Rajaratnam alert: Be afraid, be very afraid?

Are we talking about mobsters or investors – or an Elmore Leonard potboiler?

Much was revealed over the weekend about the circumstances leading to Friday’s arrest of billionaire investor and founder of the Galleon Group, Raj Rajaratnam, and various associates.

For obvious reasons, we’re not commenting on the veracity of the charges. But what is really worth noting is the unprecedented – and extensive – use of wire taps and other gum-shoe methods so beloved of Hollywood vice-and-action movies – to ensnare Rajaratnam and others.

And just like mobsters who squeal when the screws are tightened, the operation by US prosecutors also relied on crucial co-operation by associates and former colleagues, some of whom taped conversations with Rajaratnam.

As the FT adds: US investigators are now seeking to bring high-profile targets to book in the manner in which they targetted Wall Street rule-breakers such as arbitrageur Ivan Boesky or so-called junk bond king Michael Milkin in the 1980s.

Still smarting from the storm of criticism over their slowness to bring Bernard Madoff and his mega-Ponzi scheme to trial, US prosecutors are clearly anxious to trumpet their Rajaratnam bust and use it to warn other wrongdoers that this time, they mean business – and they have teeth.

Indeed, Bloomberg reports that US federal investigators are now poised to file charges against a wider array of insider-trading networks, some linked to the criminal case against Raj.

The pending crackdown, based on at least two years of investigation, targets securities professionals including hedge- fund managers, lawyers and other Wall Street players, the people said, declining to be identified because the cases aren’t public. Some probes, like the one that focused on Rajaratnam, rely on wiretaps. Others stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments

Sensational stuff eh? More arrests, more bugging. This Wall Street meets the The Wire!

But taking a different tack, the Wall Street Journal, asks in editorial whether this really is anything more than a garden-variety insider trading case. (Emphasis ours).

(U.S. Attorney Preet) Bharara made much of the fact that the case was broken with the help of wiretaps, which are more typically used against the mob or terrorists. The U.S. attorney’s implication is that Wall Street ought to watch out because prosecutors are now treating hedge funds like the mafia. This will play well politically given the public’s anti-Wall Street mood, yet probable cause to justify the wiretaps seems to have been provided thanks to the oldest method in law enforcement—a so far unidentified informant who once worked at Galleon. 

And notes that information is the lifeblood of share trading.

Information is the lifeblood of professional stock trading, and the kind that most people exchange is entirely legal. We will be looking in particular to see in the coming weeks how intimately the men from Intel, IBM and McKinsey were involved in the alleged conspiracy. We remember from the Boesky case that prosecutors weren’t above interpreting ambiguous statements as proof of criminal intent.

However, the Rajaratnam case has revealed  a fascinating picture of how prosecutors built their case against Rajaratnam using extensive wire taps and tip-offs from associates.

And then there is the intriguing matter of costs; the investigative operation, using teams of investigators and a variety of surveillance methods, would not have been too distant from the estimated $20m value of the alleged insider-trading ring.

That said, support for the prosecutors, however, is coming from some unexpected quarters. As hedge fund blogger Cassandra  – no stranger to the world of hedge-fund investing -  noted at the weekend  (his emphasis, not ours):

Innumerable traders, hedge fund managers, even entire mutual fund groups use dubious weight-of-money strategies, subvert the market by goosing the marks of existing positions – monthly, quarterly, annually, while corporations continue to surf the line of the ethical to hit numbers, subvert competition – in vain attempts to emulate Raj, or just make a few extra bucks to keep the balls of an unsustainable way of life in the air. The system is built upon it.

However, mark my words: rooting out less-than-salubrious market behaviour will promote entropy and make the market more efficient to the long-term benefit of the greater good. But … they should take heed that entropy works both ways, and those who employ similar tactics should similarly be culpable (were I Sheriff).

We’re not quite sure if “entropy” is the right word here, but we get the general message behind Cassie’s view.

Related links:
Galleon rap – NY Post
Rajaratnam and the Tamil Tigers connection – NYT