Who Was Saved?

When the jury came back with guilty x 14 against Raj Rajaratnam, billionaire head of the Galleon hedgefund, there was no shortage of folks thrilled that another fatcat inside trader was taken down.  A  juror described their deliberations:



We all wanted to give Raj the benefit of the doubt. I wanted to believe he was an honest man. How could someone so smart and rich already be involved in something so horrendous?


Leila Gonzalez Gorman, a 44-year-old teacher from Westchester County, who served on the jury that found Raj Rajaratnam guilty of insider trading and conspiracy.


The  defense team (and team is used in the sense of a football team) led by combative Akin Gump lawyer John Dowd, whose  fingers remained spry despite his years of experience. is estimated to have set Raj back about $40 million.  I know plenty of lawyers who could have lost this case for half that.  The best Dowd could come up with in summation was:



Summing up his defense of Galleon Group founder Raj Rajaratnam, attorney John Dowd tried to channel the late Johnnie Cochran, telling jurors: “If it’s public, you must acquit.”


This is why old, white shoe lawyers are not allowed to rap.

But there’s one question that hasn’t managed to get a whole lot of play here, largely because it’s been hidden behind our old friend, “common sense,” which covers up myriad gaps in thinking.  Who is harmed by insider trading?

The idea is that some guy has information that you and me, regular schmoes on the street, do not.  When he trades stock because he knows what we don’t, it’s unfair.   Stephen Bainbridge explains:



WSJ reporter Jonathan Cheng breathlessly reported that:



In scoring their biggest insider-trading victory in a generation, regulators have a message for a nation of nervous individual investors: When it comes to information about stocks, the playing field is getting a little more level.


The little guy isn’t so sure.


Piffle. Insider trading does not harm investors — little or otherwise. [Bainbridge shameless marketing effort deleted].


The balance of Bainbridge’s explanation is so prolix as to require FDA approval and a warning about reading while driving, but I can paraphrase.  People buying/selling at the time some insider is buying/selling will do so anyway, as there are always shares available to be bought/sold, so the fact that some insider is making money has no causal affect on the little guy’s losing anything. He would have lost regardless. He’s got more, but I fell asleep while reading. If you can stay awake, more power to you.

The bottom line is that we’re all insiders to some extent.  We know stuff that someone else doesn’t, and use it every day of our lives to our benefit if we can.  Most of us lack information of the sort that can produce financial gains, much to our chagrin.  So in an over-abundance of Schadenfreude, we relish laws that make it illegal for rich guys like Raj to use what they know to make money when we can’t.  In essence, the argument is that if we can’t do it, neither can you.


Rajaratnam perp walk


Who are we kidding?  It’s used every day by everyone who can, ourselves included.  We use innate intelligence, education, observation to make decisions based on things that others can’t see.  If we’re lucky, we talk to people who know more about something than we do and learn from them, using the bit of knowledge gained. 

This isn’t just the big, fat rich guy. This is the guy on the loading dock who sees widgets flying out the bay and realizes, “hey, my company is on to something this time,” and loads up.  You aren’t watching the loading dock so you don’t know this, but the guy loading pallets does.  If you’re selling stock because you think the widgets suck, while he’s buying up the stock you’re selling, you feel cheated.  But nobody made you sell, or decide to sell at that particular moment.  You had your reason, maybe your erroneous assessment or maybe your need for some ready cash to buy that shiny new iPad.  He just knew more than you did.

It’s called information asymmetry by the jargonistas, and an unlevel playing field by the prosecutors.  As if there is ever a level playing field.  As if there is anything wrong with the fact that the playing field isn’t quite level.  We know, assuming we aren’t complete morons, that there are people who are paying far closer attention to industries, companies, and who are trained in how to interpret signs and information, who will always be a step ahead of us. 

Knowing this, we try to ride their coattails whenever possible, because we know that we aren’t in the loop and will always be lagging behind those who know more than we do.  Anyone who thinks otherwise should put in his request for a job on a collective farm immediately, so he gets a room with a great view. 

