When does trading go outside the lines?

Preet Bharara, U.S. Attorney for the Southern District of New York, speaks at a press conference where he announced charges against hedge fund managers, Fortune 500 executives, and a management consulting director for participating in insider trading schemes that resulted in more than $20 million in illegal profits.

TEXT OF STORY

Kai Ryssdal: Raj Rajaratnam is out on bail today. Seeing as how most of us had never heard his name until this past Friday, here's the backstory. Rajaratnam is a partner at the Galleon Group, a not-insubstantial hedge fund in New York.

Friday morning he got a visit from the FBI and the Justice Department who said he was part of the biggest-ever insider trading ring to involve hedge funds. Hedge funds you know about. Insider trading is using information that ordinary investors don't have to make money trading stocks or bonds.

The law being the law, there's often some disagreement about what trading is insider and what's not. And it can be tricky navigating that gray area between legitimate investing and trading outside the lines. From New York, Ashley Milne-Tyte reports.


ASHLEY MILNE-TYTE: Good investing is all about good information.

William Carney teaches securities law at Emory University. He says the best investors get an edge by looking for data in the right places. The information they gather guides their decisions when to buy and sell.

WILLIAM CARNEY: There's always murkiness when people are involved in the search for the best and most private information, and that's what any professional investor is trying to do all the time.

When a hedge fund looks at a company, it calls everyone. It calls suppliers to see if they're shipping the usual amount. It calls customers to see if they're changing their buying habits. It calls the company officers and grills them about operations and balance sheets.

STEVE THEL: Hedge funds compile huge amounts of information.

Steve Thel is a professor at Fordham University Law School. He says that public information is fair game. What isn't is asking a company to spill its secrets and then trade on that. But he says traders often operate in a gray area.

THEL: They may be taking a piece of information that seems unimportant, but it only becomes important up against the background of all the other information they have.

Thel says not all inside information is "material" or important, in other words. Before a jury convicts anyone for insider trading it has to decide how important that information is and whether or not the trader knew what it was worth. He says the kind of intelligence work hedge funds are involved in every day...

THEL: Is something that may not be unlawful and that the government needs to be very careful not to criminalize. Because we want to give people an incentive to go out and discover information and put it together in a way that allows them to profit.

He says the SEC's been under pressure for years to clarify the definition of insider training, but the commission has been reluctant. Regulators worry if the rule is defined too tightly, it'll be harder to enforce.

I'm Ashley Milne-Tyte for Marketplace.

About the author

Ashley Milne-Tyte is the host of a podcast about women in the workplace called The Broad Experience.

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