Bravo, again ! Last month Galleon’s boss was convicted on multiple counts of insider trading. This week, AUSA’s in New York obtained additional insider trading convictions against former Galleon traders, as described here in Dealbook.
Now, the NYT’s insightful and provocative financial reporter, Joe Nocera, is asking the right questions. They include asking whether we will or should see efforts to claw-back from investors the ill-gotten gains achieved through insider trading. After all, aren’t investors aiding & abetting when they invest in businesses operating outside the law?
Mr. Nocera does not cover the topic, but RICO law provides analogies, and may even be applicable. Under RICO, the financial fruits of crime are frequently subject to forfeiture, including forfeiture by "innocent" persons, such as the family members of criminals. For historic perspective, go here for paid access to an early 1980s law review on RICO, go here for a 1990s article on RICO, and go here for a 2010 article on property rights, divorce and property subject to RICO forfeiture.
Perhaps Judge Rakoff would cover the topics during his teaching at Columbia – he is a scholar as to RICO, white collar crime and other subjects, including science, as is described here by Wikipedia. Indeed, Judge Rakoff wrote this treatise on civil and criminal use of RICO.
Mr. Nocera artfully raises the issues relevant to public policy, such as deterring the creation of wealth through illegal and/or fraudulent investment tools. Thus, he writes:
But there were plenty of red flags around Rajaratnam, too. Hedge fund managers will tell you that there were always rumors about insider trading at Galleon. Indeed, it was at the heart of Rajaratnam’s business model.
It is implausible that every one of Rajaratnam’s sophisticated investors were in the dark. Yet the law says that, unlike the Madoff investors, they bear no responsibility for ignoring red flags. On the contrary: They are being rewarded for looking the other way. And even though Rajaratnam is likely to spend years in prison — and will have to pay tens of millions of dollars in restitution and fines — he will remain supremely wealthy, as will his family. This is one more contrast to Madoff, whose family is likely to be penniless by the time the trustee is finished.
The phrase I find myself muttering a lot these days is: “There oughta be a law.” There oughta be a law, for instance, that executives who create corporate cultures that encourage employees to commit fraud, as Angelo Mozilo did at Countrywide, should be held criminally liable for fostering that culture. But there isn’t any such law, so Mozilo gets a pass, despite all the fraudulent mortgages Countrywide underwrote.
The more I think about it, the more I’m convinced that there ought to be a law that says that if a fund manager’s “edge” is insider trading, his investors should have to pay a price, too. Maybe then, they’d be less willing to look the other way when their fund manager starts doing things he shouldn’t.