The government, feeding upon populist feeling that people who know more shouldn’t have a leg up on the rest of us, made it a crime to trade stock on knowing things that is not public information.  As Preet Bharara knows, just as Rudy Giuliani knew before him, this is great for business and a real career maker, play to the anger of the mob.


After successfully prosecuting Raj Rajaratnam for insider trading, Southern District U.S. Attorney Preet Bharara issued a statement, saying that “Unlawful insider trading should be offensive to everyone who believes in, and relies on, the market.”

Do people really “believe in” the market?  It sounds like a religion, or perhaps a cult.  To those who pray to money, it’s probably a good analogy, but to the rest of us, it’s a tool to be used at best in the hope that we end up with greater financial security than not.  For anyone who lived through the dot com crash, who watched ten years of savings disappear overnight because we “believed” that the market must know something or they wouldn’t be bidding up shares of garage companies to Olympian heights, we learned a lesson about relying on the market.  Don’t.  It’s a game played by others, and the best we can hope for is to find ourselves on the right side of the game at the right moment. 

But the government has made it a crime for people to play the game better than others, because it makes the losers of the game feel better.  As for not so poor Raj, he knew that by playing the game too well, he could go to prison.  The fact that it shouldn’t be a crime doesn’t make it acceptable to break the law.  That’s the sucky part of the social contract, but still one to which we must adhere.

Raj will join the ranks of the immortals, like Boesky and Milken, but your house is still worth half of what is was five years ago, your IRA is still in the toilet and your job is on a plane to Bangalore.  Feel better yet?

20 comments on “Who Was Saved?

  1. D-Day

    Prolix. Hey, that’s my word, I used a few weeks ago, remember? Not too many people know that word. They picked on Raj because he’s dark. Was Boesky and MILKem black? Well, maybe on the inside.

    If you can’t do the crime, don’t do the time. The U.S. attorneys were probably jeolous, and envious that they didn’t go to business school and end up as multimillion dollar hedge fund managers like Raj and his gang. Nicely done.

  2. SHG

    Yes, you did use prolix recently, and I believe it was to describe my writing.  I was, however, familiar with the word before then, and in any event, bite me.

    As for jealousy of the fabulously rich and famous, I have discussed numerous times with my childhood friends why, in planning our futures, we were unaware of the existence of an occupation called “investment banker.”  We believe it was a conspiracy by WASPs to withhold the good jobs from Jewish kids, leaving us to become doctors and lawyers.  Bastards.

  3. Lee Keller King

    You hit it on the head, Scott. “The Market” is a cult. The “value” of a publicly traded company no longer has any real relation to what it is worth; only what the market gurus on TV SAY it is worth.

    Tulips. We are dealing in tulips, here.

  4. Stephen

    In economics one of the stronger indicators of “bubble behaviour” in a market is large amounts of regular people — people who don’t know about markets — trading in that market.

    Personally, not knowing about the thing you’re buying and selling seems like a crazy state of affairs. What kind of idiot invests in widgets without knowing if they’re selling or not?

  5. Stephen

    Yeah, that’s true. I mean I can absolutely see why insider traders would want extra information because knowing what’s going on is much safer than guessing like everyone else.

  6. Mike

    While the sentiments express the psychological issue well, there are legitimate reasons to criminalize insider trading.

    Some of us have money saved. The Federal Reserve has put interest rates low enough that inflation will actually make us poorer if we simply save our money. We have also been nudged into the markets based on the tax treatment of 401(k)’s.

    So what about the guy who has $100,000 or so in his retirement account. He can invest in some funds, but for those funds to earn the Middle Income investor, his fund manager has to make winning trades. Yet the best fund managers are going to start their own hedge funds.

    So you already have the more talented people serving the rich, which is fine. Yet now you want them to trade on insider information, too, allowing them to further nickle-and-dime the Middle Class?

