining data like those utilized by Rajaratnam still exists in wall street, except that they
exists in a smaller dimension and they are difficult for the law enforcements to prove
(Bainbridge, 2013).
What could regulators, investors and executives do to reduce the practice?
Combined together, the investors, regulators and executives have the ability to make
certain changes on how the trading world operate. This is because these are the individuals
who have control on all the operations that take place in the trading arena and thus for that
reason they can make permanent changes on how the arena operates. The investors, to begin
with, are the individuals who offer money to the traders and allow them to trade it with an
aim of gaining some profit. With this regard, therefore, the investors are simply the
employers of the traders. Without any money to trade, an individual cannot be regarded as a
trader, mostly because such an individual would be less capable of offering any money
needed for the trade to take place. The investors give their money to the traders and thus
empowers them to make trades. A trader therefore relies on investors in order to make profit
through his or her trading practice. If an investor, therefore decided to select only the traders
who are believed to have very low connection in individuals that could leak corporate

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confidential information, therefore, they would simply manage to control the wiliness of the
traders to utilize information obtained in illegal means (Souza, 2012).
Regulators, on the other hand consists of the individuals who have been given the
mandate to ensure that the traders only trade with the information they predict. These
individuals have established the rules that will be followed by all individuals or groups that
involve in the trading practice. They are aimed at ensuring that all individuals simply rely on
their trading skills and capability to attain gains in this market and that all traders have an
equal chance of success in this trading arena. In order to ensure that people do not in any way
seek to obtain any information illegally from organizations, the regulators can increase the
severity of the consequences that any individual who is caught obtaining and utilizing illegal
information in the trading business will face. Traders are individuals that deal with risks in
their daily lives. One major and common rule that most of them have is that when the risk of
the trade they are about to make increases rapidly, they are less likely to make an investment
on the same, despite the possible outcome of high returns. Considering this aspect, therefore,
increasing the consequences severity is likely to scare traders from obtaining information
unlawfully (Baker, & Filbeck, 2017).
The executives of the organizations are the individuals who have the complete control
of how the organization operates. They make a significant impact in defining and determining
the culture of the organization. With this understanding, the individuals have the ability of
establishing an organizational culture where all individuals are aware and willing to ensure
that all the organizational information remains confidential. They can also establish
technological surveillance systems which can listen to all the convesations that the
individuals have on other individuals and determine those that are leaking corporate
information to traders and other unauthorised individuals. With this regard therefore, it is
clear that the individuals have the ability to stop any form of information that may be

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circulating regarding the organization which could make some traders more capable and
others less able to operate effectively (Siegel, 2013).
Implications of sharing confidential material information?
Sharing confidential information is one of the most inappropriate means through
which organizations go through. The first major implication is the poor and less ethical
standards of the individuals that share the information of the organization to others. Almost
all the organizations have established the explanation of the importance of ensuring that all
individuals uphold the importance of ensuring that people understand the reasons why they
should in any occasion share confidential information with others. Organizations become
competitive and manage to remain relevant because of the strategies that they have, which are
unique and completely different from those that other organizations utilize. An individual
sharing these secrets can therefore jeopardize the plans that the organization have of success.
At the same time, the aspect of being involved in activities of fraud tarnish the image of an
organization, an aspect that can potentially minimize the number of investors and customers
willing to associate themselves with that organization. With this understanding, therefore, it
is significantly important for organizations to ensure that they remain completely capable of
operating in an appropriate manner and fully eliminate the possibility of any employee from
sharing any organizational confidential information (Menéndez, & Pérez, 2010).
Could it affect the decision about how an individual trades stock if he or she knew about it?
If a certain trader obtained any form of organizational confidential information which
is associated to the aspects of the organization that are traded in the stock market, such a
trader could change his or her plans and make a more precise trade, since he or she is sure
about what will happen. One main reason why traders require skills in the art of trading is
their ability to make the correct predictions and make wise trades bearing in mind the existing

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risk and how to mitigate its occurrence. When a trader is however provided with trading
information about some serious occurrence and how to mitigate it, he or she eliminates the
aspect of risk and can them make a significantly large trade which is likely to give him or her
tremendous returns in profit. With this understanding, therefore, confidential organizational
information which is in association with trade products have the ability to help the trader in
trading and thus he or she is likely to change his or her trading decisions and pattern.
Do you think the secret investigation and conviction of Rajaratnam and other people in the
Galleon network will in any way deter other fund managers and investors from sharing non-
public information?
As explained earlier, traders are individuals who deal with risks. Over time, they have
attained the need to ensure that in all the deals they make, they minimize risk to the lowest
levels possible, in order to increase their certainty of making profits. The investigation and
conviction of Rajaratnam is one of the main sign of a significantly increased risk in the
activities of obtaining illegal information from organizations and using it for beneficial
trading in the Wall Street. With this regard, therefore, majority of the traders are likely to
distance themselves from any form of illegal obtaining and use of such information, mostly
because they are aware that the consequences of being caught are significantly high and that
the chances of being caught are also high (Jaitly, 2016).
Apart from the conviction of Rajaratnam, the specific individuals who provided him
with information from different organizations were also arrested and convicted. This
incidence led to a massive negative implication for the Galleon group and all other
organizations whose employees were also involved in the case. To begin with, the
organizations obtained negative criticism from the public for allowing their employees to be
used in leaking important organizational information even without the organization knowing.

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The negative criticism caused the organization to obtain a negative image, an aspect that can
eventually lead to losses of both customers and investors. With this understanding, it is
definite that the organizations are likely to establish all forms of barriers and standards to
ensure that they do not in any occasion allow traders and hedge managers to obtain any
information before they are authorised to. With this understanding, therefore, it is clear that
the organizational executives would not in any occasion be willing to share any of the
confidential information with the hedge fund managers or any trader at any cost (Hull, 2012).
The other important aspect that reveals how the conviction of the network made it
possible for hedge managers to consider not sharing any information prior to trading is the
ability of the convicting parties to find evidence that the information Rajaratnam obtained
from his contacts in different organizations managed to help him make certain trades which
were significantly profitable. One of the major challenge that federal agents find which
makes it difficult for them to convict fraudsters in the wall street business is the challenge of
proving that any information that was shared to the traders was actually used in their decision
making practice as they traded. The fact that the agents actually managed to make this prove
in the case of Rajaratnam, however, reveals to the hedge fund managers that the risk of being
discovered and convicted of having committed a crime has increased significantly, and thus
for that reason, they should refrain from any activity that might cause them to be caught and
convicted.
Conclusion
In conclusion, ethics is a significantly important virtue in any business organization
and activity. If Rajaratnam operated like an ethical individual from the beginning and did not
rely on fraud to obtain his significant riches and popularity in the hedge fund business, he
might still be a highly reputed individual and also running a profitable organization. His low

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ethical standards which led to the establishment of the information leaking network is
however the main reason why he ended up in jail for an 11 years term and the huge fine he
was required to pay. With this understanding, it is clear that leaked information from the case
contributed significantly towards the trades that the Galleon group organization made and
thus the judgement to Rajaratnam and his associated was fair.

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