American financial markets have been stunned by the continuing news flow from the newest insider trading charges on Wall Street involving billionaire hedge fund manager Raj Rajaratnam, with reports this morning that another 10 could be charged.
Bloomberg said that US authorities had planned to arrest Rajaratnam this week, but moved earlier than expected when they learned he had bought a plane ticket to travel to London last Friday. Now more arrests are tipped to happen, possibly overnight in the US
But as dramatic as this news is, American hedge fund operators should watch what’s happening in Hong Kong where there have been 10 major convictions for corporate crimes, including insider trading, in the past year. At least one has involved an employee in China of the US bank Morgan Stanley
Now the Hong Kong securities regulator is preparing a case against executives from the big New York-based hedge fund, Tiger Asia Management, and three fund managers, claiming they manipulated to their advantage the share price of a big Chinese bank last January.
But it’s the Rajaratnam case that had grabbed the attention of booming Wall Street as investigators use tactics normally used against criminals, such as telephone taps, to track and document those claimed to be involved the $US20 million ($A21.8 million) of illegal trading profits.
It also has developed an international political edge with the Sri Lankan government claiming Rajaratnam was some kind of fund raiser for the Tamil Tigers.
There have been reports the probe has accumulated two years of information from the phone taps of hedge fund managers, lawyers, brokers and bankers, including some of the biggest names on Wall Street.
The case against Rajaratnam is detailed in this document, which lists a series of transactions where he allegedly traded on the basis of information provided by a group of known and unknown people in a range of companies and industries.
Bloomberg reported that other information came from “a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments”.
“Rajaratnam founded the Galleon Group in 1997. He was arrested last Friday with five alleged conspirators and charged in connection with the biggest insider-trading ring targeting a hedge fund.”
Prosecutors said he and his firm reaped as much as $US18 million by investing on tips from a hedge fund, a credit-rating firm and employees within companies including Intel Capital, McKinsey & Co. and IBM, which has said it had sent one executive on leave after the charges.
Rajaratnam was born in Sri Lanka’s capital, Colombo, and according to the Forbes business magazine, has a net worth of $US1.3 billion, making him the 559th richest person in the world. Galleon has been ranked among the world’s 10 largest hedge funds, managing a reported $US7 billion at its peak in 2008.
The SEC’s data-mining produced allegations at the start of the year where people from UBS and the Blackstone investment group were charged with $US8 million in profits from alleged insider trading.
The news couldn’t have come at a worse time for the battered hedge fund industry: figures out overnight show the first positive inflow into the sector for more than a year with $US1.1 billion flowing into the sector in the September quarter. These charges could very well see that reversed.
But watch Hong Kong (which should also apply to Australian financial services executives).
Over the past year Hong Kong’s Securities and Futures Commission (SFC) has started 10 prosecutions for insider trading, and obtained 10 guilty verdicts, dozens of convictions and five jail sentences. Last month the commission gained its biggest scalp yet with the conviction of Du Jun, a former Morgan Stanley banker, who received seven years’ jail, a $US3 million fine, and was banned for five years from anything to do with securities after his release.
Du was found guilty of buying shares in a firm at the same time as he was advising it on an acquisition. He was arrested when he happened to transit through Hong Kong on a flight from China.
But there is one case that could force fund managers around the world to be very careful investing in Hong Kong and China-based shares.
There’s an ongoing investigation into Tiger Asia Management. The SFC alleges that on January 6 this year Tiger was asked if it wanted to be among the buyers of shares in China Construction Bank (CCB) to be sold by Bank of America.
According to a statement on the website, Tiger responded to the invitation by shorting CCB’s shares before the offering was announced, and then covering its short position by participating in the placement. The transaction allegedly earned Tiger a profit of up to HK$29.9 million ($US3.9 million).
The commission has asked for freezing orders from the Hong Kong High Court against Tiger Asia Management and three of its senior officers, Bill Sung Kook Hwang, Raymond Park and William Tomita. The commission has asked the court for an injunction for the freeze, pending final orders, according to the statement in August. A court date has not yet been announced for the hearing.
According to media and other reports in the past couple of years, this sort of market manipulation is quite prevalent ahead of big share sales by investors or companies, as is so-called “front-running”, which is where the broker or asset manager places an other in front of those from clients in the same security and takes the price before the client. This is said to be prevalent on bank trading desks, even though there are supposed to be “Chinese Walls” separating client and company trading operations.
The fact that Hong Kong, long regarded a cowboy market and dominated by rich locals, has lifted its game and had so many insider trading wins and other actions (including forcing Richard Li to abandon court action over a controversial shareholder vote), leaves markets such as Australia looking behind the enforcement game.
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