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Information Gathering Techniques

Discuss About The Financial Reporting Managerial Rent Extraction?

Insider trading is a term that explains the exchange of securities of any organisation by any person, who has the access to the non-public security information of that organisation. The process can be described as a legal or an illegal process depending on the time span when this trading is occurring (Agrawal and Nasser 2012). If the material security information about any organisation remains non-public then this practice can be explained by an illegal procedure. The process only remains legal when the owners or the directors of the company sell shares or bonds via legal transaction. Due to this illegal trading other stockholders of any organisation faces many disadvantages (Agrawal and Cooper 2015).

The following report contains a discussion about a case of insider trading took place in a private owned hedge fund company, The Galleon Group. The company earned own and others’ profit by management of stocks, hedge funds and portfolios for other investors, resulting in an investor income of approximately $7 billion (Denis and Xu 2013). In 2009, the head of the company Raj Rajaratnam had been accused in 14 different cases of conspiracy and security deceit majorly related to insider trading.

The purpose of this project is to study the case thoroughly and identify the key points. Depending on those key points some questions are needed to be answered which are associated with information gathering techniques that had appeared in this case, effect of sharing confidential security information of the organisation and effectiveness of accusing Rajaratnam and others in order to stop further inside trading across the world.

In order to gather information Raj Rajaratnam had used several techniques which are very much common in Wall Street. The general technique of gathering information about different other companies is either to plant informers in that specific organisation or organisations or to convince some employee of another organisation to share confidential information about that company (Vishwanath 2015). This process of sharing information can take place through different networking media like telephone, fax and exchanges of document.

As per the evidences gathered, Rajaratnam had made approximately 45 phone calls to different individual regarding insider trading (Agapova and Madura 2013). These calls had been recorded and from the verification it came up that within those individuals 6 people had already been convicted. According to the recordings, many inside information had been shared between some investors or employees of other organisation and Rajaratnam. Those information were yet to be released in public (Crudo and Ravdin 2014). Evidences show that Rajaratnam tried to cover up the incidents by telling others to destroy the evidences. Additionally, evidences of inside tips of decreasing stock price of Goldman Sach’s, which just had been presented one day ago, had been delivered to Rajaratnam by someone within the board members of Goldman Sach’s (Agrawal and Nasser 2012).

Investigation Techniques

During the prosecution of Rajaratnam more information about his tactics had come forward. From the testimony of an employee of Galleon group, Anil Kumar, Rajaratnam had wired a sum of $1.75 million to a confidential seashore account in order to hire him to lay the role of a consultant who will not follow the fundamentals of traditional industry research (Agrawal and Cooper 2015).

Wall Street is familiar with this kind of insider trading techniques (Beny and Seyhun 2012). Many cases familiar to this one had already been occurred in the past (Pollman 2012). There are some renowned cases of insider trading. Stock market crash in 1929, where Albert H. Wiggin has been convicted for shorting 40,000 shares of his company purposefully, the pre-recognition scandals of Levine, Boesky, Milken and Siegel, share and utilization of inside stock information through journal columns by R. Foster Winans and internal information gathering and selling shares for own profit by Samuel Waskal and Martha Stewart are some examples (Chen, Martin and Wang 2012).

The investigation techniques of Federal government had mainly followed the procedures of wiretapping (Vishwanath 2015). The main objective of this procedure is to collect conversation records so that the prosecution can show evidences against the convict (Atkins 2013). In this case, due to wiretapping, conversations between Rajaratnam and Rajat Gupta, a member of the board of Goldman Sach’s had come in front where various inside information had been shared (Presto 2017). For example, the news of investment of $5 billion stocks in Galleon Sachs by Berkshire Hathaway had been leaked by Rajat Gupta over the phone before it becomes public (Alldredge and Cicero 2015). As a result Galleon bought 175,000 shares of Goldman Sach’s and after selling them made a profit of almost $900,000. This method had never been used for detection in inside trading and for that defence team of Rajaratnam pressed criminal charges against federal bureau of investigation, which had been denied by the Supreme Court (Baker 2016).

