Effects Of Insider Trading: Galleon Group Case Study

Business Ethics and Sustainability

Question:

Discuss About The Effects Of Insider Trading Company Galleon?

In the present world of stiff completion within the business world, business ethics as well as sustainability have been identified to be the crux of business success of organizations, firms, and companies (Zhu & Wang 2015). Business ethics refers to the practice of acting in the required and right way, considering the factors within a business’s operations. These ethical factors include a company’s conduct towards the community in its environment of operation and its employees, as well as the company’s production processes (Valera & Velasco-Lao 2009). Business sustainability, similarly, refers to a balance as well as enduring methodologies toward ecological responsibility, societal benefit, and economic activity (Nguyen et al. 2017).

Lenkey (2017) posits that with consumers becoming sensitive about conservation of their environment, companies have been compelled to ensure that they are sustainable, making sure that it takes into consideration its long-term views regarding a balance between economic, social, and economic effects of its business operations (Klein et al. 2017). As such, companies are no more said to be effective and efficient just because they are able to produce and distribute goods and services but how well they can impact the community as well as the environment. One of the companies that has suffered the impacts of business ethics is Galleon Group. For this reason, this report will critically analyse the ethical and sustainability issues that surrounded the downfall of Galleon Group despite having had a robust start and a good management.

The Galleon Group, which was founded in the year 1997, was a privately possessed hedge fund company that offered information along with services regarding investments. The company made huge profits relative to other firms by marketing careful selection of stocks. Its performance made it attract several renowned employees from prestigious companies like Goldman Sach’s as well as Needham & amp Co. Raj Rajaratnam, who served for 11 years as Needham’s analyst, quitted to start the Galleon Group. Upon his departure, Rajaratnam took a number of employees from Needham & amp Co. The act of poaching employees is highly illegal. According to Zekos (2016), poaching employees involves stealing of confidential information regarding a company’s production and sales processes by the virtue of having the experts and expertise who were involved in such processes in their former company.

While running Galleon Group, Rajaratnam employed a flamboyant or showy style of leadership, doing anything that hewould to see his company ranking high in the stock market. In an instance, Rajaratnam offered a sum of $5000 to any of his employees who could accept to shock him/herself with a stun-gun. One of his employees responded but was later on hospitalized since he became unconscious. Rajaratnam’s began encountering issues with the law in 2005 when he had to part with $20 million which was used to settle a federal scrutiny. The investigation was launched against him over a fake tax shelter which was valued at $52 million (Ahern 2017). In addition to this, the group also had to pay $2 million for purposes of settling aSecurities and Exchanges Commission (SEC) investigation over illegal/unlawful stock trading engagements (Gider & Westheide 2016), which was revealed when it was detected that an Intel Inc. employee supplied Rajaratnam with information regarding the company’s production and sales.

Overview of Galleon Group

Rajaratnam had a serious network of acquaintances. Among his acquaintances was Goldman’s Sach’s. Rajaratnam was later convicted of 14 different charges and was proved to be guilty on all of them. Nonetheless, his team and him are planning to appeal against the decision that was made. Five more people were also convicted for engaging in insider trading and fraud. One of the people who wereconvictedbecause of the cases was Rajat Gupta. Gupta was a man who had a high profile alongside great influence, having been the first Indian-born CEO and working in some of the most lucrative companies. Despite the successes that it had realized in the years past, the company collapsed and was declared closed. Clearly, the downfall of the company, which had really flourished, came as a result of unethical practices that the company’s executives were involved in.

Rajaratnam was convicted of 14 cases and was found guilty of all of them. The issues were all about his involvement in insider trading practices, which is against ethical conducts of employees as is often highlighted in employment contracts. As posited by Ali and Hirshleifer (2016), employees are not allowed to make use of their current or former company’s confidential information for their individual benefits or gains. Moreover, they are not allowed to involve themselves in any business activities that may offer direct competition to their current and former employers. Going by these management, Rajaratnam felt a victim since he sought for information regarding companies’ production and sales information through texts, voice calls, and meetings. Through these techniques, Rajaratnam was able to know some of the strategies that its rivals were using. They then modified the same to come up with very robust ones, making his company to rise above the rest in the industry. Additionally, he pointed to the weaknesses of his rivals since he was privy to such confidential information. From the foregoing, Rajaratnam as well as the other five people with whom he was convicted were involved in unethical and unlawful practices that led to several fining of the company. With the heavy fines, penalties, and thorough investigations, the company collapsed.

