Ride, Captain, Ride Upon Your Mystery Ship


Stacy-Marie Ishmael at Financial Times:

Early on Thursday morning, CNBC reported that seven people had been arrested in what was described only as “an ongoing insider trading case related to hedge funds.”

It has since become clear that the arrests are linked to the allegations against Raj Rajaratnam  and the Galleon hedge fund.

Here’s what we know:

– Fourteen people were facing charges.

– The FBI has arrested eight people – including former employees of the trading firm  Schottenfeld Group, an attorney at law firm Ropes & Gray, and former employees of hedge fund Incremental Capital. Of those in custody, 7 were arrested in New York and one on the West Coast.

– According to court documents, those arrested were Craig Drimal, a former Galleon employee; Zvi Goffer, formerly of Schottenfeld and later Galleon; Arthur Cutillo; Jason Goldfarb; Emanuel Goffer; David Plate and Michael Kimelman.

– Zvi Goffer, according to court documents, “started operating a trading firm called Incremental Capital” in 2008.
– Those facing charges include Ali Hariri, a former executive at Atheros, facing two counts – conspiracy and securities fraud; Deep Shah, a former associate analyst at Moody’s, is also facing conspiracy and securities fraud.

– Federal prosecutors will hold a press conference at noon, ET, in New York.

The arrests are not unexpected, but are indicative of the scope and complexity of the case (and the post-Madoff zeal of regulators to never again be so comprehensively caught out).

Eric Jackson at Seeking Alpha:

I know many hedge fund managers who’ve expressed mixed feelings about the Galleon case. They’re happy that illegal activities by their competitors are being halted, but they worry the case will inspire more unnecessary red tape and heavy-handed oversight. The SEC is faced with a challenge in keeping ahead of the latest and greatest tricks employed by some managers to gain a performance edge.

However, the agency appears to have been pretty creative in coming up with some ways of identifying and tracking alleged illegal behavior in the Galleon case. Hopefully, it will begin to hire more people in the enforcement division with real-world Wall Street experience and not just more bureaucratic lawyers, as was criticized by Harry Markopolos in the Madoff case.

There’s been a lot of discussion of getting hedge funds to register with the SEC as an important way for the agency to keep tabs on the potential risk these funds pose to the financial system. It’s important, therefore, to realize that Galleon was registered — its assets under management at one point last year topped $3 billion. More budget resources targeted towards enforcement would be taxpayer money better spent than registration for registration’s sake.

Finally, a word of caution on the Galleon case. Although criminality ought to always be prosecuted to the fullest extent, Galleon and Rajaratnam deserve the right to defend themselves in court. What if they are innocent, after having announced they would be winding down the firm two business days after news of the arrests first broke? Could they ever truly be made whole by the SEC if that happened? That Orwellian possibility should send shivers down the spines of hedge fund managers everywhere.

Matthew Goldstein at Seeking Alpha:

For law enforcement, the Galleon case is an important puzzle to complete. But that’s not just because authorities brought charges against a high-profile hedge fund titan like Rajaratnam.

Rather, in Galleon, prosecutors and securities regulators think they have finally penetrated the thick cloak of secrecy that surrounds the hedge fund world and found a vast web of illicit information horse-trading.

But charging executives from just two hedge funds — even one as big as Galleon once was — doesn’t prove that such practices are in any way endemic to the industry.

That’s why federal authorities are working hard to see if the Galleon net can be spread far enough to catch others in the hedge fund world.

Three other hedge funds may have attracted attention: Spherix Capital, Quadrum Capital and Trivium Capital.

All three funds ceased operation in the past year and none was ever as big or as well-known as Galleon. The funds are drawing scrutiny largely because each had either direct or indirect ties to Roomy Khan, Ali Far and Choo Beng Lee — the three widely believed to be cooperating with the investigation, according to lawyers and others close to the investigation.

Joe Weisenthal at Clusterstock

UPDATE: Erin Geiger Smith at Business Insider


1 Comment

Filed under Crime, Economics

One response to “Ride, Captain, Ride Upon Your Mystery Ship

  1. Pingback: What We’ve Built Today « Around The Sphere

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