In order to reduce these practices some definite steps are needed to be taken by the investors, executives and regulators. Firstly it is most important for any organisation to set the definition of non public information and material of the organisation and to check the employee possessions of such materials before trading (Beneish, Press and Vargus 2012). Access to the non public information of the company along with other information of business, strategies, profits and future plans should be made limited among the employees and managers of an organisation on a need–to-know basis (Agrawal and Cooper 2015). It should be strictly followed that confidential information must not get outside of the company under any circumstances (Chira and Madura 2013). Additionally, the employees and managers of different departments should be informed about the significance of maintaining the confidentiality (Vishwanath 2015).

Prevention of Insider Trading

Restriction of non public information can be done by following some steps. Company transaction should be done securely and information should be kept with the transaction related employee (Smales and Thul 2017). Access to the soft and hard copy of the informative files should be maintained in a need to know basis (Alldredge and Cicero 2015). Removal of confidential documents from conference room gives very small room to trade information (Beny and Seyhun 2012). Many times disposal of non public agreements after using reduces the risk of insider trading.

Executives like compliance officer of any organisation is the responsible person for setting the processes and policies for the company, maintaining the terms and conditions for preservation of confidential information of the company, monitoring company trades and implementing professional code of conduct along with the principles of the board of company (Beneish, Press and Vargus 2012). They are the company professionals who protect the company from insider trading (Denis and Xu 2013).

The trading window of the securities of any organisation shall be opened for the designated employees after the public release of earning data for the respective fiscal quarter (Pollman 2012). The transaction of more than 5000 shares of a company by a designated employee must be pre-cleared by the designated authority of the company (Atkins 2013). The regulation of pre clearance should be done in a periodic manner such as if within a week the trading of securities has not been completed by the employee or director; a pre-clearance will be required for trading further.

Another important role in preventing insider trading is played by the financial regulator under any financial jurisdiction. Security and Exchange Commission is the financial regulating body in United States of America (Del Guercio, Odders-White and Ready 2013). They monitor all the activities related to trading and commercial events like organisational takeovers and announcements, so that they could discover and investigate the illegal activities like inside trading and others (Driggers 2012). SEC is the main organisation is U.S. where any complain is registered regarding the irregularities of trading, suspicion of foul play and others (Crudo and Ravdin 2014).

Business confidentiality can be described by the secret embracement of business information. Each organisation contains some sensitive information which can be used for the progress of that organisation and its employees (Denis and Xu 2013). Leakage of that information or losing the confidentiality may result in harmful ways for the company and its employees. These ways can be described as monetary losses, job losses, wastage of time in judicial procedures, economic penalties and other staffs (Pollman 2012).

Role of Financial Regulators

 General risks for an organisation due to lack of confidentiality can be referred as accidental divulgence, ex-employee theft, absence of confidentiality agreements computer thefts and many more (Reed and Brunson 2013). Trade secret disclosure to clients, customers, service providers or contractors without a confidentiality agreement or a non-disclosure agreement, results in leak of non public information, moreover insider trading (Presto 2017). This agreement must be shared in order to protect the secrecy of the organisation’s business information and also in order to provide a pathway for recovering the damages the company has paid due to leakage of information (Raghavan 2013). Another top risk is ex-employee engagement in hampering the confidentiality of the organisation (Beny and Seyhun 2012). Most of the time it has been seen that an employee tries to make a copy of company information in the time of leaving that he or she can remain in the market competition (Beneish, Press and Vargus 2012). That explains the way of information theft by online or offline.

In the case of Rajaratnam the effects of leakage of confidential business information can be observed clearly. There are several examples of information theft in this whole case study. On September 23, 2008 in a board meeting of Goldman Sachs authorities had discussed about an investment of $5 billion stocks by Berkshire Hathaway (Raghavan 2013). This confidential information had been leaked before public announcement by a board member, Rajat Gupta to Rajaratnam. Following the information Galleon groups had bought 175,000 shares of stalk of Goldman Sacks (Skaife, Veenman and Wangerin 2013). After public announcement the stock price had increased and as a result Galleon Groups had made a profit of $900,000 (Presto 2017). The breach in confidentiality as Goldman Sachs generated a huge profit for Galleon groups illegally.

