For those that are so inclined, today's blog post will be regarding corporate finance, and more particularly, the recent allegations of insider trading against several people. The U.S. attorney in cooperation with the F.B.I. has charged hedge fund manager Raj Rajaratnam and 6 others working with Raj with a hefty $20 Million case. The current case is being coordinated by the U.S. Attorney's office, the SEC and the FBI. The article can be found here on cnbc.com.
Hedge fun manager Raj Rajaratnam(above)
This case is of particular importance both to those with an interest in the stocks affected, and also to the general morality issue at hand. The stocks of companies involved in these proceedings, such as Intel Corp., IBM, AMD (advanced micro devices, involved in the manufacture of several types of computer hardware, mainly central processing units.), to name a few. These stocks subsequently experienced a drop in percentage values in the range of 2.5% to as much as 8%, whether or not these drops were exclusively caused by this case is another topic of discussion. These percentages are of significant proportion, because a seemingly small percentage drop in a short time period for these major companies could represent tens or hundreds of millions of dollars in shareholder equity.
These allegations are also very concerning due to the nature of their implications on the current financial system. The case being conducted has been in the works for several years and brings the issue of hedge fund managers hiring employees with inside information on the companies to which they are trading. This is very important because in these circumstances, very wealthy hedge fund managers are allegedly using this inside information to drain the value of shareholder equity to the general public, something that is very inefficient and bad to the general economy. The scale of these operations are enormous, citing that Raj had about $7.1Billion dollars under his management at one point. The various strategies that can be used with this extreme amount of capital can be very maniuplative of the market with inside information. These financial managers can take their capital and leverage it several times, (trade with 2 to 3 times as much money as they have available) to manipulate the market by shorting stocks and making huge short term gains. They have an unfair edge against the typical investor both in the information they hold and their capital solvency, with as much as 1,000-100,000 times more money than the majority of investors on the market. This type of activity would not be destructive to the market without the addition of the insider trading. With inside trading these hedge funds can make incredible amounts of profits in very short periods of time, effectively draining the equity from the general public shareholder. This is not too much unlike a ghost buying and selling stocks in incredible quantities when they are undervalued and overvalued. This unknown force in the market then holds the securities for brief periods of time (perhaps hours or a few days) until the stock prices react to market activity. After the information has been distributed through the market under the normal discourse, then they take appropriate action to sell or buy at their benefit. This can be very unprofitable for those outside the loop.
The practice under scrutiny of hiring managers with insider knowledge about the companies they trade, is directly related to this issue. Raj is valued at $1.3Billion dollars currently, which is disheartening to the general state of the economy and the public at large. If he is indeed convicted, there will be vast implications and the SEC will have to develop major changes in policies to control these apparent practices in financial markets.
I am very concerned about cases like these, because they present a very real problem to both the economy and the average American's pocket. This cannot be tolerated and must be eliminated for the sake of our economy and progression.
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