Wednesday, October 28, 2009 0 comments ++[ CLICK TO COMMENT ]++

Galleon insider-trading case spreading to leading technology companies

As I was speculating a few weeks ago, the Galleon insider-trading case appears to be entangling many leading companies and prominent individuals. In fact it appears to be the largest insider-trading case in American history*. The latest leak seems to imply that Hector Ruiz, former CEO of AMD, the 2nd largest microprocessor manufacturer in the world, was a key insider leaking information to the accused. MarketWatch reports:

Shares of Advanced Micro Devices Inc. fell sharply Wednesday as the chip giant reeled from reports of insider-trading allegations involving its former chief executive, Hector Ruiz. The allegations could even cost him his current job.

AMD stock plummeted more than 6% at $4.83, as some analysts said the revelations could cause a short-term shock, but likely won't have any longer-term impact on the company or on GlobalFoundries -- the new company spun off from the Sunnyvale, Calif.-based chip maker earlier this year.

Ruiz, who serves as chairman of GlobalFoundries, was named in a Wall Street Journal report as the source of confidential information about AMD in the Galleon Group insider-trading case that has resulted in five arrests and has rocked the investment community.


Impact on AMD and GlobalFoundaries is likely to be limited given how (i) Ruiz hasn't been charged with any wrongdoing, and (ii) although influential, Ruiz hasn't had much success at AMD in the last decade and it's doubtful he is as critical to GlobalFoundaries as it seems.

There are many others at leading firms, such as Google, that are also implicated in this affair. It remains to be seen how far the authorities will take all of this. One of the problems for law enforcement is that the actions of Raj Rajaratnum seems to have been common in Silicon Valley, and, some argue, on Wall Street in general. Rajaratnum clearly crossed the line—especially when he knowingly acted on inside information—but I'm not sure if analysts and executives knew they were leaking confidential information. Therese Poletti recently remarked how the Galleon case is not suprising to long-time Silicon Valley players:

"Raj was incredibly brilliant," said Dan Hutcheson, chief executive of market research firm VLSI Research Inc. in Santa Clara, Calif., who knew him as a Wall Street analyst. "He was always pushy, he was always trying to get that last ounce of data. He would push you right to the edge of client confidentiality."

In speaking with several people in Silicon Valley who knew Rajaratnam during the go-go years of the 1990s, most of whom would not be quoted by name, a common theme emerged. Rajaratnam started his career in the "Wild West" of tech investing, where the rules were different, everyone wanted an edge, and many lines were crossed. And in 1997 Rajaratnam started his own fund, Galleon, in the pre-Enron, pre Reg-FD world.

"Before Reg FD people skirted the line a lot more," said Bradley Alford, a principal at Alpha Capital Management, a hedge fund in Atlanta, referring to the SEC rule known as Regulation Fair Disclosure, implemented in 2000, requiring companies to disclose material information to all investors at once. "But it's tightened up since then."

...


Information has always played a huge part of investing, but in the late 1980s and 1990s, when Rajaratnam was starting out, looser practices reigned. Computer trades PC Week and Computer Reseller News fostered gossip columns in the back of their magazines that analysts rushed to read, often making calls and writing up research notes based on rumors leaked to Spencer Katt and Shadow Ram. Company insiders won T-shirts and invitations to elite parties hosted by the magazines at the Comdex show for leaking tips.


Leaking information for T-shirts and VIP invitations seems like the dumbest thing ever but what do I know? This is a good lesson in crossing ethical (and sometimes legal) boundaries. It's easy to do so when no one is looking but it will come back and haunt you.



FOOTNOTE:

(* Something to keep in mind is that most people don't generally adjust for inflation when comparing historical events to the present. Furthermore, insider trading was rampant and ignored by the authorities (what is illegal now was not back then) so it shouldn't be surprising to see, what appears as, more serious cases in the present period, when in fact the situation was even wore in the early 1900's.)

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