The knowledge of stock prices is the key of trading of stocks. The main objective of stock trading is buying low and selling high (Patel et al. 2015). Any person dealing with stocks always want to gain profit by selling at a higher price than buying price. In commercial field, any organisation is benefitted if it has the knowledge about the future rise or fall of stock prices (Rawat et al. 2013). But this method of acquiring non public stock information for trading of stocks is highly unethical. No government justice system provides the rights to do so and this is why the process is illegal (Kaplan et al. 2012). Therefore the decision of an organisation or any person involved in stock market business regarding in purchasing or selling of stocks can be influenced very much by the knowledge of stock (Smales and Thul 2017).

Risk Factors Related with Confidentiality

The case of Galleon group is one of the most famous insiders trading case around Wall Street. Raj Rajaratnam, the owner of this organisation had earned too much profit using this illegal method of business until he had been caught by federal investigators (Baker 2016). He used various methods to cover up his illegal tactics (Reed and Brunson 2013). To provide a cover-up of ‘small-cap’ stocks, a dwarf had been hired by Rajaratnam as an analyst (Agapova and Madura 2013). In another meeting of Taser International Inc., a trader Keryn Limmer had volunteered to be tased accepting the offer of $5,000 from Rajaratnam (Skaife, Veenman and Wangerin 2013). To attract more investors to his cause, he had thrown a luxurious party at a mansion of weekly charge of $250,000 on a man-made island off the Florida Coast (Smales and Thul 2017).

Among his other approaches a few things that can be mentioned. An expenditure of $20 million to settle a federal investigation by developing a fake tax shelter in order to avoid the tax payment of $52 million was one of his approaches (Driggers 2012). Later, he fired his lawyers complaining that he had no information about the illegal shelter. Another approach was hiring Anil Kumar as a consultant at a cost of $1.75 million, which had been wired to a confidential offshore account not for conventional industry research but for insider trading of information (Patel et al. 2015).

Federal investigators had used the technique of wiretapping in this case (Kaplan et al. 2012). This was the first time when an insider trading case had been handled with the use of wiretapping. Many conversations of between Rajaratnam and employees of other companies like Roomy Khan of Intel Corporation and Rajat Gupta of Goldman Sachs had been recorded that became the evidences for this insider trading case (Chen, Martin and Wang 2012). The defence team of Rajaratnam had appealed in the Supreme Court against the aggressive wiretapping technique of federal investigators as these techniques are generally used in the case of drugs, terrorism and organised crimes (Del Guercio, Odders-White and Ready 2013). They told that the evidences were gathered using a deceptive judicial permission and hence it could not be used in prosecution (Agrawal and Nasser 2012). These also had violated the constitutional rights of Rajaratnam (Baker 2016). Against his convictions, these appeals from the defence had been proved to be not strong and the Supreme Court has struck to its judgement of 205 years of prison of Rajaratnam along with $63.8 million penalty (Chira and Madura 2013). A loss in the civil lawsuit of insider trading, induced by U.S. Security and Exchange Commission, had set another  penalty of Rajaratnam to $92.8 million for the damages which had increased the total penalties of Rajaratnam to $158 million (Crudo and Ravdin 2014).

This case was a big success for the federal investigators (Rawat et al. 2013). Along with Rajaratnam they had been able to convict more people from different organisations, like Roomy Khan of Galleon group and formerly a member of Intel, Anil Kumar of McKinsey & Co., Rajat Gupta of Goldman Sachs and few others (Kaplan et al. 2012). These people are majorly convicted of sharing inside, non public information of the organisations (Alldredge and Cicero 2015). Each person had been charged with either prison sentence or home arrest for a certain period of time along with penalty charges. Rajat Gupta had been charged with maximum 20 years in prison with a fine of $24.9 million (Atkins 2013). Defence of Rajat Gupta had used wiretapped evidences to prove that he had not been benefitted from the insider trading and also to prove the chances of some other person’s involvement in sharing the inside information. Federal Court had however denied all the petitions of Rajat Gupta maintaining his sentence (Raghavan 2013).