Opportunities, gifts, and money exchange with the intention of collecting non-public data for reasons of obtaining unfair/undue advantage in the world of business is unethical and illegal. These practices are significantly prevalent in the Wall Street as was highlighted in a study that was conducted by the S.E.C which established that there has been 102 distinct cases of such between the January of 1990 and December 2013 involving insider trading (Waxman 2017). Some of the techniques that were used by Rajaratnam are considerably common on Wall Street. Rajaratnam collected information via phone calls, texts, and attending meetings. Since he was able to get the information he desired that easily, I feel the same techniques he employed are common on Wall Street.

Illegal Practices and Downfall

The ethical culture that characterizes the Waal Street, according to Langevoort (2016), is egoism and greed which make them lose idea of what is wrong and what is right. Kusnadi (2015) points out that egoists hold the belief that they ought to take part in decision making processes that optimize their individual self-interest. Fund-managers’ as well as CEOs’ have the primary goal of maximizing profits, and some of them such as Raj Rajaratnam, can employ any act like fraud and/or bribery to realize their desires.

Owing to greed and egoistic behaviours, there is no doubt that white-collar job as well as insider trading crimes will continue growing. However, people have continued to advance strategies that can be employed to help reduce/preventthese illegal and unethical practices. The government ought to enact strict laws that require companies/organizations to design robust surveillance, compliance, supervisory as well as control measures to help detect illegal and unethical insider trading (Langevoort 2016). Similarly, investors, executives, and regulators can do whatever it takes to track all the information that they distribute alongside being aware of monetary transactions. The regulators should be vigilant to see unusual activities within the stock marketplaces before significant occasions within firms like divestments, acquisitions, mergers, and new product launches, among others. While it may be difficult to detect these anomalies, regulators should ensure that the victims are subjected to severe penalties.

Investors must be careful when contemplating capitalizing in funds whose integrity tracks are questionable. They should look into a firm’s fundamentals before making long-term investments. Valera and Velasco-Lao (2009) argue that short-term investments are often intrinsically risky due to volatility and may give false impression regarding the track record of some fund or a company. Lastly, the executives should endeavour to be loyal to their employers. They should be cautious whenever they are talking to outsiders. Despite the measures that may be taken to prevent or reduce insider trading, people will yet find ways to hide. This is because there are no specific strategies that can be employed to help curb down the practice of data gathering.

According to Schwartz (2017), when a firm’s insider shares confidential information with a prospective investor within a stock market, the prospective investor acquires undue/unfair advantage. For instance, it is common practice that firms whose stocks are traded publicly on stock exchanges are required to openly disclose their quarterly monetary operations or statements after some scheduled and designated dates to the stock exchanges. Upon the disclosure of these information, a level playground for all potential investors is created and the prices of stocks can rise or fall depending on this extra information (Lattman 2010). Sharing of confidential information material is unethical and illegal.

Preventing Insider Trading

There are a number of implications that are associated with sharing of confidential information of a company. First, it can lead to the termination of an employee’s contract with a company. A breach of the principle of confidentiality by an employee leads to his/her expulsion from a company (Wielhouwer 2013) since it is within an employer’s legal right to fire one in case the individual leaks non-public information with outsiders of the company.

The second implication is lawsuit damages. An employer, as hinted above, can sue his/her employee for leaking confidential information and if the trial of the employee is successful, the employer can get financial damages from his/her employee (Hillier et al. 2015). The implication of this is that the employee will be required to pay some money to his/her former employer, particularly if the leakage caused the employer an identifiable financial damage (Gregoriou & Ali 2009). Raghavan (2013) adds that in some cases, an employee may be compelled even to pay for the punitive damages that were generated by his/her conduct to his/her employer. Rajaratnam and Gupta suffered lawsuit damages.

