Fairness of Wall Street’s playing field on trial in hedge fund case
Terry savage email@example.com March 6, 2011 5:26PM
Raj Rajaratnam, former head of the Galleon Group hedge funds, arrives at Federal Court in New York for a pretrial conference Friday, March 4, 2011 (AP Photo/David Karp)
Updated: May 3, 2013 12:14PM
Every great American company started out as an idea in the mind of a creative, entrepreneurial person. In addition to having that unique creative idea, a lot of hard work — and a lot of luck or good timing go into building a business.
There’s one more ingredient required to build a great business: Money.
Every successful entrepreneur tells a tale of using savings, borrowing from friends and family, or mortgaging a home to get the business off the ground. But money worries don’t stop once the business catches on. In fact, that’s when access to capital becomes critical. You have to grow and expand the business before others can copy your idea.
That’s where the entrepreneur has to decide how much of his business ownership he’s willing to give up in exchange for capital to allow the business to expand. It’s the decision you see right now for companies like Groupon — whether to sell shares to the public (and face regulation by the SEC) or to give up a large portion of the future growth, and some degree of current control, by bringing in venture capital.
No matter which route the entrepreneur seeks, money is the key ingredient. In business, profits are the measure of success. And they are the basic requirement for expanding the business. You can’t grow without money. And no one is going to invest in a business that is not showing — or expecting — growing profits.
By investing in the stock market, you participate in that economic growth. When a company sells shares to the public, some of the proceeds goes into the wallets of the founders — but most of the money is plowed back into the business. A rising stock price encourages more people to buy the existing shares. And, eventually, the company may issue more shares to raise more capital to grow.
Whether you think back to Henry Ford, creating the assembly line process for building automobiles, or Steve Jobs building Apple Computer, the process is similar. It’s the way the free enterprise system creates jobs — and it is the basis of a thriving economy and the stock market.
Stop the machine
No one wants to participate in a “game” that is rigged. When people start grumbling that our economic system is tilted to favor “insiders” then the entire growth model is put at risk. That’s what’s happening now — a widespread suspicion that the markets are basically unfair.
The Academy Awards are a pretty good barometer of that feeling. In years past, winners from Marlon Brando, who protested treatment of Native Americans, to anti-war activists like Vanessa Redgrave, have used their acceptance speeches to alert the public to what they considered threatening situations.
Last week, when the film “Inside Job” (about the 2008 financial meltdown) won Best Documentary, director Charles Ferguson paused before thanking the required list of producers and talent, and reminded the viewing audience that “not a single financial executive has gone to jail” — while many have gone on to garner multi-million dollar bonuses!
There is a national unease that the system that provides our retirement investments, our economic growth — and our jobs — is rigged against the average person. It’s a sad moment for our free enterprise system.
And it will all become headlines this week, at the start of the trial of one of the largest and most penetrating insider trading cases. Former billionaire hedge fund manager Raj Rajaratnam has been charged with five counts of conspiracy to commit securities fraud and six counts of securities fraud.
The case involves insider trading by a hedge fund in some of the America’s best-known companies. The companies are not charged, but a former director of P&G and Goldman Sachs has now been charged with leaking confidential information to the hedge fund operator. Firms that were supposed to provide “research” are accused of leaking inside information. Several cooperating witnesses have agreed to testify against Rajaratnam — and the prosecutors have hours of wiretaps.
“Insider trading unfortunately has become ubiquitous with respect to hedge funds,” said Chicago securities lawyer Andrew Stoltmann. “It truly ‘un-levels’ the playing field and gives advantages to large investors and hedge fund managers — giving them an edge over small retail investors.”
Stoltmann, who handles many lawsuits on behalf of investors who feel they have been defrauded (www.InvestmentFraud.PRO), figures the government will easily win its case, given the “mountain of evidence.” And he notes: “A conviction in this case will not only expose the extent of the insider trading, but will go a long way to restoring confidence in the fairness of the markets.”
So get ready for some ugly headlines out of Wall Street this week. This time it won’t be uninformed Congressmen doing the questioning, but crack prosecutors who are out to win their case. On the positive side, a system that can cleanse itself of corruption is a basic requirement for future economic growth. And that’s the Savage Truth.
Terry Savage is a registered investment adviser