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Corrupt Fortune: The Billionaire's Apprentice and the Gaming of Wall Street

Sanjay Sanghoee   |   June 10, 2013   11:13 AM ET

To compare The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (Grand Central Publishing, June 2013) to Barbarians at the Gate might be a little premature, but just as the latter captured the spirit of unfettered greed in the 1980s, the former captures the resurgence of the same during the mid-1990s and beyond, coinciding with the technology boom that fueled unprecedented growth, and corruption, on Wall Street.

It is also not a coincidence that the key player in the Galleon scandal, its founder Raj Rajaratnam, began his career during the same era as Barbarians, when the demand for Indian-Americans adept at numbers and science boomed in response to the American economy's shift from manufacturing to information technology. While Billionaire only hints at it, it is pretty clear that the collision of the opportunity that the 1980s presented with a ruthless opportunist like Rajaratnam was almost sure to produce mayhem sometime in the future.

Therein lies the beauty of Anita Raghavan's tour-de-force book. Through meticulous research, copious history, vivid characters, and entertaining prose, Raghavan weaves together many different worlds, eras, and personality types to deliver a compelling view of the multi-cultural politics of today's Wall Street. Indian-Americans are not just the villains but the heroes of this saga as well, personified most directly by Rajaratnam and the former McKinsey consultant Anil Kumar on one side and SEC Assistant Regional Director of New York Sanjay Wadhwa and US Attorney for the Southern District of New York Preet Bharara on the other.

And straddling the murky area between these two extremes is the tragic Rajat Gupta, former head of McKinsey, board member of Goldman Sachs, Proctor & Gamble, American Airlines, and other blue-chip corporations, philanthropist, and arguably the most important role model for the Indian diaspora until his steep fall from grace. Gupta, of course, is the 'Apprentice' in the title and his character could not be more different (at least on the surface) than the master he winds up serving.

The book starts with Gupta's early life and introduces us to his father, who is a freedom fighter against the British Raj and whose experiences will impact his son's psyche, and eventually his destiny, half a century later. Raghavan shows the contrasts between Gupta and Rajaratnam expertly, while also using their stories as a vehicle to provide historical information on everything from McKinsey's role in starting the outsourcing trend in the US and the rise of the Indian Institutes of Technology, which would become crucial wellsprings of talent for American companies, to the dynamics of the hedge fund business and the inner workings of the SEC.

Gupta is a highly cultured and polished man whose primary goal in life is the realization of social status. Rajaratnam, on the other hand, is a smart, brash, and greedy street fighter whose primary goal in life is the accumulation of wealth. He is also very similar to a mafia don (a parallel which Raghavan draws multiple times) in the way that he surrounds himself with an army of foot soldiers to do his dirty work and whom he first seduces, then entraps, and finally exploits. Gupta is a statesman whereas Rajaratnam is a robber baron. Gupta does not view his American experience through the lens of race while Rajaratnam has a serious chip on his shoulder about the color of his skin.

Yet it is precisely these differences that also highlight what the two men share - a hunger for more, and which brings them together. At first, as their respective careers evolve, it seems unlikely that their paths will ever cross meaningfully, but when they do, the two find in each other what they are themselves missing. For Rajaratnam it is the type of aristocratic profile and respect in the uppermost echelons of American society that he himself can never have despite his considerable fortune, and for Gupta it is the type of money that would make him untouchable and show others that he has finally 'arrived'.

As the investigation into Rajaratnam's systematic and pathological quest to secure inside information on companies that he can use to trade profitably on, unfolds, it becomes clear that his actions are not just the result of temporary arrogance but of a criminal mindset. One would think that a seasoned businessman like Gupta, who rubs shoulders with people like Bill Gates, would have the good sense to steer clear of someone like Rajaratnam, and certainly not enter into business with him, but he does. Gupta may be close to the top of the pyramid but in his mind he cannot reach the absolute top until he has what Rajaratnam does - an insane amount of money - and so the corruption begins.

The specific trades that finally bring down Galleon and Rajaratnam are many, including trades in AMD, Akamai, Hilton, Google, and most dramatically Goldman Sachs. It is this last that ties Gupta directly to insider trading since by the time that he gives Rajaratnam a tipoff on Warren Buffett's impending investment in Goldman, he is a substantial investor in one of Galleon's funds. Traipsing through this crazy circus are many others, including bankers, consultants, and industry executives whom Rajaratnam turns into informants for stock tips (and exchanges bizarre IMs with), Rengan, Rajaratnam's reckless and arrogant younger brother, whose hedge fund Sedna Capital first sets off alarm bells at the SEC and inadvertently puts Galleon in the spotlight, Preet Bharara, the up-and-coming US Attorney who catapaults to fame on the back of the Rajaratnam conviction, and even Lloyd Blankfein, the CEO of Goldman, who abandons Gupta when the chips are down.

It is all fascinating and Raghavan, the former London Bureau Chief of Forbes, knows her stuff. While some of the detail and historical side-notes could have been left out without hurting the book, for the most part, Billionaire succeeds in making all of it engaging. The overarching theme of Gupta's corruption is developed slowly but builds to a very quick climax at the end, and includes a family secret that I will not give away. Suffice it to say that the secret circles back to the beginning of Gupta's life (which is also the beginning of the book) and raises his story to the level of Greek tragedy.

Finally, there are two questions which a book like this brings to the fore.

The first is why someone like Rajaratnam, who was worth $1.3 billion around the time of his illegal trades, broke the law for as little as $75 million in profits? Raghavan gives her answer by illustrating a pattern of unethical practices by the Galleon chief during his career, as well as an innate hubris bordering on sociopathy. If you combine this with his statements to Newsweek after his sentencing - in which he blames everyone but himself for his predicament, ranting against Indian cliques (he himself is Sri Lankan) and accusing the American justice system of racism - the picture becomes even clearer. Rajaratnam is a man living in a constant state of imagined persecution, which enables him to justify any action, however immoral or even unnecessary, to himself. The fact that he has been completely unrepentant further bolsters the likelihood of this diagnosis.

The second question which is asked is whether Rajaratnam's and Gupta's crimes will damage the stature of the Indian diaspora, and Indian-Americans in particular? Raghavan addresses this concern with a perfect quote from David Ben-Gurion:

"In order for Israel to be counted among the nations of the world, it has to have its own burglars and prostitutes."
As Indians permeate every aspect of American life from business to politics, and as more Indians rise to prominent positions in American society, it is inevitable that our community too will have its burglars and prostitutes. Indians as individuals are like everyone else, and some of us will rise to great heights, professionally and personally, while others will become victims to our own insecurities and weaknesses.

Moreover, let's not forget that for every Rajaratnam, there is a Bernie Madoff out there, and for every Galleon, there is an SAC Capital. The racial profile may change, but when it comes to money, the color that really matters is green.

In the meantime, Billionaire is a seminal work that captures the realities of race and greed in America with refreshing objectivity and efficiency, and a book that everyone should read.

SANJAY SANGHOEE is a political and business commentator. He is a banker, has an MBA from Columbia Business School, and is the author of the thriller novel "Killing Wall Street". For more information, please visit www.killingwallstreet.com

A Modern Great Gatsby: Rajat Gupta vs. Raj Rajaratnam and the Great Wall Street Scandal

Sandip Roy   |   May 22, 2013   11:48 AM ET

Leo DiCaprio will never portray him on the screen, but the disgraced Sri Lankan American moneyman Raj Rajaratnam could well be the Jay Gatsby of our times.

The story of Raj Rajaratnam versus Rajat Gupta is playing out in the media like F. Scott Fitzgerald's famous novel -- about old money East Egg, new money West Egg and rotten eggs all around.

In our real-life 21st century version, on one side we have Rajat Gupta, patrician, mover and shaker, philanthropist with all the correct credentials for today's blue blood -- IIT, Harvard Business School, McKinsey -- and a Rolodex that includes the likes of Bill Clinton. He might not be exactly old money like the Rockefellers or India's Birlas but it's close enough.

On the other side you have the grubbier Raj Rajaratnam, despite his English public school education -- the player with a gap-toothed smile and "gorilla moods" who threw blowout bashes headlined by the disco queen Donna Summer.

"How could (Gupta) get into business with a trader who was known for giving Super Bowl parties filled with scantily clad women?" wonders Anita Raghavan in an upcoming book, The Billionaire's Apprentice, excerpted recently by the New York Times.

