Fall Of The Raj

A Galleon style ship, stranded in the desert at Burning Man

Raj Rajaratnam was one of the richest Sri Lankans in the world. Not that he had much to do with Sri Lanka. I remember someone talking in hushed tones about a meeting with a big time donor (in the context of some relief work). Turned out that was Raj. I think he gave some money back. That’s all I ever heard of him. Until he got arrested. The last big time Sri Lankan I heard of was Sanjay Kumar, the Computer Associates CEO who got sentenced to 12 years for fraud. There are plenty of Sri Lankan expats that make good, and a few that make really really bad.

Raj was recently found guilty of insider trading. It’s a compelling story with him buying out McKinsey Directors and getting information from beauty queen honeypots. If he’d stuck to the Sri Lankan stock market it probably wouldn’t be a big deal as everything runs on insider trading, known here as trading.

I know of a guy who spends a shitload entertaining brokers just to get them to pump and dump stocks together. Even the government is getting into it, buying stocks in companies that it regulates. But I guess you can’t do that abroad.

Except you can. Except insider trading is almost natural. What Raj did was research on one hand, and then personal contacts on another. For every merger or buyout there are 10 lawyers and 20 consultants working on paperwork or due diligence. Not to mention their bosses. So the information exists well before it ‘should’. Using informal flow of information it seems that you can make a lot of money. Which is also illegal.

I’m actually trying to figure out why Insider Trading is so bad. It seems to be the way most business is done, through word of mouth. There actually seems to be quite a debate here.

On one hand, insider trading is broadly perceived as corrupt or unfair. But so is short selling. Or the stock market in general. Then there is Gordon Gecko. However, the more empirical argument is that “illegal insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.” To that end I skimmed a Duke study which says, “we find that the cost of equity in a country (after controlling for risk factors, a liquidity factor, and other shareholder rights) is reduced by about 5% if insider trading laws are enforced.”

OK. On the other hand, there’s the argument that says let information flow and it will set prices more accurately than trying to control it. As Milton Friedman said, “you want more insider dealing, not less. You want to give people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.”

I also read this from Ajay Shah, an Indian finance/economics guy.

Let us imagine two island–countries with different policy regimes. On island A, insider trading is swiftly detected and severaly punished, hence it is essentially absent. On island B, insider trading is rampant. If insider trading were an unambiguous evil, then island B should clearly have inferior market efficiency. Is that the likely outcome? How would price formation on the two islands differ?

On island B, insiders would play a major role in price discovery. Individual and institutional speculators would find it very difficult to compete, and they would settle into passive strategies like owning index funds. On island A, in the absence of insider trading, market inefficiencies would flourish, which would attract significant resources into research and speculation by both individuals and institutions. Markets would become quite efficient on island A too, but the price discovery would be dominated by retail and institional speculators who stand outside listed companies and subject them to intense scrutiny.

To me, I think an island where people buy index funds is probably better, since most people shouldn’t be picking stocks at all and are just getting ripped off by firms taking advantage of their ignorance.

Honestly, I’m not sure whether insider trading is bad or not. Compared with the egregious crimes that people got away with in the US financial crisis, and get away with still, I’m not sure that insider trading is even up there. Sanjay Kumar, for example, actually committed fraud.

But anyways, uh, Raj Rajaratnam is in jail.

43 Comments

  3. insider trading is bad because it creates an asymmetric distribution of information. Indi, i’m not sure any of the local examples you gave amount to insider trading.

    there is alot of insider trading here. mostly in the form of leaks. From what i’ve heard certain people get hold of financial reports weeks prior to their release. these guys can enter and exit the market far more efficiently than normal investors. Infact, in most cases the train is gone by the time favorable news gets published officially.

  4. You mentioned Gordon Gecko… not all his actions would be considered illegal at the time, in fact he may have been acquitted on all charges of securities fraud under existing laws. Too bad for Raj though the whole HF industry in the US is jittery after his conviction

    http://todaysadvisor.com/gekko.aspx

  5. Match fixing and spot fixing also should be fair then???

  6. Not the first time a Tamil has been involved in major fraud. Pathetic. The Tamil diaspora must be real proud. lol.

  7. Ah racism. Stay classy.

    Two Tamils convicted out of thousands in business. Must be the race

  8. That’s a fantastically racist comment – perhaps Zoid’s unaware of Sinhalese fraudsters doing their best to in the UK? Like these nasty pieces of work defrauding other Lankans in London..

