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Lie, Cheat and Steal

Dan Solin   |   October 20, 2009    8:56 PM ET

Is man inherently evil? Maybe that's too big a question.

Are members of the securities industry inherently evil? Will they do or say absolutely anything to get their hands on your money?

Obviously, it would be unfair to make such a blanket characterization, but sometimes you really have to wonder.

Consider these items:

Item #1: A study by two finance professors estimated that 10% of the returns of hedge funds reported to a standard database were "distorted." The authors concluded that "[T]his suggests that misreporting returns is a widespread phenomenon."

Translation: The practice of lying about hedge fund returns to make them appear more attractive than they are is a common practice.

Item #2: Another study concludes the hedge fund industry "is vulnerable to entry by managers who have no particular skill, but whose lack of skill is difficult to detect based solely on their track records. In other words, the hedge fund industry has a potential lemons problem."

Translation: A con artist can easily set up a hedge fund, make it look like he is adding "alpha," reap the rewards of huge fees and live happily ever after when the fund blows up.

Item #3: A third study found that "incomplete and inaccurate disclosure of important information is not uncommon among a sample of funds selected for research by clients of a major due diligence firm."

Translation: Lies, lies and more lies.

Item #4: Billionaire Raj Rajaratnam and others were arrested on October 16, 2009 and charged with using inside information that permitted the $7 billion hedge fund at Galleon Group in which he was a partner to reap $12.7 million in profits. These charges are allegations only and have yet to be proven at trial.

Translation: This item is the least surprising. The only way to get an edge in an efficient market is to illegally use inside information.

The bottom line transcends "buyer beware." This is an industry where the end justifies the means. The only expertise they have is the ability to transfer your wealth to their pocket.

Not every sheep must be shorn. You should be the exception.

Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Moral of Insider-Trading Bust: Only Fools Try to Beat the Street

  |   October 20, 2009   10:16 AM ET

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Robert Khuzami: SEC Prosecutor Wall Street's Latest Enforcer

Ryan McCarthy   |   October 20, 2009    8:40 AM ET

Wall Street's wrongdoers may have officially met their match. After less than six months on the job, Robert Khuzami, the newly appointed top prosecutor at the Securities Exchange Commission, has been very busy. Last week, the head of the SEC's new enforcement division brought civil charges against billionaire Raj Rajaratnam, in what's considered to be the largest insider trading case ever.

During his short tenure, Khuzami has also brought fraud charges against former Countrywide CEO Angelo Mozilo and insider trading charges against Dallas Mavericks owner Mark Cuban. (The charges against Cuban were thrown out, and the SEC is currently appealing.)

Khuzami, who was chosen by SEC chair Mary Schapiro, has taken an approach that has "shaken the agency to the core with reforms designed to make sure it does not miss the next Madoff," according to Reuters.

Here's more from Reuters:

To some, the former federal prosecutor has revolutionized SEC enforcement by scrapping middle managers, giving lawyers more subpoena power, and creating squads to focus on areas such as complex financial products and municipal securities.

"Aggressive is an understatement," said Cam Funkhouser, senior vice president of market regulation at the Financial Industry Regulatory Authority, who has known Khuzami for a decade.

The SEC, since Khuzami arrived, appears to be undergoing somewhat of a structural shift. Last week, they hired 29-year-old former Goldman Sachs exec Adam Storch, to be the COO of its enforcement division. New departments within the agency's enforcement division also target things like derivatives and hedge funds.

More from AmLawDaily:

The enforcement division also plans to form five new specialized units, Khuzami said, focusing on asset management (such as hedge and mutual funds); structured financial products (such as derivatives); municipal bonds and public pensions; market abuse and manipulation; and foreign corrupt practices.

The changes will result in more SEC enforcers on the front lines, as the specialized units will be dispersed throughout the country and have the power to assign cases and negotiate settlements. Khuzami hopes the changes will help strip away the layers of bureaucracy that slow down investigations.

Interestingly, Khuzami never intended to become a lawyer. According to Reuters, Khuzami is the son of two professional ballroom dancers. His brother is a musician and his sister is a muralist. "I never had any talent," Khuzami joked to Reuters. "I toyed with going to culinary school."