The tone, aghast and incredulous, sounds just one sneer away from Fitzgerald's Tom Buchanan telling the nouveaux riche Jay Gatsby he doesn't stand a chance with Daisy.

"She's not leaving me! Certainly not for a common swindler who'd have to steal the ring he put on her finger."

In Baz Luhrmann's cinematic version The Great Gatsby becomes all about orgiastic parties filmed in eye-popping 3D. But the book itself was a scathing observation about the false differentiation between class and money or the lack thereof. Gatsby, a man of great charm but mysterious wealth, throws his money around like there's no tomorrow, while Tom Buchanan, polo-playing Mr. Old Money and garden-variety adulterer rues, "Civilization's going to pieces." Rajat Gupta also viewed the Johnny-come-latelies striking it mega rich during the heady boom years on Wall Street with lofty disdain.

As Raghavan writes:

Offers were flowing into Gupta's office too, but his wife, Anita, told a colleague he enjoyed the stature that came with his job. He could trade places with these young Wall Street guys and 20-something tech millionaires any day, but they could never trade places with him.

Just as Tom Buchanan scoffed that, for all his ill-gotten fortunes, Gatsby, "Mr. Nobody from Nowhere," could never hope to be one of them. What stings most is both Gatsby and Rajaratnam are fabulously, vulgarly wealthy. Rajaratnam is the one who loaned Rajat Gupta $5 million at one point.

But while Fitzgerald didn't sugarcoat Gatsby's corruption, he was withering about the Buchanans. "They were careless people, Tom and Daisy, they smashed up things and retreated back into their money of their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made."

Unlike Fitzgerald, we cannot let go of our giddy enchantment with the likes of Rajat Gupta. Before Gupta's conviction, R. K. Raghavan, a former CBI director gushed about his "unsullied record":

The fact that he was elected thrice to lead McKinsey, one of world's leading consulting firms, by its partners and the first non-American to be so chosen is proof enough that he is a professional to the core who will not commit the indiscretions of the kind attributed to him.
In Anita Raghavan's telling of the story, at least as evident from the excerpt, Gupta comes across as more sinned against than sinning. "What if Gupta, the adviser to presidents and executives, simply got played?" she wonders. Even if his conviction is overturned, he will be remembered as "the dignified McKinsey managing director who fell down the money trap, and under the spell of a boorish hedge fund trader, a reality which in his world is almost as damning as the crime he stands accused of committing."

Raghavan is not calling Gupta innocent or dismissing the evidence against him as circumstantial the way his lawyers are. But she points out that after his stellar run on Wall Street he wanted to "burnish his legacy as a philanthropist." If he had a "lust for zeros" as the story is headlined, it was for a higher cause.

If Gupta wanted to compete on the same level as Stephen A. Schwarzman, who would go on to give $100 million to the New York Public Library, or Sandy Weill, whom he knew from the Weill Cornell Medical College board, he had to be a billionaire.
Gupta's greed is thus ennobled in a way Rajaratnam's will never be. Rajaratnam is the man who treats 70 of his closest friends and family to a lavish Kenyan safari for his 50th birthday. Gupta, pointedly, is not on that guest list. One is class. The other is crass.

But Fitzgerald knew that while the two worlds did not want to be seen socializing together the borders between them were infinitely permeable. "He and this Wolfsheim bought up a lot of side-street drug-stores here and in Chicago and sold grain alcohol over the counter. That's one of his little stunts. I picked him for a bootlegger the first time I saw him, and I wasn't far wrong," says Tom about Gatsby.

"What about it?" replies Gatsby. "I guess your friend (Wall Street tycoon) Walter Chase wasn't too proud to come in on it." In fact, even Tom shows up at his secret speakeasy as do senators.

The Rajaratnam-Gupta affair unfolds on exactly the same lines. While his associates and friends now try to underscore the social gulf between the two, the fact is, it didn't stop Gupta from picking up the phone and calling Rajaratnam after a Goldman board meeting.

It's just the ending that is a little different, but only a little. The "careless" Buchanans just shrug and walk away, letting all the blame and opprobrium fall on Gatsby, leaving him to be the fall guy for their crimes. Rajat Gupta, on the other hand, has been convicted by a jury. But as he sits in his Westport, Conn. estate working on his appeal, he hopes he will at least walk free, if not unscathed.

The abandoned Rajaratnam meanwhile complains bitterly, "Every bloody Indian cooperated (to nail me)." And then says piously, "They wanted me to plea bargain. They wanted to get Rajat. I am not going to do what people did to me. Rajat has four daughters." This is not to say our modern Gatsby is the "man of sensitivity" that Jay was. Or a modern day chronicler should say to him, "They're a rotten crowd. You're worth the whole damn bunch put together."

But our belief in the intrinsic nobility of the Rajat Guptas remains our blind spot. The Raj Rajaratnams and Rajat Guptas are more connected that we'd care to admit. Both believed in the green light at the end of the dock (though theirs was of the dollar kind) and "the orgiastic future" that has now eluded them both. But that's no matter, for as Fitzgerald observed, tomorrow the rest of us will continue to "run faster, stretch out our arms farther -- so we beat on, boats against the current, borne back ceaselessly into the past."

The Great Gatsby reminds us the more things change, the faultline of class remains unalterably the same.

Another version of this blog first appeared on Firstpost.com.

America's New Math: 1 Wall Street Hour = 21 Years of Hard Work For the Rest of Us

Les Leopold   |   April 22, 2013    6:13 PM ET

The new Rich List is out -- yet another example of financial pornography. While nearly 15 million Americans still can't find jobs due to the 2008 Wall Street-created crash, the top hedge manager, David Tepper, earned $1,057,692 an HOUR in 2012 -- that's as much as the average American family makes in 21 years!

America's new math: one Wall Street hour = 21 years of hard work for the rest of us.

Together the top ten hedge fund managers waltzed off with $10.1 billion in 2012, which is more than enough to hire 250,000 entry level teachers or 196,000 new registered nurses.

It's not just that these financial gurus are filthy rich. It's that they are the richest of the rich and we don't even know what they do. Overall, hedge fund managers make 50 to 100 times more than our top athletes, movie stars, CEOs, lawyers, writers, doctors and celebrities. Yet, their activities are treated like state secrets.

So what is a hedge fund? No, it has nothing to do with the wholesale garden supply business. Nor does all that money come from hedging against unforeseen negative economic events. Rather, hedge funds are investment vehicles for the super rich -- for "sophisticated" investors and institutions who have the resources to gamble for ultra-high returns.

Are you worth what you earn?
In a capitalist society your value is determined by what the market says you're worth. The market is not supposed to pay you billions unless you're producing enormous amounts of value for the economy. Bruce Springsteen makes a good living because people like his songs, buy his records and attend his concerts. We give him money, he gives us entertainment.

But not every market transaction is such an obvious fair exchange of value. Monopolies can jack up prices to make extra profits without increasing the value produced. It is also possible to lie, cheat and steal your way to riches without producing any economic value at all. And as we learned during the Wall Street crash, the creators of toxic assets produced an enormous amount of negative value for society even as "the market" paid them enormous sums.

So do hedge funds produce economic value or are they ripping us off?
Hedge fund managers don't sing, act, hit baseballs or make movies for a living. Actually, obtaining reliable information about what they do is really hard to come by. (It took nearly two years of research for How to Make a Million Dollars an Hour before I could chase down just a few of the answers.)

When you read media reports it always sounds like top hedge fund managers are just the very best at buying low and selling high. We're told that investors like Tepper were smart enough to load up on Apple, Inc in 2012 while everyone else was worried that the Euro crisis would crash the markets...and so on. Maybe that's true. But we have no way to really check out what a particular hedge fund does on a day to day basis. That's proprietary information.

Instead we need to step back to examine the hedge fund business as a whole, and then ask two basic questions:

1. How is it possible for hedge funds, most with fewer than 100 employees, to make more money than corporations with tens of thousands of employees?

2. Is there any evidence to suggest that hedge funds succeed in large part because they have found ingenious ways to cheat? If so, how widespread is the cheating?

