MILESTONES: UNITED STATES
By Anita Hawser
It may have taken only 12 days of deliberations for the jury in the Galleon trial to convict Raj Rajaratnam, the co-founder of Galleon Group, of 14 counts of securities fraud, but the repercussions of Wall Street’s most high-profile insider trading scandal for the hedge fund and financial services industries in general will rumble on for some time.
Columbia’s Jackson: Funds do positive work
“It sends a very clear signal to the industry that insider dealing is dangerous and will be punished,” remarks Wolfgang Fabisch, CEO and co-founder of b-next Group, which provides regulatory compliance software within the financial sector. “Funds are now afraid that insider dealing may corrupt investors’ trust in the market. International and financial institutions can’t afford to show any weaknesses when fighting insiders. The risk of losing business is too high,” he adds.
Fabisch believes the Galleon verdict will impact not just hedge funds but also other financial institutions that engage in this business. “They will need to understand their transactions and the network of people they work with both inside and outside their organization to avoid the misuse of information by insider trading,” he says.
Fabisch maintains that you cannot have better corporate governance without technology. “How do you monitor [100,000 transactions a day] without technology?”
Columbia Law School professor, Robert Jackson, says the Galleon verdict has profound implications for the way hedge funds conduct their research. “What hedge funds are asking themselves right now: ‘Is what we do smart research or illegal insider trading?’ Hedge funds will have to re-evaluate how they do the research that informs their long-term view.” Jackson says this will affect consultants to big funds, and how funds use their guidance to inform their investment decisions.
However, he says regulators looking to impose further restrictions on hedge funds need to ensure that they don’t negatively impact the positive work hedge funds do in bringing liquidity to the equity markets. “Clarifying the rules [for hedge funds] would be helpful,” says Jackson, “but any rulemaking should take great care to balance the need to rule out Rajaratnam-type activity with the need to preserve the critical social function played by hedge funds.”