The impact of this case is huge in the commercial sector regarding hedge funds. Number of people charged with conspiracy and insider trading was almost 26. 4 billion dollar of investments were reduced from the company and in 2009, Galleon group was closed. The case had been a wake-up call for the Wall Street. The companies affected by the network of this illegal practice were Google, IBM, Intel, Goldman Sachs, 3Com Corp, Axcan Pharma, Atheros, Akamai Technologies and some others (Driggers 2012).

There will definitely be a change in the trend of sharing non public information by the investors and other fund managers. However, the extent of this change will not be a great one (Rawat et al. 2013). Conviction of Rajaratnam and the other people and their huge penalties will definitely give the other hedge fund managers a matter to consider the work of the justice system and the investigation team had been exceptional in this case (Chira and Madura 2013). Use of advance techniques like wiretapping in information gathering will make the corrupt investors and employees more cautious about their activities and their respective consequences (Skaife, Veenman and Wangerin 2013). The analysis of risk and benefits of Rajaratnam in this case might had presented an assurance that the benefits are comparatively larger than the risk, but according to the experts, if any trading generates too many unethical and legal issues that can be turned into criminal prosecution and ultimately result in a prison sentence, that trading should be avoided (Agapova and Madura 2013). The major objective of the firms competing in the financial market is to stay on the top by any means and insider trading is one of the fastest and profitable ways, despite of its highly unethical approach (Patel et al. 2015). Therefore, demolishing the practice of insider trading with one big success is not quite possible for the financial regulating organisations like SEC (Chen, Martin and Wang 2012). For setting an example the penalties in Rajaratnam case had been strictly implemented despite of various defence pleadings of the convicted (Reed and Brunson 2013). Therefore hedge-fund managers and the investors will try to cover up their activities as much as they can (Del Guercio, Odders-White and Ready 2013).


Therefore, from the above report on insider trading, derived from the case study of Galleon group, the effects of insider trading can be clearly obtained. Insider trading is not only an illegal practice but also it is highly unethical. Success of any organisation and progress of its employees depends on maintaining the sensitive information of that organisation confidential. Sharing of confidential information of business of any organisation can not only result in a vast reduction of company profits but it can also result in total collapse of that organisation. Raj Rajaratnam, the director of Galleon groups had implemented various insider trading techniques to achieve high profitability with some other employees of some companies like Intel, Akamai Technologies, Axcan Pharma, Goldman Sachs and others. These companies had been heavily impacted due to leakage of confidential information. However, this profitability of Galleon group did not remain same for a long time as the federal investigators finally became successful on convicting them of their crimes using new investigation techniques. Ultimately Rajaratnam and other benefactors were sentenced to prison for a long time and charged a huge penalty. This case became one of the biggest successes for Security and Exchange Commission of U.S. That proves that no matter how big the illegal activities become, government ultimately finds a way to end it for the sake of common people.


Agapova, A. and Madura, J., 2013. Impact of the Galleon case on insider trading prior to company issued guidance.

Agrawal, A. and Cooper, T., 2015. Insider trading before accounting scandals. Journal of Corporate Finance, 34, pp.169-190.

Agrawal, A. and Nasser, T., 2012. Insider trading in takeover targets. Journal of Corporate Finance, 18(3), pp.598-625.

Alldredge, D.M. and Cicero, D.C., 2015. Attentive insider trading. Journal of Financial Economics, 115(1), pp.84-101.

Atkins, A.P., 2013. New Methods of Financial White-Collar Criminal Investigation and Prosecution: The Spillover of Wiretaps to Civil Enforcement Proceedings. Pace L. Rev., 33, p.716.

Baker, A., 2016. Raj Rajaratnam: Cheater (Revised).

Beneish, M.D., Press, E. and Vargus, M.E., 2012. Insider trading and earnings management in distressed firms. Contemporary Accounting Research, 29(1), pp.191-220.

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Crudo, T.P. and Ravdin, G., 2014. What Really Counts in White-Collar Sentencing: The Galleon Cases. Litigation, 41, p.22.

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Vishwanath, K.R., 2015. Book Review: Anita Raghavan, The Billionaire’s Apprentice: The Rise of the Indian American Elite and the Fall of the
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