Hedge Funds want to know who wins the race before it is run:
We also are told that these guys (and yes they all are guys) make big bucks because they're terrific gamblers -- the very best poker players in the financial world. But that's a misleading analogy. Evidence suggest that many are more like card sharks. They don't really want to gamble. Instead they always seeking to bet on a sure thing. Better yet, they would prefer to create a rigged bet. Sounds far fetched? I'd wager that the financial maneuvers I'm about to list understate the severity of hedge fund cheating. (For more detailed information please see my workshop on C-Span Book TV)

1. Insider trading:
Many hedge funds (and we don't know how many) make their money through illegal insider tips. If you know something big is about to happen to a company that no other outsider is supposed to know, you're betting on a sure thing. So far U.S. Attorney Preet Bharara has nailed about 70 hedge fund honchos for obtaining illegal tips. The billionaire Raj Rajaratnam tried, found guilty and put away for 9 years. And the third richest hedge fund earner in 2012, billionaire Steven Cohn, is watching as several of his high-level employees succumb to federal indictments. He could be next.

How endemic are these crimes? We can only speculate, but this much is clear. It's very hard to nail someone for insider trading. So the odds of ever getting caught are slim given that there are 9,000 hedge funds. But perhaps we should listen to the man closest to the prosecutions:

"Given the scope of the allegations to date, we are not talking simply about the occasional corrupt individual. We are talking about something verging on a corrupt business model." -- U.S. Attorney Preet Bharara, NYT, May 27, 2011

2. Design financial products to fail so that you can collect the insurance:
This was the game of choice before and during the housing bubble. We know for certain that hedge funds colluded with big banks to create mortgage-related securities that were designed to crash and burn, so that hedge fund investors could bet against them. In fact the hedge fund bettors designed the bets by assembling the worst mortgages they could find to place into the securities.

Sounds strange? It is. In fact, nowhere else in capitalism is something this shoddy permitted. It's precisely like designing and building a home to fall down in six months so that you, the seller, can collect the insurance. Goldman Sachs, JP Morgan Chase and Citigroup have paid over a $1 billion in S.E.C. fines for misleading investors about these shoddy deals. But their hedge fund partners made billions on the insurance and didn't have to cough up a dime in penalties.

Not only did these deals defraud investors, but overall they puffed up the housing boom and then accelerated the crash. Without any exaggeration, these scams had no positive redeeming value for the economy. We're talking pure rip-off.

3. Manipulating the Media -- Rumor Mongering:
If you're really cleaver you can slip phony tips to gullible reporters -- information that is designed to assist your betting strategies. For example, you can set off rumors about a particular bank's solvency while you're betting against that bank. If you can help set off a bank run, so much the better, because then you can really win big. However, rumor mongering violates the law....if you're caught.

What evidence do we have that this really goes on? Ask Jim Cramer the frenetic star of "Mad Money." Over a decade ago he ran a very successful hedge fund. Years later he admitted during an on-line interview (transcript here) that he fed false rumors to his comrades at CNBC so that Cramer's hedge fund could cash in on them. (The statue of limitations had already run when he confessed his sins.) Furthermore, he said point blank if you're not willing to violate the rules, "maybe you shouldn't be in this game."

4. High Frequency Trading:
Here's a game for fun and profit that is both legal (for now) and foolproof. You set up your ultra high speed computers right next to the stock exchanges so that you get the feed a few nanoseconds before the rest of the world. Then with the help of expert programmers you use that information to automatically jump in ahead of normal investors, so that you buy stocks that others want, jack up the price a little bit and then sell them back to these normal speed buyers. This means that when the rest of us hit the buy button on E-Trade, a high frequency algorithm has probably jumped in there before us, bought the stock we want, and is selling it back to us for a few pennies of profit. They do this millions of times a minute, racking up from $5 to $20 billion a year. It's like a hidden private sales tax that goes into the pockets of high frequency traders. Our pension funds and 401ks are fleeced as well.

A Tax Break for Hedge Funds
And the list goes on and on. Some maneuvers are ethically challenged but legal. Other's are borderline. And some are flagrantly in violation of law. But in any event, most Americans would call it cheating. And to add insult to injury, hedge funds have a special tax break called "carried interest" which allows the richest of the rich to pay a lower tax rate than the rest of us.

Halting Runaway Inequality
Not only are we victims of the cheating and the tax breaks, but also, these outrageous incomes distort our entire income distribution. The more these guys make, the more every CEO desires -- (Would Freud call it hedge fund envy?) Corporate compensation committees don't want to lose their talented executives to hedge funds, do they? So up and up go corporate compensation packages. In 1970 the top CEOs averaged $45 for every one dollar paid in worker wages. By 2006 the ratio jumped to $1,723 to $1.

The solutions are straightforward:

1. Get rid of the carried interest loophole: The Obama administration now claims at long last to support the elimination of this outrageous loophole. But don't hold your breath. Instead of cutting back Social Security, the President should demand an immediate vote on this loophole all on its own. It might prove extremely embarrassing (and revealing) for members of both parties who for so long have quietly blocked its elimination. Voting on this loophole should become a litmus test of whether a politician is for Main Street or Wall Street.

2. Support the Robin Hood Tax: National Nurses United is leading the charge for a small tax on all sales of stock, bonds and derivatives. They aptly call it "A Sin Tax on Wall Street." Eleven other nations are instituting such a tax which would go a long way towards putting the high frequency vultures out of business, as well as moving significant sums from the bloated financial sector to the rest of the economy. (See robinhoodtax.org)

3. Full disclosure: We need to shine a bright light on what these hedge funds do. Many are so large that they could have an enormous negative impact on the economy if their bets go wrong. We need to know exactly how they make their money. If revealing those "trade secrets" undermine their profitability, so be it.

Of course, none of this will come easy. But sooner or later the American public will act on what they already sense: we are leeced each day in a myriad of ways by the big banks and hedge funds.

Get ready.

This blog post originally appeared on Alternet.org

Les Leopold is the author of How to Make a Million Dollars an Hour: Why Hedge Funds are Siphoning away America's Wealth (John Wiley and Sons, 2013)

  |   December 27, 2012    5:01 PM ET

(Reuters) - U.S. hedge fund manager Raj Rajaratnam has agreed to pay disgorgement of about $1.5 million in a civil lawsuit filed by the Securities and Exchange Commission, and to waive his right to appeal the judgment, court papers showed.

Rajaratnam would make the payment, representing the profits obtained by unlawful means, to the SEC within 90 days after the entry of the final judgment in court records, according to a filing.

Rajaratnam, currently serving a 11-year prison term, was convicted of securities fraud and conspiracy in May 2011. He was accused of running a network of friends and associates who leaked corporate secrets to him for years.

Former Goldman Sachs Group Inc director Rajat Gupta, a former chief of consulting firm McKinsey & Co, has also been charged with leaking tips to Rajaratnam. Gupta denies the charges.

Rajaratnam, the founder of Galleon Group, has already paid $63.8 million in criminal penalties, and a judge had earlier ordered him to pay $92.8 million in a civil case brought by the SEC.

The case is SEC vs Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 11-07566.

(Reporting by Sakthi Prasad in Bangalore; Editing by Ryan Woo)

Stop the Presses

David Crisanti   |   December 6, 2012   11:49 AM ET

There is nothing the press likes more than a story about the press, so the biggest news in England last week was the release of the Leveson report on the media and its relation to politics and power in the UK. Every major paper lead with the story and some went so far as to carry special supplements to report on the report, as it were. You'd have thought Princess Di had been reanimated and played strip pool with her sons for all the coverage.

The report itself recommends that the mainstream print media be regulated by an independent body created by Parliament. The finding is controversial because it potentially threatens freedom of the press. Lord Justice Leveson, who wrote the report in response to the phone hacking scandal, essentially found that given the power of the press, they simply have to act more responsibly than they have under self-regulation.

You can guess how the press feels about this, but the idea of standards for mainstream media is appealing to me. Not necessarily to ward off the dangers of phone hacking, but because I have a disease -- a disease that causes me to read the WSJ and then react with a tantrum whenever I read something that is absurd. Given the up-and-down content of the Journal I am in a near constant state of dyspepsia.

We don't have to go far to find examples. In this weekend's WSJ there was an article on MLPs -- publicly traded domestic energy partnerships that pay out much of their cash flow to investors and enjoy certain tax advantages. The article left unchallenged a money manager's claim that he does well buying ETFs (exchange traded funds) of MLPs rather than individual MLPs. The reality is the money manager is terribly derelict in his duties since the ETF charges nearly 1 percent in annual fees and disallows the tax breaks investors receive when buying the MLPs individually. Isn't the money manager there to do exactly the opposite, to make sure investors receive all the credits available and pay as few unnecessary fees as possible? The idea that anyone is well served by buying the MLP ETF let alone by investing with a money manager that will charge him additional fees for the privilege is risible (unless you are the money manager, who is also enjoying free advertising courtesy of the WSJ).

