Wall Street’s clean up reaches far and wide

The case was widely seen as a litmus test of the government's avowed post-global financial crisis crackdown on insider trading. A key breakthrough for the prosecution was persuading the court to accept recorded telephone conversations between Rajaratnam and his confidantes as evidence. Exchanges such as those in which former Goldman board member Rajat Gupta tipped off Rajaratnam about Berkshire-Hathaway's impending $5 billion investment in the firm were played to the jury, making the truth of the government's allegations painfully clear.

Though Rajaratnam is expected to appeal, he faces a maximum of 25 years when he comes up for sentencing on July 25.

The case has set down a marker for how all future battles will be fought and assessed. And to Ken Springer, an ex-FBI white-collar crime special agent who has since set up Corporate Resolutions, a commercial investigations and advisory firm, it will change the way Wall Street does business - in the US and overseas.

"I think the message for the Street is that the old boy network, and the old ways of sharing information, won't work anymore," he tells AVCJ. "It also shows that the government was prepared to bring in the first string; they used all of the 21st century investigative tools. This was, for example, the first time wiretaps were used in a white collar case."

The long game

AVCJ also contacted two international US-based law firms for their take on the Galleon case and its implications. They declined comment - perhaps an indication of how much further this story has to run. Springer notes that another insider trading trial is already underway in New York; a Galleon trader is one of several defendants. He also notes that it was striking how many people didn't testify against Rajaratnam, prompting speculation that they will be testifying against others.

In this way, Rajaratnam has been cast as the major player whose prosecution allowed the government to show what it could achieve. Spooked by the fact that there are thousands of wiretaps as yet unrevealed, other traders are lining up to plead guilty in the hope of cutting a deal rather than going to trial. "If you have a good attorney and he knows the deck is stacked against you, he'll tell you you're better off taking the plea agreement and negotiating the sentence," Springer says.

From the perspective of Wall Street firms wishing to protect themselves, re-educating their traders is crucial. They must make employees pointedly aware of the new realities, of what insider trading is, and that those who are officers or directors of companies are insiders and therefore forbidden to speak about company matters. Companies should supplement this with special precautions, conducting sweeps of conference rooms when working on IPOs and getting non-disclosure agreements put in place.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law last July, exacerbates the situation. The legislation includes a "whistleblower bounty program" under which informants who provide information to the Securities and Exchange Commission can claim 10%-30% of any financial sanctions that result, if they exceed $1 million. Corporate Resolutions provides "ethics hotlines" to companies, including private equity players, minimizing the potential fallout.

"If investors want to know if there's an issue over illegal or unethical activity, an ‘800' number or email comes to us and then we talk to the investor or counsel and try and resolve the problem," Springer explains. He expects it to become standard that internal hotlines must be utilized before a whistleblower approaches the SEC.

Implications for Asia

The Rajaratnam case casts a shadow over Asia through the reach of the Foreign Corrupt Practices Act. Many US investors have already begun cleaning house, recognizing that willful blindness is no longer an adequate defense. "People used to say ‘I have a third party agent, how am I supposed to know what he does?' Well, now they're responsible, period," Springer says. "Over the past four to five years tremendous fines have been levied and so a lot of education and compliance efforts have been re-vamped."

Corporate Resolutions has an office in Hong Kong and Springer believes companies face two major challenges when dealing with management teams in Asia. First, public information is often not as widely available as it is in the US, which means companies must seek independent, third-party verification of facts. Second, corrupt practices, including insider trading, are thoroughly ingrained in some markets.

Springer accepts that change will take time, but he is in no doubt about the eventual outcome: "If Chinese or Indian companies, for example, resist allowing the extra scrutiny, US companies aren't going to invest. They may be able to make things cheaply, but they still need us as partners to fast-track their investment growth."

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• Topics
• North America
• Goldman Sachs