    <i"…group was led by Vibhawa Fonseka, 41, of Hounslow, who used his respected family name to attract investment with promises of big profits for those who agreed.”

    http://tinyurl.com/62gk4k2

  10. I am a little ambivalent on the problem of insider trading. It is quite common in the local market and I am as guilty of it as a lot of other people.

    Dodo’s basic point is correct, but what you have described is not insider trading, it is what the UK rules (not sure what the locals ones are) would describe as “attempting to create a false market for shares”. This is a much more serious business and I’m pretty clear that it should be stopped, not least because if it goes much beyond the current levels, there will be a major loss of investor confidence and a collapse on the market.

    This is an example of what can happen if price manipulation goes too far:

    http://www.economist.com/blogs/asiaview/2011/01/stockmarket_riots_bangladesh

    Insider trading flounders on the definition of what is inside and what is not. Analysts and reporters who attend briefings may get an insight into the company that others may not, even though any broker is free to request a meeting. These need not be straight tips, just little bits and pieces that can put together a bigger picture.

    Certainly people who have regular meetings with companies (analysts, fund managers) have access to a greater depth of knowledge on how a company operates than the ordinary small time investor. This is not technically insider information, this is research, but it gives an edge but is considered fair since people have to work on it and it must focus on historic public information, although in the process of going into details some lines may be crossed.

    There are big things that can cause prices to move (eg a merger, acquisition) which are clearly insider info and which for the most part people keep a secret because of the possibility of getting caught. Its the gray area on regular earnings, sales, performance where it is harder to draw the line. There is a lot of info that is released anyway, someone who is in close contact may get an edge or two. A lot of people will now be treading very, very carefully.

    Perhaps the penalties should be stiff fines, rather than jail? This is what happened in the past.
    See also

    http://www.economist.com/blogs/schumpeter/2011/03/insider-trading_charges

    http://www.economist.com/blogs/schumpeter/2011/05/after_galleon_verdict

    http://www.economist.com/blogs/dailychart/2011/05/insider_trading

    I don’t think short selling is a problem.

    On the local market, I did (half-seriously) suggest closing down the SEC, but that is not a real solution.

    http://jestforkicks.blogspot.com/2009/10/raj-and-local-market.html

  11. AWESOME source there Heshan! Now we know where you get your “info” from. LMAO

    Doesn’t change the fact that diaspora Tamils are addicted to credit card fraud, other kinds of fraud, drug trafficking, prostitution, people smuggling, gang crime, funding terrorists etc etc etc

  12. Read google news on “lanka” and every other week there is a lankan arrested for something or another and the name is Tamil nine times out of ten.

  13. “Raj Rajaratnam is in jail.”

    Where he should be – like other Tamil criminals.

  14. Agree. The overwhelming majority of diaspora Sri Lankans arrested for various crimes tend to be SL Tamils. But there’s a good reason for that – which is their illegal activities in support of a banned terrorist organisation. It is not because of their so-called ethnicity. Or are you claiming there’s a special genetic predisposition to criminal behaviour?

    If the boot was on the other foot, the Sinhalese diaspora would be as prolific in their offending.

  15. Nothing I said was racist. It’s FACT.

    I don’t think there is a special genetic predisposition to criminal behaviour when it comes to Tamils. But perhaps there is a CULTURAL predisposition to criminal behaviour amongst the Tamils.

    For example:

    http://www.youtube.com/watch?v=ZAEJwbEvyaM

    And Tamils provided most of the world’s suicide bombers for a long, long time, defeating the 1 billion Muslim population.

  16. Zoid,

    Interesting you think that there’s a ‘cultural’ predisposition to this behaviour, rather than my contention which is it was environmental factors that lead to this upsurge. i.e. almost every diaspora group funding an insurgency in their home country, from other countries have resorted to criminality.

    In fact, London is a diaspora insurgency funder’s supermarket. SL Tamils, Kurds, Indian Sikhs (Khalistan), Pakistani jihadis, Algerian jihadis etc.

    http://thecarthaginiansolution.wordpress.com/2011/05/06/british-cabinet-in-brain-damage-shock/

    Until the emergence of the LTTE in the UK (post 1983), the UK Tamil diaspora were generally noted for their industriousness, thrift and law-abiding nature. That shows that the ‘environmental’ factor was the main causative agent behind an upsurge in Tamil criminality as opposed to any inherent ‘cultural’ predisposition.