Elsewhere in that day's paper is Holman Jenkin's column.

He writes informatively and well on telecoms and other technical sectors -- or so I think: I don't have any direct experience in those sectors myself, so don't know for certain if what he writes is true. But when he writes about what I do for a living -- trading -- I know he is wrong. For the third or fourth time since the guilty verdicts in the Raj Rajaratnam insider trading case, he has written that insider trading is a victimless crime, one in which all parties are unaffected by insider activity.

He is incontrovertibly and demonstrably incorrect.

Jenkins cites the recent case in the news where a hedge fund trader at SAC saved his company approximately $275 million by exiting a long position once he obtained inside information from a doctor that clinical trials for an Alzheimer's drug were going poorly. Once the trial news became public, i.e., after SAC had sold, the stock dropped 70 percent. Jenkins has valid points when he notes that it's hard for industrious traders doing diligent research to know for sure where the line is that separates good work from criminal work. But he is factually wrong when he writes that the buyers would have bought the stock anyway, whether SAC was selling or not. However many shares SAC sold is exactly the number of shares now owned by the rest of the market that they wouldn't have owned if SAC hadn't sold. It's a zero sum game, shares are neither created nor destroyed and if SAC still owns them, someone(s) else doesn't. And as much money as SAC saved or made by selling those shares ($275 million in this case), it's exactly the amount lost by others -- money they wouldn't have lost if SAC hadn't acted. We may not know the exact name of the victim, and in fact there may be many victims, but that doesn't mean they don't exist.

We can't blame Jenkins; he is not a trader so perhaps he shouldn't know better, but we can blame the WSJ for allowing such fallacious content. And we should care about this beyond my dyspepsia because papers like the Journal not only shape opinion, they shape legislation. And if you think the public has abandoned the equity market due to the phantom threat of electronic market making, wait until you see what they do when they regularly get creamed if insider trading is made legal. Jenkin's article is titled "The High Cost of Ignorant Stock Prices." How high is the cost of ignorant journalism?

Doctors Who Advise Wall Street Investors Operate In Ethical Grey Zone

Ben Hallman   |   November 27, 2012    9:35 PM ET

Once upon a time on Wall Street, the enterprising trader looking for a nugget of inside information about a public company worked the phones, developed sources at law firms and pestered friends and family for tips.

According to allegations made in a recent $276 million insider trading fraud lawsuit -- and several other high-profile cases in recent years -- the aspiring fraudster now has an easier path: hire an "expert network" company to find those sources.

Expert network companies have been around for about a decade. They sign up thousands of academics and industry professionals as consultants, then offer their services to money managers, investors or anyone else willing to pay top dollar for an hour or two of that person's time. Consultants, and the industry, describe what they do as matchmaking, pairing subject-matter experts with analysts and others who make investing decisions.

Federal authorities have said the relationships can be conduits to fraud, giving hedge funds and other money managers easy access to people with market-moving information about a drug or another product.

The increased scrutiny of these relationships has led a handful of financial firms to sever ties with the expert companies. Now, some medical ethicists are urging their peers to do the same, warning that the risks might outweigh the financial reward.

"There's one reason for these investment firms to get involved, and that is to get the inside dope on a product," said Arthur Caplan, director of the Center for Bioethics at New York University.

He said physicians should steer clear. "This work has nothing to do with being a doctor," he said.

In separate interviews with The Huffington Post, three doctors said that they followed ethical practices during consultations for fees that averaged about $400 an hour. They said they supplied general information and opinions only on subjects in the public domain and that the conversations helped them better understand how market forces shape their profession.

"There's too much at risk," said John Hsu, director of anesthesiology at Presbyterian Intercommunity Hospital in Whittier, Calif., who consults through Gerson Lehrman. "If I am convicted of insider trading, that means jail. I would lose my license and lose my reputation. It's not worth it."

The doctors -- two of which asked to remain anonymous for fear hurting their consulting business -- didn't agree among themselves about what counts as fair game to disclose to a money manager or other questioner. For example, one oncologist said he would divulge whether a particular drug was effective -- and would be willing to reveal, for example, how many patients out of 10 it had helped.

Hsu, on the other hand, said he would only reveal his general impressions of the effectiveness of a drug, and would not be willing to say how many people it had helped.

Hsu said he had been asked this kind of question, and others that probed at what he might know about a drug under development, but had never revealed that kind of information. "I don't want to screw up," he said. "I'm always watching what I say."

Federal authorities allege that some of these relationships have far exceeded the legal bounds. In the most recent case, federal prosecutors and the Securities and Exchange Commission claim that Mathew Martoma, a former portfolio manager at an affiliate of the powerful hedge fund SAC Capital Advisors, traded on insider information given to him by University of Michigan neurology professor Sid Gilman.

Gilman, according to the allegations, served on a committee monitoring the safety of an Alzheimer's drug under development by drug companies Elan and Wyeth. In 2008, according to the criminal complaint, Gilman told authorities that he passed along information about the trial, which prompted SAC Capital to sell out its large positions in the companies within days.

Gilman received $108,000 in consulting fees through an expert network company -- later identified in press reports as Gerson Lehrman Group -- but did not otherwise profit from the information he passed along, according to the allegations. The hedge fund, run by the fantastically wealthy Stephen Cohen, did quite a bit better: earning $276 million, counting profit from short positions taken in the stocks soon after the fund sold them off, the government claims.

The fraud unfolded "on a scale that has no historical precedent," Manhattan U.S. Attorney Preet Bharara said at a news conference.

Gerson Lehrman did not respond to a request for comment and has not been accused of wrongdoing. In the past, the company has said it requires its consultants to sign nondisclosure agreements and not to discuss their own companies. Professionals who have accepted consulting jobs through Gerson have said they must take a yearly ethics review quiz and sign off before each new assignment asserting that they do not have a conflict that would prevent them from discussing the topic.

Stories about illicit activity enabled by expert network companies date at least as far back as 2005, when the Seattle Times identified 26 instances in which doctors leaked confidential details about ongoing drug research to Wall Street firms.

The expert network company that has received the most attention in recent years is Primary Global Research, which turned up in the insider trading case involving Raj Rajaratnam, the former Galleon Group head who was convicted of securities fraud last year. Several Primary Global employees have since been convicted of insider trading-related charges.

In another high-profile case, Broadband Research founder John Kinnucan pleaded guilty in July to passing along illegal tips to hedge fund clients and obstructing justice. He had previously made waves when he sent out an email to those clients in which he said he refused to wear an FBI wire. More than a dozen insider trading arrests followed in an operation that Manhattan U.S. Attorney Preet Bharara and the FBI called "Perfect Hedge."

What worries Eric Campbell, the director of research at the Morgan Institute for Health Policy, part of Harvard Medical School, is how little academic institutions know about the relationships between their staff and these outside consultancies -- or the financial firms that pay big fees to hire them.

"There is no common disclosure standard," he said. "If you asked me how frequently these consultations take place, I couldn't tell you. There is no data. Nobody knows."

Campbell said this lack of oversight puts the institutions at risk. He noted that other relationships, such as those between pharmaceutical companies and doctors, are very closely scrutinized, even though those can be greatly beneficial, leading to the development of a powerful new drug, for example.

Even if above board, there is no obvious societal benefit to a relationship with a financial company," he said. "The outcome is financial gain for a very select group of people."

Mark Gongloff   |   October 24, 2012    2:15 PM ET

Rajat Gupta already has friends in high places. Now he will get to make some new friends in prison.

The former Goldman Sachs director was sentenced on Wednesday to two years in prison, followed by another year of parole, and ordered to pay a $5 million fine. He was convicted in June on insider-trading charges, following a trial that included testimony from Goldman CEO Lloyd Blankfein.

“With today’s sentence, Rajat Gupta now must face the grave consequences of his crime – a term of imprisonment," Manhattan U.S. Attorney Preet Bharara said in a statement. "His conduct has forever tarnished a once-sterling reputation that took years to cultivate.