Sharing confidential information has the implication of leading to criminal charges. Driggers (2012) points out that under extreme conditions, sharing non-public information by an employee can lead to criminal charges against workers. Mogul (2015) explains that in cases where the sharing of information comprises of stealing an employer’s intellectual propriety or proprietary information, the theft crime can be punished by imprisonment or fine. Lastly, sharing of confidential information can lead to damage of reputation. From a long-term standpoint, sharing of confidential information can completely damage an employee’s reputation, particularly if the employee works in an industry characterized by stiff competition (Gider & Westheide 2016). The cases of Rajaratnam and Gupta eloquently explain this.

Regarding my stock trading, I would make no attempt to make a choice regarding that stock, owing to the fact that I never had a legal information concerning the stock. I would ensure that I act hard and make no decision that would earn revenue, yet if things boiled down, I would probably be in trouble for possessing that kind of information. Having information from inside and impeccable sources that there are possibilities that a stock will decrease after some period of time, I will be able to determine if I felt comfortable investing financially into that stock.

Similarly, owing to the fact that I have no clue regarding stock marketplace industry outs and ins, I would be hesitant to make any ruling on stock market to someone. However, thus does not imply I will be exempt from investigations and/or punishment in case my hired individual violates confidentiality laws in my stead. Contrarily, had I the opportunity to privy the insider information, I would still make opportunities in attempting to be as legal, ethical, and suitable as I ought to be. I would want my investors, colleagues, and employees to entirely comprehend the culture within which my commerce errands are ran, ethically as well as with transparency. Thus, confidential information influence a stock, and general, investment.

The secret investigation as well as conviction of Raj. Rajaratnam along with other employees of Galleon network will not dissuade other investors and fund managers from sharing or leaking confidential (non-public) information. From my response to question 1, I indicated that there have been a high number of frauds taking place within the insider trading which are going on at an alarmingly rapid rate. Personally, I hold the opinion that the outcomes of this case will sensitize most insiders to carefully filter out suspicious people and/or give a close and keen attention to their business environments alongside the people who are in their surroundings and circle of friend/trust (Zekos 2016). Nevertheless, this will not successfully help them deter the occurrence of any infraction, just in the same way infractions are spoken of as well as executed. 

Additionally, the secret investigation and conviction will not help reduce cases of such frauds since most people always think that they are able to outsmart any kind of system (Ahern 2017). This makes them feel that they are capable of hiding (Ali & Hirshleifer 2016). Since the investigation was done in secrets, other employees of Galleon never knew what led to the accusation of Rajaratnam. As such, they will still find themselves trapped in the same mess.

My justification for this argument is that Rajaratnam was able to conspire without other people committing trade secrets and frauds which later on led him to being charged for insider trading. Additionally, it is notable that instead of making use of the skills he gained from working alongside other monetarist institutions, Rajaratnam unethically colluded with other firms to canvass confidential information regarding stocks that were never publicly released. It is also worth noting that with the globalisation and technological advancement, there a number of strategies that have come up for data gathering that can easily outwit the process of Rajaratnam’s investigation and conviction. Valera and Velasco-Lao (2009) posit that globalisation has also made the global marketplace accessible to different people at any time, making it difficult for other employees of the company to be held responsible for leakage of secret information. It is for these reasons that I answer this question by a ‘no’.

