A long-term full-court press to root out insider trading in the hedge-fund business is how Janice Fedarcyk, an assistant director at the Federal Bureau of Investigation, has described the governments ambitions. Robert Khuzami, director of enforcement at the Securities and Exchange Commission , says it will target hedge funds for aberrational performance, which he considers to be outperforming the market consistently by 3%.
Edgy hedgies
Hedge-fund executives, gathering in Las Vegas for an industry event, are not pleased with all the attention theyre getting. More unflattering headlines are likely. The government has already arrested several other hedge-fund managers, including two former portfolio managers at SAC Capital, one of the industrys largest funds, as part of a crackdown on the use of expert network firms, which link hedge funds with company executives. Another Galleon employee, Zvi Goffer, who attended Mr Rajaratnams trial, has been charged with insider trading, and will stand trial later this month.
It is not just hedge funds that will feel the fallout from Galleon. The case ensnared executives and board members at companies like McKinsey, Intel, Goldman Sachs, Moodys and IBM. This will lead companies to rethink their insider-trading and compliance policies. The biggest fish to be caught up in the mess so far is Rajat Gupta, a former board member of Goldman Sachs and ex-boss of McKinsey, who has been charged by the SEC in an administrative proceeding for allegedly passing tips to Mr Rajaratnam. Mr Gupta has sued the SEC and is asking to stand trial in front of a jury. He may reconsider now that he has seen Mr Rajaratnams fate.
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