Insider Trading and the Galleon Case

This assignment delves into the complex world of insider trading, using the high-profile Galleon case as a focal point. It requires students to analyze various aspects of this illegal activity, including its legal ramifications, ethical considerations, and financial consequences. The analysis should encompass the historical context, key players involved, regulatory responses, and the lasting impact of the Galleon case on market integrity and investor confidence.

Running head: INSIDER TRADING
INSIDER TRADING
Name of the Student
Name of the University
Author note

1INSIDER TRADING
Executive Summary:
Aim of this report is to study the case of Galleon groups related with insider trading. The
illegal and unethical ways of gathering confidential information about other organisations by
the director of Galleon groups Raj Rajaratnam and the involvement of other employees from
different organisations have been studied. Effectiveness of leakage of non public business
information in order to manipulate stock trading and gain of huge profits has been
understood. The investigation method and penalties for inside trading have also been noticed.
The report has been concluded providing the answers of various techniques that can prevent
insider trading. It also explains the role of different bodies in prevention of insider trading.

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Table of Contents
Introduction:...................................................................................................................3
Question 1:.....................................................................................................................3
Information Gathering Techniques:...........................................................................3
Investigation Techniques:..........................................................................................4
Prevention of Insider Tradings:..................................................................................5
Role of Financial Regulators:.....................................................................................6
Question 2:.....................................................................................................................6
Risk Factors Related with Confidentiality:................................................................6
Incident relating Galleon groups and Goldman Sachs:..............................................7
Stock Trading:............................................................................................................7
Question 3:.....................................................................................................................7
Cover-Ups:.................................................................................................................7
Investigation and Conviction:....................................................................................8
Impact:........................................................................................................................9
Conclusion:..................................................................................................................10
References:...................................................................................................................11

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Introduction:
Insider trading is a term that explains the exchange of securities of any organisation
by any person, who has the access to the non-public security information of that organisation.
The process can be described as a legal or an illegal process depending on the time span
when this trading is occurring (Agrawal and Nasser 2012). If the material security
information about any organisation remains non-public then this practice can be explained by
an illegal procedure. The process only remains legal when the owners or the directors of the
company sell shares or bonds via legal transaction. Due to this illegal trading other
stockholders of any organisation faces many disadvantages (Agrawal and Cooper 2015).
The following report contains a discussion about a case of insider trading took place
in a private owned hedge fund company, The Galleon Group. The company earned own and
others’ profit by management of stocks, hedge funds and portfolios for other investors,
resulting in an investor income of approximately $7 billion (Denis and Xu 2013). In 2009, the
head of the company Raj Rajaratnam had been accused in 14 different cases of conspiracy
and security deceit majorly related to insider trading.
The purpose of this project is to study the case thoroughly and identify the key points.
Depending on those key points some questions are needed to be answered which are
associated with information gathering techniques that had appeared in this case, effect of
sharing confidential security information of the organisation and effectiveness of accusing
Rajaratnam and others in order to stop further inside trading across the world.
Question 1:
Information Gathering Techniques:
In order to gather information Raj Rajaratnam had used several techniques which are
very much common in Wall Street. The general technique of gathering information about
different other companies is either to plant informers in that specific organisation or
organisations or to convince some employee of another organisation to share confidential
information about that company (Vishwanath 2015). This process of sharing information can
take place through different networking media like telephone, fax and exchanges of
document.

