Madoff Investors vs Rajaratnam Investors

A NYTimes op-ed raises an interesting question: When we sue Madoff investors who were "net winners" to recover their ill-gotten gains, why don't Rajaratnam's Galleon investors face consequences of a similar nature--why are they allowed to keep their ill-gotten gains?  From the op-ed:

Political Perks: Evidence of Insider Trading in Washington

When it comes to insider trading cases, probably none have been as big as the recent conviction of the billionaire Raj Rajaratnam, former hedge fund manager and founder of Galleon Group. (See our prior posts on Rajaratnam here.)

Rajaratnam had a huge web of contacts that fed him with insider information which he then traded on to make billions and to obtain abnormal returns for investors in his hedge funds. His case has been hailed as a huge victory for the US Justice Department in an effort to crack down on what is believed by some to be a widespread problem in our capital markets.

There is now evidence suggesting that the Justice Department may not need to look so far from Capital Hill to find rampant insider trading. A new study...

Raj Rajaratnam Conviction

Posting to Blogger was down for over 24 hours, so this is a bit delayed.  Two days ago, Galleon Group founder Raj Rajaratnam was convicted of 14 counts of securities fraud and conspiracy.  One of the things that stands out to me about this case is the breadth of Rajaratnam’s insider trading network.  The WSJ has an interactive graphic that maps out Rajaratnam’s network, and seeing the number of people involved in the network blows me away. 

 

Remember, this isn't a diagram of Rajaratnam's golfing buddies--these are people who have at least been accused of passing on insider information.  More than anything, seeing such a network makes it hard for me to believe that this is an isolated incident.  Indeed, current trends suggest that we are just starting to see how pervasive insider trading really is.  According to the WSJ:

Insider Trading Loss

More on Raj Rajaratnam's alleged insider trading scheme: the alleged scheme produced a net loss for defendants (from NYT):

Raj Rajaratnam, the authorities say, masterminded one of the biggest insider-trading schemes in a generation.

But if Mr. Rajaratnam was trading on insider information, apparently he was not very good at it.

A close examination of the trades that led to his arrest last week reveals a startling fact: In all, Mr. Rajaratnam lost millions from what prosecutors characterize as illegal trading.

Alleged Insider Trading

You may have seen recent reports in the news of an alleged insider trading ring.  The WSJ points out that the "prominence of the alleged conspirators" is surprising:  

Why a purported billionaire would want to risk all of that for insider trades that prosecutors say yielded some $20 million in total gains is a mystery that we assume further evidence will explain.

I am interested in seeing how this case unfolds.  Based on what we know now, it seems that the potential costs of insider trading far outweighed the potential benefits to this group of individuals.  Since this appears to be a group of highly intelligent individuals, you have to wonder what would motivate them to participate in the alleged insider trading ring.