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Hedge fund insider-trading trial to start

Heidi Moore Mar 7, 2011

Hedge fund insider-trading trial to start

Heidi Moore Mar 7, 2011


Kai Ryssdal: We’ll take a turn now from oil prices that are rising to Wall Street stars who are falling. This week hedge fund manager Raj Rajaratnam is set to stand trial for what federal prosecutors are calling the biggest insider trading investigation ever. Prosecutors are off to a good start. Nineteen people have already pleaded guilty in the case.

But Rajuratnam is the star defendant, and his trial puts hedge fund managers back in the unwanted spotlight. Are they trading geniuses, or do they just use their connections to score information to goose their returns?

Our New York bureau chief Heidi Moore reports.

Heidi Moore: Think of Raj Rajaratnam as the Mark McGwire of Wall Street. In the same way that McGwire kicked off the doping scandal that swept through baseball, Rajaratnam’s trial shows that the government is cracking down on insider trading among hedge funds.

Chris Whalen, the founder of Institutional Risk Analytics, says investors pay dearly to keep their money with hedge fund managers, so they expect magic and sparkle dust.

Chris Whalen: There are a lot of funds out there who try to increase their odds of success by cheating. And they’re under enormous pressure to do so.

Rajaratnam forged strong ties with the tech industry as an investor. Now the government accuses him of using those connections to make $45 million in illegal profits between 2003 and 2009.

Eric Breslin, a partner with law firm Duane Morris, says tight industry ties can often present a problem for hedge funds, because they’re less regulated.

Eric Breslin: What is the line between really good and foresighted analysis and trading on inside information? The line can be very, very narrow. You can make one two-minute telephone call and make yourself a tremendous amount of money. Hard to pass up.

Rajaratnam beat the market almost every year since 1992. Returns like that, says Chris Whalen, are too good to be honest.

Whalen: An honest manager is going to be wrong as many times as they’re right.

At the heart of the government’s case are hundreds of wiretaps. That’s a technique usually used in mob cases. So perhaps the government sees Rajaratnam less as Mark McGwire and more as John Gotti.

In New York, I’m Heidi Moore for Marketplace.

Ryssdal: Jury selection for the Rajuratnam case begins tomorrow. We got a hold of the juror questionnaire, which includes this question: How honest do you think Wall Street executives are? You can share your answer here.

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