Two Torpedoes in the Water: The Galleon Insider Trading Case

Yesterday, a federal jury in Manhattan returned a guilty conviction on 14 counts of insider trading against Raj Rajaratnam, a billionaire and founder of the Galleon Group hedge fund.  

The Galleon Group prosecution, one of the largest securities fraud cases to date, involved a tangled web of inside, paid informants who provided non-publically available information to Galleon traders.  Adam Smith, a former Morgan Stanley trader and top executive at Galleon who has plead guilty to insider trading, testified that a motto of the Galleon Group was to have "two torpedoes in the water"--diligent research and inside information because if one doesn't hit, the other one was likely to. The New York Times provides a great visual representation of the parties, their relationship, and the status of their prosecution here.

I have two points to make:  the first is that the lasting impact of this case will happen in the appeals where issues such as fraud on the market and the scope of insider trading will have the chance to be revisited by courts.  While the jury is in, it isn't the last word on this case.  Second, expect to see a heightened revival of the debate regarding the efficacy and role of inside information cases.  Is insider trading a practice that erodes the perception and integrity of the markets or are prosecutions such as this one with the Galleon Group simply a waste of government resources that keeps information from fully permeating the markets? 

As you can imagine, there is extensive coverage, as well as commentary, regarding this case.  A few good recap articles of the wildly entertaining facts of this prosecution include the following: NYT's Dealbook, WSJ, and WSJ's MarketBeat (compares Rajaratnam possible sentence with those of other Wall Street convicts). An annotated copy of the original criminal complaint against Raj Rajaratnam is also available here: Download Raj-Rajaratnam-Galleon-Criminal-Complaint-in-Plain-English

I have used this case to teach insider trading and fraud on the markets in my basic corporations class since the indictments were announced in the Fall of 2009.  While not in any casebooks yet, the facts of this case and the resources available on-line make it a fun, interactive case to discuss with students. If you have any ideas or resources that you use to discuss this case in class, please share in the comments section.

Anne Tucker