When Raj Rajaratnam, the founder of New York–based hedge fund firm Galleon Group, and five others were arrested by the FBI and charged by the U.S. Attorney for the Southern District of New York in connection with an insider trading investigation, the immediate response within the hedge fund community was one of shock — followed immediately by fear.
Who would be next?
The FBI has charged more than 20 people in a scandal that has rocked Wall Street, Connecticut and California’s Silicon Valley. The case poses some hard questions to the hedge fund industry: Where’s the line between insider information and the kind of market intelligence that provides an edge?
For hedge funds, the rising bull market before the crash of 2008 was characterized by crowded trades, increased pressure for returns and the rapid-fire dissemination of information — all of which made staying ahead of the competition increasingly difficult.
Jahan Raissi, a partner with law firm Shartsis Friese and a former SEC enforcement official, says the SEC’s cases “have tended to be fairly cut and dried.” In light of this investigation, Raissi says many hedge funds have doubled their efforts to make sure they stay on the right side of the law — some going as far as avoiding conversations altogether with the management of companies in which they invest. Intelligence gathering, it seems, just got harder.