Conclusion

From the analysis, it can be summarised that inside trading is illegal, unethical, and costly to individuals and companies involved. Considering the case of Galleon Group, it is evident that despite the fact that the company was able to make good profit right from the time it was launched, things changed, leading to the collapse of the company. The company had to part with a lot of money in servicing the fines and penalties that it faced. Companies must, for this reason, try to ensure that they close all gaps through which their confidential information can be leaked. The advancement in technology management day bay day implies that companies must modify their strategies each moment to ensure that their information are safeguarded at all time. Text messaging, phone calling, and meeting, among other techniques through which people can acquire these information are to be guarded since a leak of such information for a company in the SE can easily affect its survival in the market. For employees to evade the implications that surround insider trading, employees should always be careful of those they talk to. According the case of Rajaratnam and Galleon Group, it is revealed that some people openly shared information with Rajaratnam leading to their guilt of the unethical and illegal practice of leaking confidential information. The analysis reveals that greed and egotism are not good. Lastly, it is important for employees and companies to know that there are a number of ways through which they can be caught revealing such confidential information. Nonetheless, this report establishes that despite efforts by companies to safeguard their confidential information, they cannot completely succeed in protecting their information. This calls for modification of strategies all the time.

List of References

Ahern, KR 2017, ‘Information networks: Evidence from illegal insider trading tips’, Journal of Financial Economics, vol. 125, pp. 26-47. 

Ali, U, &Hirshleifer, D 2016, ‘Opportunism as a firm and managerial trait: Predicting insider trading profits and misconduct’, Journal of Financial Economics.

Driggers, A 2012, ‘Raj Rajaratnam’s historic insider trading sentence’, American Criminal Law Review, vol. 49, p. 2021.

Gider, J, &Westheide, C 2016, ‘Relative idiosyncratic volatility and the timing of corporate insider trading’, Journal of Corporate Finance, vol. 39, pp. 312-334. 

Gregoriou, GN, & Ali, PU 2009, Insider Trading: Global Developments and Analysis, CRC Press, Boca Raton.

Hillier, D, Korczak, A, &Korczak, P 2015, ‘The impact of personal attributes on corporate insider trading’, Journal of Corporate Finance, vol. 30, pp. 150-167.

Klein, O, Maug, E, & Schneider, auditing, ‘Trading strategies of corporate insiders’, Journal of Financial Markets, vol. 34, pp. 48-68. 

Kusnadi, Y 2015, ‘Insider trading restrictions and corporate risk-taking’, Pacific-Basin Finance Journal, vol. 35, no. Part A, pp. 125-142. 

Langevoort, DC 2016, Selling Hope, Selling Risk: Corporations, Wall Street, and the Dilemmas of Investor Protection, Oxford University Press, New York.

Lattman, P 2010, ‘In Court Hearing, U.S. Defends Use of Wiretaps in Galleon Case’, The New York Times, p. 3.

Lenkey, SL 2017, ‘Insider trading and the short-swing profit rule’, Journal of Economic Theory, vol. 169, pp. 517-545. 

Mogul, AN 2015, ‘Behind enemy phone lines: insider trading, parallel enforcement, and sharing the fruits of wiretaps’, Fordham Law Review, vol. 84, p. 1247.

Nguyen, V, Tran, A, &Zeckhauser, R 2017, ‘Stock splits to profit insider trading: Lessons from an emerging marketing‘, Journal of International Money and Finance, vol. 74, pp. 69-87.

Raghavan, A 2013, The Billionaire’s Apprentice : The Rise of The Indian-American Elite and The Fall of The Galleon Hedge Fund, 1st ed, Business Plus, New York.

Schwartz, MS 2017, Business Ethics: An Ethical Decision-Making Approach, Wiley-Blackwell, Malden, MA.

Valera, KD, & Velasco-Lao, FM 2009, ‘Towards Investor Confidence: Insider Trading Laws and Its Implications on Market Efficiency [article]’, Philippine Law Journal, no. 2, p. 421.

Waxman, AB 2017, Rogues of Wall Street: How to Manage Risk in the Cognitive Era, Wiley, Hoboken.

Wielhouwer, JL 2013, ‘When is public enforcement of insider trading regulations effective?’ International Review of Law & Economics, vol. 34, pp. 52-60. 

Zekos, GI 2016, Law and Economics of Corporate Governance and Insider Trading, Nova Science Publishers, Inc, Hauppauge, New York.

Zhu, C, & Wang, L 2015, ‘Insider trading under trading ban regulation in China’s A-share market’, China Journal of Accounting Research, vol. 8, pp. 169-191.