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As per the evidences gathered, Rajaratnam had made approximately 45 phone calls to
different individual regarding insider trading (Agapova and Madura 2013). These calls had
been recorded and from the verification it came up that within those individuals 6 people had
already been convicted. According to the recordings, many inside information had been
shared between some investors or employees of other organisation and Rajaratnam. Those
information were yet to be released in public (Crudo and Ravdin 2014). Evidences show that
Rajaratnam tried to cover up the incidents by telling others to destroy the evidences.
Additionally, evidences of inside tips of decreasing stock price of Goldman Sach’s, which
just had been presented one day ago, had been delivered to Rajaratnam by someone within
the board members of Goldman Sach’s (Agrawal and Nasser 2012).
During the prosecution of Rajaratnam more information about his tactics had come
forward. From the testimony of an employee of Galleon group, Anil Kumar, Rajaratnam had
wired a sum of $1.75 million to a confidential seashore account in order to hire him to lay the
role of a consultant who will not follow the fundamentals of traditional industry research
(Agrawal and Cooper 2015).
Wall Street is familiar with this kind of insider trading techniques (Beny and Seyhun
2012). Many cases familiar to this one had already been occurred in the past (Pollman 2012).
There are some renowned cases of insider trading. Stock market crash in 1929, where Albert
H. Wiggin has been convicted for shorting 40,000 shares of his company purposefully, the
pre-recognition scandals of Levine, Boesky, Milken and Siegel, share and utilization of inside
stock information through journal columns by R. Foster Winans and internal information
gathering and selling shares for own profit by Samuel Waskal and Martha Stewart are some
examples (Chen, Martin and Wang 2012).
Investigation Techniques:
The investigation techniques of Federal government had mainly followed the
procedures of wiretapping (Vishwanath 2015). The main objective of this procedure is to
collect conversation records so that the prosecution can show evidences against the convict
(Atkins 2013). In this case, due to wiretapping, conversations between Rajaratnam and Rajat
Gupta, a member of the board of Goldman Sach’s had come in front where various inside
information had been shared (Presto 2017). For example, the news of investment of $5 billion
stocks in Galleon Sachs by Berkshire Hathaway had been leaked by Rajat Gupta over the
phone before it becomes public (Alldredge and Cicero 2015). As a result Galleon bought

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175,000 shares of Goldman Sach’s and after selling them made a profit of almost $900,000.
This method had never been used for detection in inside trading and for that defence team of
Rajaratnam pressed criminal charges against federal bureau of investigation, which had been
denied by the Supreme Court (Baker 2016).
Prevention of Insider Tradings:
In order to reduce these practices some definite steps are needed to be taken by the
investors, executives and regulators. Firstly it is most important for any organisation to set the
definition of non public information and material of the organisation and to check the
employee possessions of such materials before trading (Beneish, Press and Vargus 2012).
Access to the non public information of the company along with other information of
business, strategies, profits and future plans should be made limited among the employees
and managers of an organisation on a need–to-know basis (Agrawal and Cooper 2015). It
should be strictly followed that confidential information must not get outside of the company
under any circumstances (Chira and Madura 2013). Additionally, the employees and
managers of different departments should be informed about the significance of maintaining
the confidentiality (Vishwanath 2015).
Restriction of non public information can be done by following some steps. Company
transaction should be done securely and information should be kept with the transaction
related employee (Smales and Thul 2017). Access to the soft and hard copy of the
informative files should be maintained in a need to know basis (Alldredge and Cicero 2015).
Removal of confidential documents from conference room gives very small room to trade
information (Beny and Seyhun 2012). Many times disposal of non public agreements after
using reduces the risk of insider trading.
Executives like compliance officer of any organisation is the responsible person for
setting the processes and policies for the company, maintaining the terms and conditions for
preservation of confidential information of the company, monitoring company trades and
implementing professional code of conduct along with the principles of the board of company
(Beneish, Press and Vargus 2012). They are the company professionals who protect the
company from insider trading (Denis and Xu 2013).
The trading window of the securities of any organisation shall be opened for the
designated employees after the public release of earning data for the respective fiscal quarter
(Pollman 2012). The transaction of more than 5000 shares of a company by a designated

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employee must be pre-cleared by the designated authority of the company (Atkins 2013). The
regulation of pre clearance should be done in a periodic manner such as if within a week the
trading of securities has not been completed by the employee or director; a pre-clearance will
be required for trading further.
Role of Financial Regulators:
Another important role in preventing insider trading is played by the financial
regulator under any financial jurisdiction. Security and Exchange Commission is the financial
regulating body in United States of America (Del Guercio, Odders-White and Ready 2013).
They monitor all the activities related to trading and commercial events like organisational
takeovers and announcements, so that they could discover and investigate the illegal activities
like inside trading and others (Driggers 2012). SEC is the main organisation is U.S. where
any complain is registered regarding the irregularities of trading, suspicion of foul play and
others (Crudo and Ravdin 2014).
Question 2:
Risk Factors Related with Confidentiality:
Business confidentiality can be described by the secret embracement of business
information. Each organisation contains some sensitive information which can be used for the
progress of that organisation and its employees (Denis and Xu 2013). Leakage of that
information or losing the confidentiality may result in harmful ways for the company and its
employees. These ways can be described as monetary losses, job losses, wastage of time in
judicial procedures, economic penalties and other staffs (Pollman 2012).
General risks for an organisation due to lack of confidentiality can be referred as
accidental divulgence, ex-employee theft, absence of confidentiality agreements computer
thefts and many more (Reed and Brunson 2013). Trade secret disclosure to clients,
customers, service providers or contractors without a confidentiality agreement or a non-
disclosure agreement, results in leak of non public information, moreover insider trading
(Presto 2017). This agreement must be shared in order to protect the secrecy of the
organisation’s business information and also in order to provide a pathway for recovering the
damages the company has paid due to leakage of information (Raghavan 2013). Another top
risk is ex-employee engagement in hampering the confidentiality of the organisation (Beny
and Seyhun 2012). Most of the time it has been seen that an employee tries to make a copy of