"We hope that others who might consider breaking the securities laws will take heed from this sad occasion and choose not to follow in Mr. Gupta’s footsteps," Bharara added.

It remains to be seen how much of a deterrent Gupta's sentence will be. At the time of his conviction, many experts suggested that such convictions attract attention for a little while and then fade in memory. Insider trading is fairly rampant, in part because there's so much money to be made at it, and few of the people doing it ever think about getting caught.

But the government is clearly making a notable effort to stop it, winning convictions of more than 70 people during a wide-ranging, three-year assault, notes Peter Lattman of the New York Times.

A former head of the global consulting firm McKinsey & Co. and board member of Procter & Gamble, Gupta is the most notable conviction so far in the government's campaign. He's such a big deal, in fact, that he managed to get people like Bill Gates and Kofi Annan to write letters pleading for leniency in his case, largely because of a lifetime of charitable works. Gupta had asked to be sent to Rwanda to help fight HIV/AIDS and malaria, in lieu of prison. Judge Jed S. Rakoff of the Federal District Court in Manhattan did seem swayed by these arguments, going lighter on Gupta than the eight to ten years recommended by sentencing guidelines. The maximum possible sentence for Gupta was 20 years for securities fraud and another five for conspiracy.

"The Court can say without exaggeration that it has never encountered a defendant whose prior history suggests such an extraordinary devotion, not only to humanity writ large, but also to individual human beings in their times of need," Rakoff wrote in his sentencing order. But Rakoff also noted that Gupta would be free to continue his charitable works after his prison term is over, and that some prison time was necessary as a deterrent to other inside-traders.

"When one looks at the nature and circumstances of the offense, the picture darkens considerably," Rakoff wrote, adding that "his criminal acts represented the very antithesis of the values he had previously embodied."

Gupta was convicted of giving tips to another convicted inside-trader, former hedge-fund manager Raj Rajaratnam, who was sentenced to 11 years in prison. Gupta's defense team said the evidence was circumstantial, including evidence of a phone call Gupta made to Rajaratnam immediately after a September 2008 conference call discussing an offer from Warren Buffett to invest $5 billion in Goldman to carry it through the financial crisis. Rajaratnam bought up a bunch of Goldman stock after the call from Gupta, turning an immediate profit of more than $1 million after Buffett's investment became public knowledge.

In Rakoff's words, Gupta's tip was "the functional equivalent of stabbing Goldman in the back."

Gupta was ordered to report to prison by 2:00 p.m. ET on January 8, 2013.

This post has been updated with details throughout.

Oversight: Why Congress Needs to Back the Securities and Exchange Commission

Sanjay Sanghoee   |   September 17, 2012   12:12 PM ET

As the US grapples with a recession, and as financial scandals continue to rock the economy on a weekly basis, the issue of Wall Street Reform is quickly reaching critical mass. It is clear that something must be done urgently to protect our financial system and to ensure its stability. The government body with the biggest responsibility for this, the Securities and Exchange Commission (SEC), must step up to the plate and meet its promise to the public.

Right now the agency is on the firing line. From articles alleging favoritism by the SEC for JPMorgan Chase and Goldman Sachs, to questions about the closeness of the agency with the industries it regulates, rumors are flying and the knives seem to be out.

But as our economic problems pile up, we need to stop playing the blame game and find real solutions to our problems. The SEC has always been a convenient scapegoat for both Washington and Wall Street but it is worth asking if the real failure here is that of Congress. As this frenetic election cycle has revealed clearly, the nexus between business and politics is not only a reality but one that could shape our economic future for decades to come.

First of all, let's be fair. The SEC's failure to stop Bernard Madoff was an immense black eye for the agency, and more recently, its efforts to change the dubious way in which money-market funds report their share price to customers fell flat in the face of pressure from banking lobbies. The SEC's track record is far from perfect.

Yet, all this bad press fails to capture the other side of the story: despite its shortcomings, the SEC has also executed vast reforms since 2008 and improved its performance considerably (even the Madoff whistleblower and vocal critic Harry Markopolos has acknowledged that he is impressed by the changes and by current Chairman Mary Schapiro). To judge the agency purely on the basis of failures is misleading because it does not take into account all the things it does right or the scope of the fight that the Commission engages in every day, not to mention it ignores the budgetary constraints that it functions under.

In order for the SEC to do its job properly, it needs adequate resources, and for that it needs the support of Congress. To understand why the budgetary issue is so important, and why the SEC deserves more funding now than ever before, let's look at the trajectory of the Commission since the Madoff scandal.

The SEC's directive is broad: to protect investors, facilitate capital formation and to ensure the fair and efficient functioning of markets. This includes investigating and prosecuting securities fraud, inspecting public company disclosures and financial statements to ensure transparency and legality, and promoting fairness in dissemination of market-related information and trading activities. By itself, that is no small task, but the burden on the Commission has also increased considerably with the Dodd-Frank Act.

To meet these challenges, the SEC has streamlined its management structure to reduce bureaucracy, created better cooperation between the field offices and headquarters, strengthened the working relationship with other agencies such as the FBI and the Department of Justice, instituted a robust system to handle tips and complaints, and built up its investigative and enforcement muscles through new technology and additional manpower.

A lot of this is due to the efforts of Schapiro, who was formerly the head of the Financial Industry Regulatory Authority (FINRA) and the Chairman of the Commodity Futures Trading Commission (CFTC) and has as an extensive background in financial regulation. More to the point, she makes no excuses for the past failures of the agency and is on a constant crusade for improvement. This fact too, however, gets overlooked in the criticism of the SEC.

On the technology front, the agency has created standardized systems for enforcement, examination management, risk analysis, and other core functions, and waded into high-tech analytics, collecting real time trading data and analyzing it with sophisticated "quant" technology - the same technology that is used by funds on Wall Street for trading and hedging.

In terms of enforcement, the agency has set up a comprehensive tips and complaints process that also includes the ability to detect patterns of fraud. Stephen Cohen, Associate Director in the Enforcement Division, says that the focus is on speed and accountability, and on ensuring that nothing falls through the cracks. The Commission has also started hiring ex-bankers, who bring industry expertise to the process of investigation and evidence gathering.

The overhaul seems to have worked: in the fiscal year ended September 30, 2011, the SEC filed a record 735 enforcement actions and distributed more than $2.8 billion in disgorgement and penalties to harmed investors. Its Trial Unit prevailed against 87% of defendants and won record penalties against Galleon founder Raj Rajaratnam, Charles Schwab, Citigroup, Bank of America, (and yes) Goldman Sachs and JPMorgan Chase - the same firms that people have suggested get preferential treatment from the SEC, in some cases for their roles in the subprime mortgage crisis.

But despite all this, the SEC faces a budget challenge. For 2013, the agency has asked Congress for $1.57 billion, which will enable it to hire about 700 more people, strengthen its market monitoring activities, prevent a wider array of corporate crimes, and enable it to stay on top of complex and evolving financial instruments. It is also useful to know that the SEC collects matching funds from securities transactions, which means that it costs taxpayers nothing. And yet the Appropriations Committee in the House of Representatives has refused to approve the budget, leaving the agency in limbo till the issue is resolved.

Given the urgency of financial reform, this is appalling.

Consider what the SEC is up against today. Wall Street alone spends $1.4 million a day to lobby Washington against banking reform; and total lobbying spending in 2011 was $3.3 billion - a lot of it directed towards defeating regulation and enforcement. The fact is that the SEC's resources are inadequate for the Herculean task that is laid on its shoulders even at full capacity, but with a budgetary shortfall it is absolutely impossible.

Another kink in the system is the legal framework governing the SEC. A common criticism of the agency is that the damages recovered by it are often a fraction of the true size of the crime. That is true, but what most people don't realize is that the SEC is restricted by law to recovering only double the ill-gotten gains - in other words, the actual profits made by a criminal - even if the transaction involved a bad investment or trade that was several times larger in amount. There are some exceptions to this but the ceiling imposed by the law is illogical and should be lifted.

And finally, there is the political factor. Even though the SEC goes out of its way to avoid politics, it is no secret that Republicans do not favor financial regulation and consider the agency a hindrance to business. The refusal by the Republican-controlled House to approve the latest funding request seems to confirm this attitude. But whatever the personal beliefs of our politicians, they should understand that the SEC, by ensuring a level playing field for all parties, is protecting our free market system. As Schapiro says, "We cannot have a strong economy without strong capital markets and that requires a solid rulebook and competent enforcement."

