Insider trader conviction sparks sell-off in financial markets
Posted on 12 May 2011 with 3 comments from readers
The 20-year jail sentence handed out to Sri Lankan-born hedge fund manager Raj Rajaratnam triggered an immediate slide in global stock and commodity markets yesterday.
It was the longest jail sentence for insider trading since Ivan Boesky and Michael Milken in the late 1980s, an era encapsulated in the original ‘Wall Street’ film. Markets reacted unfavorably this week because traders thought the conviction might dampen some trading activity among hedge funds.
Insider trading
There is a fine line between market insight and insider information on Wall Street, and clearly the jury was in no doubt that Raj Rajaratnam was on the wrong side of this demarcation. Remarkably he had been under investigation for a decade.
His conviction might embolden the authorities to go after other transgressors. Indeed, where are the investigations into market activities surrounding the subprime crisis and market implosion? So far a few raps on the knuckles and tiny fines are all that has been done.
Again the trouble is that the dividing line between legitimate business practice and illegal sales is blurred. Knowingly selling a poor product is not a crime, some might regard it as clever salesmanship. But pedalling triple-A securities that you know are nothing of the kind is illegal, or at least question the legitimacy of the rating agency.
However, what generally happens is that the sins of the past are quickly forgotten in the great rush to do business in the present. That did not happen in the case of Raj Rajaratnam.
Market top
Whether his sentence is the final straw that breaks the camel’s back on Wall Street is more interesting. Insider trading convictions are certainly an indication of excess and often come near a market top.
But so many black swans, astrological predictions and Hindenburg Omens have been safely past over the last 12 months that the markets have assumed an almost mystical state of permanent levitation, despite an economic outlook that looks far from promising.
Is Raj Rajaratnam, now sat at home on a record $100 million bail, selling out of his positions? Or is he trying a big short before his inevitable incarceration? Markets do look a bit toppy.
3 Comments posted by readers:
Fleming had a name for the demilitarized zone our fine editor calls the “grey area”..
he called it sharp practice, the means by which all men become filthy rich..no standard, no morality ever supercedes sharp practice..the grey town stands alone
as shepherd over farcical regulation or govt corruption..a man lives w/ his sin, many very comfortably..generally, w/ few exceptions, the male children of these men are failures in succession, giving rise to a different expression – karma..in defense of Raj,
he has been cut out of the herd for prosecution by an equally dirty justice dept,
and there is no getting past the racial overtone – White Wall St Walks the slogan
I enjoyed your remark about the markets: “they have assumed a state of permanent levitation” despite the pre-Depression signs and omens. In the same way as levitation is presumed to be due to evil causation, there does seem to be something sinister in the way the markets remain up there.
Rajaratnam has know been judged to be evil and, as you suggest, there must be others who are shaking in their boots. If it took ten years to nab Rajaratnam, how many others, unknown to them, are being observed and even wire-tapped.
Silver has now fallen below £20 per oz but in May 2010 it was £13 per ounce. It went up from £13 to £29 in less than a year so that it has shown that it can levitate significantly when down. At that time, there was no contemporary experience of it being higher than £13 but now there is.
If silver does fall to £13 per oz, it will be a very tempting buy since we know it can reach £29 and higher historically too. JPM will have lost a lot of their silver stocks by the time the bottom of the “french curve” is reached, so the uprise could be exponential.
But why do the markets continue to levitate? The gambling spirit has not left a worried global economy, it seems.
Like playing musical chairs, the markets will continue to levitate until the music stops (i.e. until the FED no longer props it up every trading day).
@ Tim McKee:
Enjoyed your remarks!
“no standard, no morality ever supercedes sharp practice”
Yep!