The Securities and Exchange Commission has taken a lot of flack for its incompetence, particularly over the failure to detect the Bernard Madoff scandal. But in the case of alleged insider trading at hedge fund Galleon Group, the agency should be commended. It displayed investigative skill as well as immense patience, leading to the uncovering of what could be the largest insider trading case to date.
"What's particularly unusual [about this case] is that the SEC got in early, while the alleged trades were taking place, and that they gathered evidence in the real-time," Brad Bennett, partner at Baker Botts LLP told The Deal. Prosecutors began investigating the case in 2007, using wire taps to record conversations that went on between executives at the highest rungs.
Then, in the face of public indignation after the Madoff scandal was made public, the agency could have redeemed itself by moving against Galleon and pointing to it as proof that its investigators hadn't just been perfecting their online poker game, or watching paint dry. Instead it waited until the case was solid. The agency waited until it thought it could wait no longer, according to Bennett.
From the AP:
The timing of the arrests might be explained by a footnote in the complaint against Rajaratnam. In it, an FBI agent said he had learned that Rajaratnam had been warned to be careful and that Rajaratnam, in response, had said that a former employee of the Galleon Group was likely to be wearing a "wire."
The agent said he learned from federal authorities that Rajaratnam had a ticket to fly from Kennedy International Airport to London on Friday and to return to New York from Geneva, Switzerland next Thursday.
Was Rajaratnam going to flee? Who knows. Either way, the SEC probably had enough to charge him when it finally arrested him. In fact, the incidents of alleged insider trading in the complaint took place in 2008, but the SEC continued to monitor the wire taps to see if any more players were indicated.
Insider trading cases are some of the hardest to prove. The burden is on the government and in a criminal case, the defendant must be found guilty without a doubt, Bennett explained. This was a major endeavor for the SEC, and so far, it has gotten it right. -
Sara Behunek
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