The recent criminal conviction of Galleon hedge fund founder Raj Rajaratnam indicates that big money is still being made by Wall Street kingpins through insider trading, the lazy, but fool-proof, passage of inside information. Last month, government prosecutors proved that Rajaratnam reaped huge profits from insider tips about material, market-moving developments at Goldman Sachs. Purportedly armed with advanced knowledge of Goldman’s earnings and Berkshire Hathaway’s investment in Goldman Sachs, Rajaratnam loaded up on Goldman shares and then earned outsized profits when the events were disclosed publicly and the market reacted positively. Prosecutors suggested that the inside information was provided to Rajaratnam by a member of Goldman’s board of directors.
On Monday, investors sued the Goldman insider, Rajat Gupta, alleging that he violated the disclosure requirement of Section 16(b) of the Securities Act of 1934, which requires detailed disclosure about “short swing” trading (within less than six months). The investors allege that Gupta beneficially owned the shares traded by Rajaratnam, and that Gupta’s failure to disclose the trading violated Section 16(b).