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company information in the time of leaving that he or she can remain in the market
competition (Beneish, Press and Vargus 2012). That explains the way of information theft by
online or offline.
Incident relating Galleon groups and Goldman Sachs:
In the case of Rajaratnam the effects of leakage of confidential business information
can be observed clearly. There are several examples of information theft in this whole case
study. On September 23, 2008 in a board meeting of Goldman Sachs authorities had
discussed about an investment of $5 billion stocks by Berkshire Hathaway (Raghavan 2013).
This confidential information had been leaked before public announcement by a board
member, Rajat Gupta to Rajaratnam. Following the information Galleon groups had bought
175,000 shares of stalk of Goldman Sacks (Skaife, Veenman and Wangerin 2013). After
public announcement the stock price had increased and as a result Galleon Groups had made
a profit of $900,000 (Presto 2017). The breach in confidentiality as Goldman Sachs generated
a huge profit for Galleon groups illegally.
Stock Trading:
The knowledge of stock prices is the key of trading of stocks. The main objective of
stock trading is buying low and selling high (Patel et al. 2015). Any person dealing with
stocks always want to gain profit by selling at a higher price than buying price. In
commercial field, any organisation is benefitted if it has the knowledge about the future rise
or fall of stock prices (Rawat et al. 2013). But this method of acquiring non public stock
information for trading of stocks is highly unethical. No government justice system provides
the rights to do so and this is why the process is illegal (Kaplan et al. 2012). Therefore the
decision of an organisation or any person involved in stock market business regarding in
purchasing or selling of stocks can be influenced very much by the knowledge of stock
(Smales and Thul 2017).
Question 3:
Cover-Ups:
The case of Galleon group is one of the most famous insiders trading case around
Wall Street. Raj Rajaratnam, the owner of this organisation had earned too much profit using
this illegal method of business until he had been caught by federal investigators (Baker
2016). He used various methods to cover up his illegal tactics (Reed and Brunson 2013). To

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provide a cover-up of ‘small-cap’ stocks, a dwarf had been hired by Rajaratnam as an analyst
(Agapova and Madura 2013). In another meeting of Taser International Inc., a trader Keryn
Limmer had volunteered to be tased accepting the offer of $5,000 from Rajaratnam (Skaife,
Veenman and Wangerin 2013). To attract more investors to his cause, he had thrown a
luxurious party at a mansion of weekly charge of $250,000 on a man-made island off the
Florida Coast (Smales and Thul 2017).
Among his other approaches a few things that can be mentioned. An expenditure of
$20 million to settle a federal investigation by developing a fake tax shelter in order to avoid
the tax payment of $52 million was one of his approaches (Driggers 2012). Later, he fired his
lawyers complaining that he had no information about the illegal shelter. Another approach
was hiring Anil Kumar as a consultant at a cost of $1.75 million, which had been wired to a
confidential offshore account not for conventional industry research but for insider trading of
information (Patel et al. 2015).
Investigation and Conviction:
Federal investigators had used the technique of wiretapping in this case (Kaplan et al.
2012). This was the first time when an insider trading case had been handled with the use of
wiretapping. Many conversations of between Rajaratnam and employees of other companies
like Roomy Khan of Intel Corporation and Rajat Gupta of Goldman Sachs had been recorded
that became the evidences for this insider trading case (Chen, Martin and Wang 2012). The
defence team of Rajaratnam had appealed in the Supreme Court against the aggressive
wiretapping technique of federal investigators as these techniques are generally used in the
case of drugs, terrorism and organised crimes (Del Guercio, Odders-White and Ready 2013).
They told that the evidences were gathered using a deceptive judicial permission and hence it
could not be used in prosecution (Agrawal and Nasser 2012). These also had violated the
constitutional rights of Rajaratnam (Baker 2016). Against his convictions, these appeals from
the defence had been proved to be not strong and the Supreme Court has struck to its
judgement of 205 years of prison of Rajaratnam along with $63.8 million penalty (Chira and
Madura 2013). A loss in the civil lawsuit of insider trading, induced by U.S. Security and
Exchange Commission, had set another penalty of Rajaratnam to $92.8 million for the
damages which had increased the total penalties of Rajaratnam to $158 million (Crudo and
Ravdin 2014).