Ironically, the private sector already knows this. Even as companies lobby to decrease regulation, they are also working diligently to make the SEC's job easier. According to Bhavna Sethi, Founder and Managing Director of Cinapse LLC and a Technology Consultant in New York, firms are reviewing their technology infrastructure, refocusing priorities and re-allocating budgets to meet the SEC, FINRA and Dodd Frank requirements. Even hedge funds, who have been notoriously secretive, are now registering with the SEC in record numbers.

But competent enforcement comes at a price, and should the SEC's latest budget request remain in Congressional purgatory for long, it could derail the agency's reforms and stall its progress. We cannot afford that. There are enough banks out there willing to gamble with our economic future without our leaders aiding it too. It is easy to level blame at the SEC but if our government is serious about reform, then it needs to stop dragging its feet and help the agency achieve its directive instead. Now.


Sanjay Sanghoee has worked at leading investment banks Lazard Freres and Dresdner Kleinwort Wasserstein as well as at a multi-billion dollar hedge fund. He is also the author of the financial thriller, "Merger" (available below). Please visit www.sanghoee.com for more information.

  |   July 16, 2012    7:32 PM ET


* Kumar to be sentenced Thursday, faces up to 25 years

* US praises Kumar for testimony against Rajaratnam, Gupta

* Kumar pleaded guilty to helping Rajaratnam

By Basil Katz

NEW YORK, July 16 (Reuters) - A disgraced former McKinsey & Co partner whose testimony helped convict Wall Street giants Raj Rajaratnam and Rajat Gupta on insider trading charges deserves leniency at sentencing because his cooperation was exceptional, federal prosecutors said

In a letter to Judge Denny Chin on Monday, Manhattan federal prosecutors said that Anil Kumar's cooperation was "nothing short of extraordinary."

Kumar, 53, is expected to be sentenced on Thursday in Manhattan federal court. He is among a handful of people who, after being charged criminally, chose to plead guilty and help prosecutors and the Federal Bureau of Investigation in their wide-ranging probe of illicit trading on Wall Street.

"From the first day of Kumar's cooperation through the present, he's been one of the best and most important cooperating witnesses that the (prosecutors) working on the Rajaratnam investigation have worked with in securities fraud cases," the letter said.

In the letter, prosecutors said Kumar was essential in helping the government improve its case and convict Rajaratnam and Gupta, "two of the most important securities fraud trials in history."

They said Kumar's testimony at the successive trials of the two men was particularly convincing because he had opted to turn against one person who had been his friend for over 25 years, and the other who had been his mentor at McKinsey.

Galleon-group hedge fund founder Rajaratnam is serving an 11-year prison term after being convicted last year.

Gupta, a former board member at Goldman Sachs who headed elite business consultancy McKinsey & Co for nine years, was convicted in June. He faces up to 25 years in prison when he is sentenced in October.

Kumar's lawyer, Gregory Morvillo, declined comment on any sentencing submission by Kumar's defense because it had not yet been made public.

"We are very pleased that the United States Attorney's Office thought so highly of Mr. Kumar's cooperation," Morvillo said. "We think it is a very strong letter."

Kumar, as part of an agreement with prosecutors, pleaded guilty in January 2010 to one count of conspiracy to commit securities fraud and one count of securities fraud tied to feeding Rajaratnam secret stock tips. The charges carry a combined maximum of 25 years in prison.

Known as a "5K1" letter, Monday's filing is standard. The letter tells the judge in the case whether the defendant fulfilled the terms agreed to in his cooperation agreement with prosecutors, and if so, how much assistance he provided and at what personal cost.

It is then up to the judge to decide whether to credit the assistance and give the defendant a break in his sentence.

In fact, as is common in these types of cases, Judge Chin may opt to impose only a very light prison term on Kumar, or may decide that no prison time at all is warranted. Kumar is free on bail and lives in California.

Last month, Adam Smith, a former Galleon employee turned government cooperator, was sentenced to two years probation by U.S. District Judge Jed Rakoff in Manhattan. Rakoff also oversaw the Gupta trial.

The case is USA v. Anil Kumar, U.S. District Court, Southern District of New York, No. 10-cr-00013.

Susan Antilla   |   July 5, 2012    3:06 PM ET

Bloomberg View:

Rajat Gupta, the former McKinsey & Co. chief and pal of imprisoned inside trader Raj Rajaratnam, has one goal after being convicted last month of securities fraud: To convince federal Judge Jed Rakoff that he deserves minimal jail time.

There is a compelling public interest, after all, in keeping white-collar criminals on the street. The financial markets need liquidity, as any summer intern at a Washington lobbying firm can tell you, and we would be facing dark days if we lost our best talent at leaking confidential information. What good is a tipster in a place where high-frequency trading means swapping cigarettes for a batch of washed and folded laundry?

I don’t mean to suggest that his lawyers and throng of big- name business friends aren’t already doing a serviceable job of portraying Gupta as an honorable man who doesn’t belong in jail. Gupta’s lawyer, Gary P. Naftalis, pushed so hard to be allowed to tell the jurors about Gupta’s philanthropy that Rakoff had to offer a reminder: Even Mother Teresa would be judged on the evidence -- but presumably not her saintliness -- if charged with robbing a bank. And on the website www.friendsofrajat.com, a collection of supporters cite everything from Gupta’s role as a founding board member of the Global Fund for AIDS, malaria and tuberculosis to his selfless offer to pay for a friend’s son to go to college.

Going Far

The effort to tout his charity and good heart is a respectable start for the former Goldman Sachs Group Inc. (GS) director. But it doesn’t go far enough.

With the sentencing slated for Oct. 18, there’s no harm in maxing out on every possible pitch as to why the man found guilty of leaking confidential information to Rajaratnam should get a break. The community-service alternatives alone are boundless. A not-for-profit to wage war on bullying of school- bus monitors comes to mind. Or maybe a faux-feminist foundation that cranks out op-ed articles on why it’s bad for women to receive equal pay to men.

Speaking of op-eds, it wouldn’t be the worst idea for him to get his worker bees cracking on a competition among news media outlets for first dibs on a Gupta byline. If Gupta’s lawyers balk, at least the public-relations people could ghostwrite a sermon on Gupta’s finer points, and hunt down a big name in business willing to put his or her name on it. You know, the types who are on important corporate boards and maybe even run global management-consulting firms.

White-collar defendants with bottomless checkbooks have been known to make colossal efforts to paint themselves as philanthropic pillars of the community. Sometimes that charity begins right around the time investigators deliver their first subpoena. Other times, as in the case of Gupta, magnanimity is a long-established practice.

You might wonder who would care if a rich person found guilty of a crime has sprinkled a few crumbs among the little people -- and juries often wonder the same thing. Experts in selecting and analyzing juries say that jurors in mock trials and focus groups get turned off when there’s too much talk about a defendant’s good works. Philip K. Anthony, the director of jury consulting at DecisionQuest Inc. in Los Angeles, says jurors often mention that wealthy defendants derive benefits from their largess, including tax write-offs and goodwill from business associates and the community.

Paul Neale, the chief executive officer of Doar Litigation Consulting -- the Lynbrook, New York-based firm that worked on the Gupta case -- declined to comment on the trial. But he did say he has never seen philanthropy as a “definitive factor” in 23 years of mock trials that his firm has conducted.

Reality Play

Reality, though, can play out differently. Richard M. Scrushy, the former CEO of HealthSouth Corp., was acquitted by a jury in 2005 on charges he directed an accounting fraud. The Birmingham, Alabama, community got a heavy dose of his pious side even during the trial. Scrushy delivered a lecture and donated $5,000 to a church attended by one of the jurors. He and his wife hosted a Bible show that aired five days a week on local TV during the months before the trial began.

Even Rajaratnam benefited from hundreds of supportive letters to the court. Federal Judge Richard Holwell acknowledged Rajaratnam’s “very significant dedication to others” at sentencing, giving him 11 years even though sentencing guidelines called for as much as 24 1/2 years.

Maybe it wouldn’t hurt for Gupta to consider the example of Ronald Ferguson, the former CEO of General Reinsurance Corp. who faced a potential life sentence for helping American International Group Inc. deceive shareholders. Part of his pitch to the judge at sentencing was that he wanted to get back to his seminary education “and live my purpose to serve others.” Though his conviction was reversed on appeal and then settled in June in advance of a retrial, U.S. District Judge Christopher Droney sentenced him to only two years back in 2008. “We will never know why such a good man did such a bad thing,” Droney said. Ferguson’s supporters flooded the court with 379 letters.