    If people weren’t being nudged into the stock market, insider trading would be a non-issue. The government has, however, forced people into the stock market. If you’re going to force people into a market, you should at least make it somewhat fair.

  7. SHG

    Naive. Did you think the best money men are working for the poor? Ever? This is about money, and only money. As it should be. This isn’t about fairness, but making a profit.

  8. Mike

    Of course that’s true. It’s also true that it’s not responsive to my points.

    A guy has to do something with his money. Put it in a bank account, so that it loses value each year because of the Fed’s manipulation of interest rates?

    Is a guy not going to contribute to a 401(k) or IRA, so that he loses half of his money to taxes?

    Trading is a game that most people shouldn’t play – especially people without a lot of money. Yet the government has thrown everyone into the game.

    Now what?

  9. Dan

    Any business that needs to raise money has an interest in the market being free of insider trading. If in fact it is true that “[i]t’s a game played by others, and the best we can hope for is to find ourselves on the right side of the game at the right moment” then nobody sensible, whether a little old lady, or the manager of a pension fund with billions, would invest in the stock market. They’d take their ball and go home the same way it wouldn’t be fun to play blackjack at a casino with a loaded deck (yeah, I know, the odds always favor the house and people play anyway). Anyone who thinks we should have capital markets that real producers, i.e. people who invent stuff that we can use, can rely on to access funding has an interest in the market being free of insider trading. The dot com crash is insignificant. Lots and lots of companies were able to raise lots of money. Most of them were stupid and are gone today. The good ones remain. But if people no longer put money into equities because they know the game is rigged in favor of people like Raj, then the good companies wouldn’t be here either.

  10. Mike

    The entire post is ironic in an awesome way. It speaks the truth about insider trading, that is, that insider trading is the norm. Yet it criticizes the conviction. However, it’s in Wall Street’s best interest for someone to be used as a sacrificial lamb. Ignorance – along with government disincentives to leave the market – keeps the rubes (and I’m one of them) in the market.

    If people actually knew how Wall Street worked, “blood in the streets” wouldn’t be a metaphor for a bad trading day.

  11. SHG

    No reason to “respond” as your points are irrelevant.  If there was no illegal insider trading, the playing field would no more or less unlevel than it would be otherwise.  Your points assume that there is some existential possibility that there could be information symmetry.  There never was and never could be. If illegal insider trading was completely eradicted, it would change nothing.

    Or to put it another way, Raj was caught, prosecuted and convicted. Now you know all about it. Can you identify any harm his crime produced?  Stocks go up, down or stay the same, and for no particular reason.  His plays meant nothing.

  12. SHG

    Do people believe we are all equal in the eyes of the market?  Of course not.  But your beef isn’t with Raj, but with Goldman Sachs, and it’s not over insider trading but complete manipulation of the markets.  We’re playing in their casino, with the same odds but no hot cocktail waitresses or free drinks. That, Mike, is your concern, not Raj hedging his bets.

  13. SHG

    If I was going to get one free link, I would have used it for something much better than this. Maybe dancing girls, or Phil Ochs.

  14. SHG

    After the IPO, the company gets nothing from its stock trading in the market. Ever wonder why a stock is price $10 on the IPO and goes to $54 by the end of the day?  The company just got burned out of $44 per share, but they knew who they were getting in bed with.  They don’t want the markets free and fair; they want it fixed in their favor.

    That’s the point, nobody cares about fair markets; they care about being on the winning side of the trade. And they couldn’t care less about the game being rigged as long as they are on the right side.

  15. A Voice of Sanity

    “How could someone so smart and rich already be involved in something so horrendous?”

    How is it that all of these smart people don’t protect themselves with legal firewalls via foreign countries? Even Bernie Madoff could have walked if he’d taken some precautions.

    As for the ‘game’, of course. I wish I had bought Bre-X at a quarter and sold it at $200. C’est la vie!

  16. SHG

    How could someone so smart and rich use a commenter name like “A Voice of Sanity?”  The answer remains a mystery.

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