Wednesday, October 21, 2009 0 comments ++[ CLICK TO COMMENT ]++

It remains to be seen how far-reaching the Rajaratnum investigation will be

The Rajaratnum case that I was referring to in my prior post has the potential to be a spectacular blow up for Wall Street. Depending on how far the government takes it, we may be looking at the largest criminal investigation ever conducted on Wall Street. Unlike other popular criminal cases, such as the Bernie Madoff case, Enron, or Worldcom, this insider trading scheme appears to impact many firms and involves a huge network of insiders. Let me quote the thoughts of Michael J de la Merced, a New York Times reporter:

As I report in the Times article, the case is fascinating on multiple levels. The sheer size of the purported network, riddled with unnamed co-conspirators and tipsters, is tantalizing. Who was the unnamed investor-relations employee who allegedly illegally spilled the beans on Google’s quarterly earnings? Who was the Akamai executive who did the same? The Moody’s Investors Service analyst who divulged that Hilton Hotels was about to be acquired by the Blackstone Group ahead of the formal announcement? Prosecutors haven’t said yet.

These aren't some backwater penny-stock companies; these are some of the largest companies in the world. For example, the fact that some Google employee was leaking quarterly earnings is kind of disturbing if you think about it. As I remarked yesterday, these leaks have little impact on long-term investors like me, but imagine the traders and other short-term investors who live and die with short-term moves.

We also have the case of some director (very senior) at McKinsey spilling confidential details. Given how employees of McKinsey have knowledge of sensitive, very secretive, information about their clients, this isn't some minor side-issue. No doubt this has the potential to seriously tarnish the reputation of McKinsey & Co. Although not a fraud and hence the company won't blow up, this situation can ruin the reputation of McKinsey—sort of like Arthur Andersen earlier in the decade.

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