Raj Rajaratnam was just arrested with five other people under charges of insider trading. This case is of special interest to us in Sri Lanka because old Raj was counted upon many as a powerful force in bringing credibility to Sri Lankan investments.
Raj is a manager of a hedge fund. Hedge funds are basically organizations that take the money of very wealthy people, put it all together, and invest it in various forms all over the world with the aim of constantly increasing the fund’s Net Asset Value. The NAV is basically the amount of money in the fund.
Hedge funds will invest in various ways, they will lend, they will buy and sell stocks, they will buy and hold stocks and bonds etc etc. Their ultimate purpose is to use their investors money and increase it.
Hedge funds are run by managers who will manage their clients’ money. A lot depends on the reputation and past results of managers as investment is a game that places a lot of trust in credibility. Most good managers start their own funds and charge their clients a commission on the profits. Raj started the Galleon Group in 1996 and has been very successful.
Forbes Magazine has ranked him the 559th richest man in the world and the 236th richest American for 2009. He is also currently the richest Sri Lankan in the world.
Information is a key aspect in investment. It is much easier to make money if you get information faster and before anyone else. This will allow you to get to know about potential changes in the market before anyone else, enabling you to buy or sell in anticipation of these changes and make some quick money.
This kind of information is called insider information. Insider information can be obtained from various ways like contacts inside companies, governments etc. Trading based on insider information is known as Insider Trading.
Insider trading is illegal because so much of the market depends on the fair and free flow of information. When information is restricted to a few individuals, it allows these individuals to make profits at the expense of other investors in the market.
Crimes such as these are very hard to track down and prove. The wiretapping into collecting evidence against Raj Rajaratnam apparently started somewhere back in 2006.
Raj, together with his accomplices in other hedge funds, is accused of sharing insider information relating to various tech stocks like Google and Sun Microsystems. I am also reading several internet news reports now on how Raj may have sponsored the LTTE back in the day but im not sure how credible they are. He has, however, been a generous contributor to the Democratic Party.
Reports so far indicate that the scheme has earned profits of about 25 million USD. And RR’s personal earnings amount to up to about 20 million USD.
Implications to Sri Lanka will probably depend on Raj Rajaratnam’s autonomy from the Galleon Group in the investment decisions made on Sri Lanka. What he brought to Sri Lankan investments in terms of credibility wont matter much if Galleon sticks around and continues investing here. Also i think we are at a point where a lot of other big investors have looked at the prospects here and have formed their own conclusions and most of them are positive.