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This case was a big success for the federal investigators (Rawat et al. 2013). Along
with Rajaratnam they had been able to convict more people from different organisations, like
Roomy Khan of Galleon group and formerly a member of Intel, Anil Kumar of McKinsey &
Co., Rajat Gupta of Goldman Sachs and few others (Kaplan et al. 2012). These people are
majorly convicted of sharing inside, non public information of the organisations (Alldredge
and Cicero 2015). Each person had been charged with either prison sentence or home arrest
for a certain period of time along with penalty charges. Rajat Gupta had been charged with
maximum 20 years in prison with a fine of $24.9 million (Atkins 2013). Defence of Rajat
Gupta had used wiretapped evidences to prove that he had not been benefitted from the
insider trading and also to prove the chances of some other person’s involvement in sharing
the inside information. Federal Court had however denied all the petitions of Rajat Gupta
maintaining his sentence (Raghavan 2013).
Impact:
The impact of this case is huge in the commercial sector regarding hedge funds.
Number of people charged with conspiracy and insider trading was almost 26. 4 billion dollar
of investments were reduced from the company and in 2009, Galleon group was closed. The
case had been a wake-up call for the Wall Street. The companies affected by the network of
this illegal practice were Google, IBM, Intel, Goldman Sachs, 3Com Corp, Axcan Pharma,
Atheros, Akamai Technologies and some others (Driggers 2012).
There will definitely be a change in the trend of sharing non public information by the
investors and other fund managers. However, the extent of this change will not be a great one
(Rawat et al. 2013). Conviction of Rajaratnam and the other people and their huge penalties
will definitely give the other hedge fund managers a matter to consider the work of the justice
system and the investigation team had been exceptional in this case (Chira and Madura
2013). Use of advance techniques like wiretapping in information gathering will make the
corrupt investors and employees more cautious about their activities and their respective
consequences (Skaife, Veenman and Wangerin 2013). The analysis of risk and benefits of
Rajaratnam in this case might had presented an assurance that the benefits are comparatively
larger than the risk, but according to the experts, if any trading generates too many unethical
and legal issues that can be turned into criminal prosecution and ultimately result in a prison
sentence, that trading should be avoided (Agapova and Madura 2013). The major objective of
the firms competing in the financial market is to stay on the top by any means and insider
trading is one of the fastest and profitable ways, despite of its highly unethical approach

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(Patel et al. 2015). Therefore, demolishing the practice of insider trading with one big success
is not quite possible for the financial regulating organisations like SEC (Chen, Martin and
Wang 2012). For setting an example the penalties in Rajaratnam case had been strictly
implemented despite of various defence pleadings of the convicted (Reed and Brunson 2013).
Therefore hedge-fund managers and the investors will try to cover up their activities as much
as they can (Del Guercio, Odders-White and Ready 2013).
Conclusion:
Therefore, from the above report on insider trading, derived from the case study of
Galleon group, the effects of insider trading can be clearly obtained. Insider trading is not
only an illegal practice but also it is highly unethical. Success of any organisation and
progress of its employees depends on maintaining the sensitive information of that
organisation confidential. Sharing of confidential information of business of any organisation
can not only result in a vast reduction of company profits but it can also result in total
collapse of that organisation. Raj Rajaratnam, the director of Galleon groups had
implemented various insider trading techniques to achieve high profitability with some other
employees of some companies like Intel, Akamai Technologies, Axcan Pharma, Goldman
Sachs and others. These companies had been heavily impacted due to leakage of confidential
information. However, this profitability of Galleon group did not remain same for a long time
as the federal investigators finally became successful on convicting them of their crimes
using new investigation techniques. Ultimately Rajaratnam and other benefactors were
sentenced to prison for a long time and charged a huge penalty. This case became one of the
biggest successes for Security and Exchange Commission of U.S. That proves that no matter
how big the illegal activities become, government ultimately finds a way to end it for the sake
of common people.

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