Drunken Sailor?

I was about to go into a several post-long detour on sales and trading performance in Q3 and 2009 as a whole. But, prone as I am to distractions, I am taking yet another turn off the highway. With all the attention that this whole Galleon insider-trading thing is getting, I thought I might as well put in my two cents. If you somehow haven’t heard about the matter, check out one of the billion articles that have been written over the last four days. Here is a link to the NY Times piece and for the more sexually adventurous, the WSJ article, titled Colleagues Finger Billionaires.

For those too lazy or conservative to read about fingering, here’s the brief overview: very rich and ostensibly successful hedge fund honcho gets in trouble for supposedly relying on an intricate network of other important people to obtain and profit off insider information. On the face of it, we have the standard insider trading theatrics – there’s the non-public information, the foul-mouthed characters, and the ill-gotten gains.

But something strikes me as rather odd about this affair. Galleon is a BIG hedge fund, with almost $4 billion in assets under management. Yet the numbers being thrown around here are extremely small. The government accuses Raj Rajaratnam (props to anyone who can pronounce that name, by the way) of illegally making $20 million. $20 million? Is that a joke?

Raj is a big dude, and not just in girth. The guy is listed on Forbes as having a net worth of $1.8 billion (which made him the 262 richest American) and producing a 21% return net of fees since 1997. Last time I checked, $20 million is about 1% of $1.8 billion and about 0.50% of $4 billion – in other words, a very small number in Raj’s life. So, he’d have to do a lot more insider trading to make a meaningful impact on his fund’s (and thereby his) bottom line. Why would somebody risk so much (in the way of jail time, ill repute, career suicide) for so little in the grand scheme of things?

I can think of three answers:

1) Mr. Rajaratnam thought he could get away with it either because the SEC wouldn’t catch him or because his case would be difficult to prosecute (it very well might be despite the preponderance of evidence against him).

2) He didn’t think what he was doing was truly illegal. The evidence suggests that the cast of characters involved certainly wanted to keep their operations quiet, but there’s a big difference between doing something sketchy and committing a crime.

3) He is an idiot, a drunken sailor at the helm of a large ship, who simply never weighed the costs against the benefits. Now, I’m not saying that you should engage in securities fraud when the potential benefits loom large, but there is clearly no reason to when they don’t.