Monday, October 19, 2009

Big Bust on Wall Street

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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It's not everyday that a billionaire hedge fund manager gets busted for insider trading as happened last Friday. This is not because Wall Street isn't permeated with criminal insider trading activity at the very top, but because the SEC has turned a blind eye to it for a long, long time. In a celebrated case from just a few years ago, an SEC employee who tried to investigate a well-known hedge fund manager was promptly fired for his efforts. The SEC has claimed in the past that since hedge funds and big brokers trade continually it isn't possible to prove that they are engaging in insider trading. It was possible this time however because instead of just examining trading records, wiretapping was used.

Wiretapping was first legally permitted in 1928 by a U.S. Supreme Court decision, several years before the SEC was created. Left to its own devices the SEC would probably never have decided to use any law enforcement technology not available to the Amish, but the FBI was involved in this case. The insider trading investigation against Raj Rajaratnam apparently began in 2007. Rajaratnam runs the Galleon Group which has $3 billion under management. He has been charged with conspiracy and securities fraud. Reports indicate that he is at the center of an insider trading ring and more arrests are coming.

Where did Rajaratnam get his inside information? Other than sources that worked directly for the companies involved, Internet sources indicate that Rajaratnam seemed to have at least one informant at the rating agency Moody's, the consulting firm McKinsey & Company, and Intel Capital (the venture capital arm of the technology giant). These are all top firms. You should ask yourself how many other firms have employees involved in providing insider information, how many employees are involved and to how many hedge funds is this information provided? My guess is the answers to these questions is a lot, a lot and a lot. Why aren't there stricter controls within these firms that prevent this from happening? The public has a right to know.

At least some progress is being made in reigning in the Wall Street criminal operations. The biggest Ponzi schemer of all time, Bernie Madoff, is behind bars, not because the SEC caught on to his obvious $50 billion scam after numerous investigations, but because it finally blew up on its own accord. At least the SEC did finally close down the $8 billion 'investment fraud' run by Allen Stanford. The head of a top New York law firm, Marc Drier, has been sentenced to 20 years in jail for fraudulent activity. All of these cases were beyond outrageous and extreme examples of criminality. What about all the other criminal activity on Wall Street that is being done with at least a grain of discretion? Rajaratnam is merely the tip of that very massive iceberg.

NEXT: U.S. Dollar Down, Everything Else Up

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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