  17. I don’t think Tamils are crooked by nature. But some brown people will do anything to make – or save – a quick buck. I have Indian friends that buy a GPS for car trips. When the trip is over, they return the GPS for a refund. Chinese are even cheaper bastards. I know a few that are making 80k a year, but bringing food from home for lunch. Most of the Chinese restaurants employ exclusively Chinese workers to save on operating costs. I guess the logic is that by paying lower wages, they can remain open for longer.

    So when you give a brown guy like Rajaratnam a chance to make 20 million in half an hour, his decision comes as no surprise. The attitude is ingrained in the culture.

  18. Not the Tamil culture, but the Asian culture in general. With the exception of Japanese – those guys don’t skim.

  19. Hmmm…‘cultural’ predisposition…yea like the “Helping Hum Bug Thotta” scam…there are good Tamils and there are bad Tamils…there are good Sinhala Buddhists and there are the Rajapaksas’…there are good suddas and there are bad suddas…and there are racists like Zoid.

  20. So Zoid…how many Swiss Bank accounts does Rajpaksa and his family have? And where are they? For the moment in “Hotel de Temple Palace.” Where are the Sinhala criminals like Vermin Silver and Sour Gin Vaas now? For the moment they are part of the “Wannabe Kings” entourage…the bigger they are… the harder they fall…we the silent minority are waiting patiently for the fall…

  21. There was another group of people (with a much lower melanin content) that ‘everyone (especially in Europe) knew’ to be tight-fisted, very careful with money, saved every little thing, weren’t generous to others, always looked to make a fast buck, would go to any length to make a profit and would haggle over the smallest deal.

    They are the Jews.

    According to Heshan Logic Jews must be honorary Asians :)

  22. Zoid,

    your argument seems to be:

    Raj is a criminal

    Raj is a Tamil

    Therefore all Tamils are criminals.

    The fact that Raj is a criminal is true, but the argument that is implied is racist.

    If you substitute the name of Raj, with that of Baddegana Sanjeewa and the race with Sinhalese, then the same argument would hold true.

  23. “Not the first time a Tamil has been involved in major fraud.”

    FACT.

    “Raj is a criminal

    Raj is a Tamil

    Therefore all Tamils are criminals.”

    Brush up on your English comprehension skills will you. Interesting to see you extrapolate out that line of thinking.

  24. The Rajapakse’s are awesome – they ass raped Prabhakaran and pissed all over the Tamil extremists.

    Sweet :)

  25. ” UK Tamil diaspora were generally noted for their industriousness, thrift and law-abiding nature. ”

    This is what Tamils like to think of themselves, not necessarily what others actually think of them.

  26. Prabhakaran got a bullet in his brain – POW! And a hot iron rod up his tootsie.

    Snap. Burrrn :)

  28. That’s nothing to be proud of, man. It’s a disgrace to Buddhism that 100k people had to die in a war because the Buddhists wanted control of a bunch of land.

  29. @ Mango,

    Yeah, Jews are like Tamils. They do very well under difficult conditions. But once they become prosperous, it pisses everyone off.

  31. Just like they’re ass raping your taxes. If the Sinhala-Buddhists had 4 brain cells, they would’ve learned from CBK.

  35. My my, looks like I struck a raw nerve with my comments :)

    But think about that fat pig Prabhakaran with a bullet in his ugly head and a hot iron rod up his kundi..

    His death was a good day for Sri Lanka in particular and the world in general.

    Tamil extremists are still trying to recover from the blow that they received and the severe anal trauma they suffered at the hands of the Rajapaksas.

    It must have hurt real bad :(

    PAU ANEY! :)

  36. Nah it was an awesome day – seeing bug eyed Prabha dead as a dodo and lying in mud half naked like a mee haraka :) Tamil extremists around the world must have been shitting their pants in anger, their blood boiling with tears welling in their beady eyes.

    Check it out: http://www.youtube.com/watch?v=oJYicNFOhKs

    WOOT!

    PS It’s the Tamils who tried to steal Sri Lankan land and create a Tamil-only country. Needless to say, they got OWNED – Bigtime. What to do no.

  39. …What about the Rajapaksas’ ? How many swiss bank accounts do they between them? Raj got caught…the Rajapaksas’ will get theirs someday like Ferdinand Marcos and similar despots who stole from the country…

    ps. Remember “Helping Hum Bug Thotta?”

Comments are closed.