A seminary stint may not be in Gupta’s future, but perhaps he could catch a break if he winds up filing an appeal and selects a new legal team with the magic touch.

In one of the most famous insider-trading cases of the late 1980s, Martin Siegel faced as much as 10 years in prison and a $260,000 fine. He had sold inside information in return for suitcases full of cash. Despite his crime, he spent only two months in prison, five years of probation, and received no fine.

It’s a pity that Gupta won’t have a shot at hiring the lawyer who shepherded Siegel to his propitious outcome. Siegel used Jed Rakoff, the guy who will decide what sentence suits Gupta’s crimes.

(Susan Antilla, who has written about Wall Street and business for three decades and is the author of “Tales From the Boom-Boom Room,” a book about sexual harassment at financial companies, is a Bloomberg View columnist. The opinions expressed are her own.)

Read more opinion online from Bloomberg View: Mandate Not the Only Health Tax Republicans Backed and The Other Big Case the Supreme Court Got Right.

Dear 'Big Daddie': 'Tiddie Biddie' Emails Reveal Raj's Intimate Ties

Jillian Berman   |   June 22, 2012   11:50 AM ET

Guys, if you want to pass some insider “tiddie biddies” about major companies along to your friends you probably shouldn’t do it in writing.

David Loeb, a current Goldman Sachs managing director, exchanged emails with Raj Rajaratnam that included what he described as “tiddie biddies” about Apple, Intel and other technology companies, the Wall Street Journal reports.

It appears the two had an especially close relationship, according to the emails reviewed by the WSJ; Loeb affectionately referred to Rajaratnam as “Dr. RR” and “big daddie” and signed his emails “CBF” reportedly an acronym for "Chunky But Funky."

Dr. RR currently has his chunky self parked in prison. The Galleon Group hedge fund founder, was convicted of insider trading last year and is serving an 11 year sentence. Loeb is under FBI investigation for allegedly passing insider information about technology companies along to hedge funds. The e-mails indicate that the two were closer than previously thought.

Loeb’s relationship with Rajaratnam was a subject of controversy during the trial of Rajat Gupta, a former Goldman Sachs director who was found guilty earlier this month of passing secret information from Goldman board meetings to Rajaratnam.

One of Gupta’s key defenses -- which was based partly on a wiretapped conversation in which Loeb passed insider information to Rajaratnam -- was that Rajaratnam had other sources at Goldman for tips besides Gupta. Ultimately the judge excluded the tapes of the wiretapped conversations between Loeb and Rajaratnam from evidence.

The investigations into Loeb, Gupta and Rajaratnam are part of a widespread effort on the part of a variety of government agencies to crack down on insider trading by targeting high profile suspects. Still, it's unclear whether the convictions in the Gupta and Rajaratnam cases will do much to deter insider trading in the future.

Inside Traders May Not Heed Gupta Message

Mark Gongloff   |   June 15, 2012    5:59 PM ET

The conviction of Rajat Gupta on insider trading charges is a real score for government prosecutors -- maybe the biggest such conviction in history.

It will also probably barely deter other people from insider trading.

"I think for the next few days people will talk about Gupta, and for the next few days they will be more thoughtful about their actions," said Dan Ariely, a behavioral economist at the Duke University Fuqua School of Business. "And then it will stop."

A federal jury on Friday convicted Gupta, a former Goldman Sachs director, of passing on nonpublic information from Goldman board meetings to former hedge fund manager Raj Rajaratnam, who has already been convicted and jailed for insider trading.

Several lawyers and analysts praised Preet Bharara, the U.S. attorney in Manhattan, for winning a conviction against Gupta despite having only circumstantial evidence. The success could lay the groundwork for more aggressive cases in the future, these experts said.

"This is a big win for the prosecution," said Philip S. Khinda, co-head of the SEC Enforcement Practice at the law firm Steptoe & Johnson. "It will embolden the government."

Just as impressive, Gupta was not just some low-rent hedge fund manager, but someone who had reached the highest ramparts of the business world. As such, he makes an unforgettable example for potential wrongdoers.

"I think people are going to take a look at this and say, ‘That could be me,’" said Thomas Gorman, a lawyer at the firm Dorsey & Whitney who defends clients against Securities and Exchange Commission and Justice Department securities investigations. "This is one of their own, a man at the pinnacle of corporate America. That sends a big message."

"In the history of insider trading, Rajat Gupta is probably the highest-level person in corporate America who’s been convicted on inside trading," said Richard Sylla, a professor of economics and financial history at the New York University Stern School of Business.

Impressive. But the memory will fade, Sylla warned. "The effect of these things wears off."

Though Bharara is being widely praised for his prosecutions, other industry watchdogs are mostly asleep and don't seem likely to perk up any time soon.

"This should be a model for the rest of the law enforcement community on Wall Street, but I don't have much hope for that," said Dennis Kelleher, president of Better Markets, a non-profit group pushing for financial reform. "While this case may be a deterrent, the juxtaposition of slack enforcement in any other arena green-lights people to do what they want."

A possibly more fundamental problem is human nature: The people who are considering trading on inside information don't typically stop and think about the long-term potential consequences, according to Duke professor Ariely.

Ariely, the author of a new book, "The Honest Truth About Dishonesty," has as part of his research talked to more than a dozen people who have been accused and/or convicted of insider trading. None even stopped to even think about the possibility that they might be caught, Ariely said.

In that way, inside traders are like any of us who text while we drive, eat food that's bad for us, or partake in any number of other behaviors that could have horrible long-term consequences.

"There's recent analysis that looks at whether there's evidence the death penalty is reducing crime, and there's no evidence for it," Ariely said. "And if you don't find clear and strong evidence there, what are the chances that this will work out?"

What's more, these inside traders felt like their behavior was socially acceptable -- everybody was doing it, in other words, Ariely said.

And everybody is doing it because it makes them money. Always has, always will.

"It will make people on Wall Street pause, but because the motivation on Wall Street is to make money, people will always violate the law," said Michael S. Weinstein, a former federal prosecutor who chairs the white collar defense practice at the law firm Cole Schotz. "This case is not going to prosecute away insider trading."

Jury Convicts Ex-Goldman Director Of Insider Trading

D.M. Levine   |   June 15, 2012   11:50 AM ET

NEW YORK -- Jurors in a Manhattan federal court Friday found former Goldman Sachs board member Rajat Gupta guilty of conspiracy and securities fraud, only two days after closing arguments ended in the closely watched insider trading case.

Gupta, 63, was found guilty of passing on nonpublic information from Goldman Sachs board meetings to now-jailed hedge fund manager Raj Rajaratnam, but the jury didn't convict him on two charges, including an allegation that Gupta had also leaked information about discussions of the Procter & Gamble board, on which he also served.

"Having fallen from respected insider to convicted inside trader, Mr. Gupta has now exchanged the lofty board room for the prospect of a lowly jail cell," said Preet Bharara, the U.S. attorney in Manhattan, according to The Wall Street Journal "Violating clear and sacrosanct duties of confidentiality, Mr. Gupta illegally provided a virtual open line into the board room for his benefactor and business partner, Raj Rajaratnam."

Gupta’s four daughters cried and took turns embracing their father after the verdict was read, as Gupta maintained the relatively stoic face he had displayed throughout most of the four-week trial. His wife Anita buried her face in her arms, according to the Journal.

The conviction represents a tragic fall for Gupta, a Harvard graduate and corporate titan who was a former chief of McKinsey & Co., a top corporate consulting firm.

Sentencing in the case is scheduled for Oct. 18. Gupta faces up to 20 years in prison, according to the Journal, which says his sentence will likely be lower. Rajaratnam was sentenced in October to 11 years in prison for insider trading.

In a statement to the press after the trial, Gupta’s lead defense lawyer, Gary Naftalis said that the defense will move to set aside Friday’s verdict. “This is only round one,” he said.

Naftalis emphasized Gupta's innocence. He “didn’t trade, didn’t tip Mr. Rajaratnam. He didn’t receive a dishonest dime,” Naftalis told reporters.

