Raj Rajaratnam – Getting An Edge

Jun 24, 2011
J. Webster
Comments Off on Raj Rajaratnam – Getting An Edge

The New Yorker’s George Packer on the insider trading case of Raj Rajaratnam, this is a great read.

In the language of hedge funds, Galleon’s strategy was to “arbitrage reality” with the consensus on the Street—to find information about a given company that diverged from Wall Street’s view, allowing Galleon to cash in when the company’s stock price rose or fell. At Galleon, this was known as “getting an edge.” The analyst or portfolio manager with the best read on a company was called the “axe” on that stock. The surest way to become the axe was to have a source who passed on information about a company’s earnings, upcoming deals, and other confidential matters. The ultimate edge was insider trading—the acquisition of nonpublic information about a company—and Rajaratnam was the king axe. At Galleon’s daily 8:30 A.M. meeting, he always had more information than his employees and didn’t hesitate to let them know it. By the mid-aughts, hedge funds accounted for nearly half of all stock trades, and there was ferocious competition for wealthy investors and the business of investment banks. Lightly regulated and nearly opaque, hedge funds played a central role in the creation of credit-default swaps and other financial exotica that led to the economic collapse of 2008.

Here’s how Raj Rajaratnam got his so called ‘edge’:

Five days after Rajaratnam’s deposition, the investigators turned up an I.M. exchange, dated January 9, 2006, between rajatgalleon and roomy81:
IM Administrator: The Galleon Group archives and reviews incoming and outgoing instant messages.
rajatgalleon: hey
rajatgalleon: u back
roomy81: i am here
roomy81: did not go any where
rajatgalleon: call me..just got back today
roomy81: please let me know on JNPR
roomy81: donot buy plcm till i het guidance
roomy81: want to make sure guidance OK

PLCM was the ticker symbol for Polycom, a manufacturer of voice and video equipment. JNPR was Juniper, a company that made switching routers. But what jumped off the screen was “till I [get] guidance . . . want to make sure guidance OK.” The term “guidance” refers to the direction of a company’s quarterly earnings, up or down. Roomy Khan seemed to have an inside track on Polycom’s financial information. Without this I.M., the case would probably have died.

Here’s Preet Bharara with the announcement of the insider case and the warning for Wall Street traders: Is law enforcement listing?

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