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Galleon Hedge Fund Scandal: The Cursing, The Paranoia And $4 Million For Kenny Rogers On Auto-Repeat

Marcus Baram   |   October 19, 2009    1:59 PM ET

Research assistance by Claire Schneiderman

The story of Galleon Group, the hedge fund at the heart of the biggest insider-trading scandal in decades, has plenty of colorful characters from a billionaire whose charitable donations ended up aiding rebels in Sri Lanka to a foul-mouthed ex-Bear Stearns executive who befriended a mild-mannered IBM vice president.

Here's a guide to the scandal's most colorful quotes and anecdotes:

- Leon Shaulov, a loudmouth senior trader at Galleon, once turned on a colleague, Gary Rosenbach, in front of the rest of the staff, screaming: "You're a disease, you're a jinx."

- Galleon founder Raj Rajaratnam once "paid $4 million to have Kenny Rogers come to a birthday party at his house and sing his favorite song, 'The Gambler,' over and over again. Kenny refused to go on after a dozen times."

- Anyone who arrived late at Galleon's morning meeting of 70 analysts, portfolio managers and traders was fined $25.

Straight from the indictment of co-defendants Danielle Chiesi and Mark Kurland, both from the hedge fund New Castle, and Robert Moffat, the IBM officer who provided them with information regarding AMD, IBC, and Sun Microsystems, come some incredibly insightful quotes caught on government wiretaps:

- Chiesi to Kurland, on whether to call an Akamai executive when they believed Akamai would announce quarterly earnings earlier than expected, "Do you want me to call [the Akamai Executive] up? It's a pretty fucking scary thing to do." Kurland replied, "Call him... Let him talk."

- Following this conversation, an Akamai executive called Chiesi to say that he was "gonna come visit you in New York and I'm gonna give you a present. But it has to be face to face..." Later, he said, "Danielle, I have a major present for you." Chiesi asked what he was talking about, and the Akamai executive replied, "Information." Chiesi said, "Well that, that is a great present."

- Perhaps Chiesi knew that she would be indicted in the first case of insider trading where the feds used wiretapping. When Kurland called Chiesi at the end of August, 2008, Chiesi said that she was going to "get a new cell phone and talk to [the AMD executive from there... I know I'm paranoid." Kurland replied, "Alright, well don't keep talking about it on the phone. I'll take care of it alright."

- Regarding whether Chiesi and Rajaratnam would have bought AMD stock if they weren't in on the trading, Chiesi asked, "If the two of us weren't close to the company as we are, would you be long the stock?" Rajaratnam replied, "Yeah, no. I wouldn't." Chiesi said that she "wouldn't of touch[ed] it with a fucking 10-foot pole."

- In what seems a clear sign that Rajaratnam and Chiesi were aware of potential wrongdoing, during a discussion of AMD stock, which both of them were buying, Chiesi said: "I don't want anybody else to make money on this but us, 'cuz I don't want to get in trouble for a lot of reasons..."

- A conversation between Chiesi and a co-conspirator was even more telling: the co-conspirator asked when the announcement would take place regarding an AMD reorganization, Chiesi replied, "September... I swear to you in front of God... You put me in jail if you talk." Later, Chiesi said, "I'm dead if this leaks. I really am... and my career is over. I'll be like Martha fucking Stewart."

By Joshua Gallu and David Scheer   |   October 19, 2009    2:46 AM ET

Federal investigators are gearing up to file charges against a wider array of insider-trading networks, some linked to the criminal case against billionaire hedge-fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said.

LARRY NEUMEISTER and CANDICE CHOI   |   October 16, 2009   12:42 PM ET

NEW YORK — One of America's wealthiest men was among six hedge fund managers and corporate executives arrested Friday in a hedge fund insider trading case that authorities say generated more than $25 million in illegal profits and was a wake-up call for Wall Street.

Raj Rajaratnam, a portfolio manager for Galleon Group, a hedge fund with up to $7 billion in assets under management, was accused of conspiring with others to use insider information to trade securities in several publicly traded companies, including Google Inc.