Jurors didn't see it that way. “We wanted to believe the allegations weren’t true,” said jury foreman Rick Lepkowski in a question-and-answer session after the verdict. “At the end of the day, the evidence was, in my opinion, overwhelming.”

The matter was handed to the jury for deliberation on Wednesday, after a month of testimony and arguments. Last week, Goldman Sachs CEO Lloyd Blankfein completed his testimony for the prosecution, telling the court that Gupta was present at key Goldman board meetings in which nonpublic information was discussed.

Jurors seemed to have an appreciation for Blankfein, who has been making an effort lately to reach out to the press. In the courtroom, Blankfein exchanged banter with federal Judge Jed S. Rakoff, for example, joking about a high-priced restaurant Blankfein planned to visit with his daughter.

“I appreciated Mr. Blankfein’s levity,” during the frequent occasions when his testimony was interrupted by objections or requests for sidebar conferences with the judge, said Lepkowski, a nonprofit executive who lives in Ossining, N.Y. “I didn’t find him an unhelpful or uncredible witness.”

Throughout the trial, Gupta’s defense lawyers argued that the prosecution’s case was based on indirect, circumstantial evidence since there was no documentation of most of the conversations between Gupta and billionaire Rajaratnam.

One particularly crucial piece of evidence related to a Sept. 23, 2008, Goldman Sachs board conference call during the financial crisis in which a proposed $5 billion investment from Warren Buffett’s firm Berkshire Hathaway was discussed. Shortly after that call, the prosecution showed the court evidence that Gupta phoned Rajaratnam, though the substance of that call was not documented.

"That news was going to be very good news for Goldman Sachs," prosecutor Richard Tarlowe said in closing arguments. "It was getting the Good Housekeeping seal of approval ... When the board approved the deal that day, the public did not yet know something good was going to happen."

Shortly after the call between Gupta and Rajaratnam, the prosecution said, Rajaratnam directed employees at his hedge fund, Galleon Management, to purchase $40 million in Goldman Sachs stock.

As the AP reported, "the hedge fund manager's assistant, Caryn Eisenberg, testified at trial that it was the only call her boss received on his private line that day between 3 p.m. and 4 p.m. 'That evidence is devastating for the defendant ... If you believe Ms. Eisenberg, it's over – the defendant is guilty,' Tarlowe said."

In the end, Tarlowe's assessment prevailed. These sorts of calls were “too coincidental,” said juror Ronnie Sesso, a resident of Manhattan’s East Village neighborhood who works as a children’s advocate at the New York Administration for Children’s Services.

Asked whether Gupta’s status as a highly paid corporate executive colored their impression of him, both Sesso and Lepkowski said no, that they in fact found Gupta to be sympathetic. “I really feel [Gupta] was highly respected … He built a name for himself. He wanted the best for his family,” said Sesso.

Lepkowski agreed. “We wanted [Gupta] to walk out of that courtroom.”

Last year, Goldman's reputation ranked among the worst in the United States. Check out the others:

Insider Trading Defense Questions Goldman CEO's Credibility

D.M. Levine   |   June 12, 2012    9:04 PM ET

NEW YORK -- Prosecutors and defense lawyers offered starkly differing profiles Wednesday of Rajat K. Gupta during closing arguments in the former Goldman Sachs board member's insider trading trial.

"Rajat Gupta abused his position as a company insider," said Assistant U.S. Attorney Richard Tarlowe in an impassioned summation as he stood before the federal court Wednesday morning. Gupta's alleged leaks of secret Goldman information to his hedge fund friend helped feed an insider trading operation to "cheat average investors,” the prosecutor said. Tarlowe argued that Gupta, a man who'd reached the highest echelons of American industry as former managing partner of consulting firm McKinsey & Co. and a member of the boards of directors of Goldman Sachs and Procter & Gamble, enjoyed extraordinary access to information that investors did not. He used that information to help himself and his friend, the now-jailed hedge fund manager Raj Rajaratnam, Tarlowe said.

Gupta’s lead defense attorney, Gary P. Naftalis, told jurors Gupta was a legitimate businessman who had business dealings with Rajaratnam that were entirely above board. "Rajaratnam had all sorts of conversations with Mr. Gupta about all sorts of legitimate things," Naftalis said in his muted argument. But Naftalis's main aim during his summation was to poke holes in the government's case, in part by showing that the government's allegations were based on circumstantial evidence. The government's burden of proof, Naftalis said, is "not satisfied by suspicion, it's not satisfied by guesswork. ... You need real evidence." In various forms, he repeated the line that there is "no real, hard, direct evidence to support the allegations prosecutors have leveled against Mr. Gupta."

Gupta is on trial in U.S. District Court in Manhattan on one count of conspiracy and five counts of securities fraud. Prosecutors allege that Gupta illegally passed information he gleaned from confidential meetings of the Goldman Sachs and Procter & Gamble boards to Rajaratnam, who used the information to make stock trades.

Rajaratnam was convicted of insider trading in October and sentenced to eleven years in prison. If convicted, Gupta faces up to 25 years.

Jurors begin deliberating the case Thursday.

One potential challenge for the defense inside the jury deliberation room may be Gupta's elite status, said Michael S. Weinstein, a former federal prosecutor who chairs the white collar defense practice at the law firm Cole Schotz. “There’s a class element" to the case, said Weinstein. “You want people who are of the same mindset that the defendant is -- a businessman or an executive.” Most jurors in this case are not of that mindset, he said.

Another defense challenge is likely the surfeit of indirect evidence, which even by Naftalis's admission paints a very negative picture of Gupta. “The circumstantial evidence is compelling and devastating,” said James Cox, professor of corporate and securities at Duke University, who has followed the trial closely.

Throughout the four-week trial, prosecutors have sought to paint Gupta as a member of the boardroom elite who used his access for illlicit gain. They called high-profile witnesses including Goldman CEO Lloyd Blankfein, to testify that Gupta attended Goldman board meetings and heard secret, market-moving information -- such as whether to accept a $5 billion investment from Warren Buffet's Berkshire Hathaway during the financial crisis in 2008. Other prosecution witnesses testified that, immediately after meetings like that one, calls were placed between phone numbers associated with Gupta and Rajaratnam. Shortly thereafter, according to testimony, Rajaratnam bought or sold shares in Goldman Sachs.

The prosecution played a wiretapped conversation from July 2008 that appeared to show Gupta confirming to Rajaratnam that the board had discussed purchasing insurance giant AIG. That conversation isn't part of the government's case against Gupta, but prosecutors have used it as evidence of the close relationship between Gupta and Rajaratnam and the type of information the two discussed.

In his closing argument, Tarlowe came back to the Buffett allegation, telling jurors, "Gupta was one of a very limited number of people who knew about Warren Buffett's investment in Goldman Sachs" before the public. "The first thing he did," after he heard about the investment during the board meeting "was call Rajaratnam" who then "wasted no time" in burying millions worth of Goldman Sachs stock, Tarlowe said. "That evidence is devastating for the defendant."

The defense argued neither this incident nor others cited by the prosecution fail to directly show Gupta offering Rajaratnam inside information -- just that there were phone calls and stock trades. "Telephone records don't tell you what was said on a call," Naftalis said. "There is not a single recording in which Rajat Gupta gave Mr. Rajaratnam [information] on which he traded. ... You think you'd have a recording of it one time. And there wasn't one because it didn't happen."

It's a strategy that Thomas Gorman, a lawyer at the firm Dorsey & Whitney who defends clients against Securities and Exchange Commission and Justice Department securities investigations, said could pay off for the defense. “Circumstantial evidence is susceptible to interpretation," Gorman said. "The defense doesn't have the burden of proof. They just need to point out other reasonable possibilities that might explain some of these circumstances.”

Gupta's lawyers also questioned the credibility of prosecution witnesses, including Goldman Sachs CEO Lloyd Blankfein.

Naftalis cited Blankfein's testimony about a Wall Street Journal article from late-October 2008 that reported the firm planned to fire 10 percent of its workforce -- more than 3,000 people. "I don't even know that it's true, I just know the article says that," Blankfein said. During cross-examination of the Goldman CEO earlier in the trial, Naftalis presented a transcript of a voicemail Blankfein sent Goldman employees the day of the Journal report, confirming the layoffs.

Blankfein, "was being less than candid when he told you he couldn't remember firing 3,000 people," Naftalis told jurors Wednesday. Blankfein "remembers nothing, and that's exactly what his testimony is worth."