A warning to Wall Street

Federal prosecutors scored one of their biggest insider-trading convictions this week when a jury found billionaire hedge-fund manager Raj Rajaratnam guilty on 14 counts of securities fraud and conspiracy. This case won’t satisfy the nation’s hunger to hold Wall Street accountable for the financial industry collapse that triggered a deep recession and cost millions of people their jobs. But it’s important in its own right for the message it sends about the day-to-day business of investors.

According to the Securities and Exchange Commission, illegal insider trading happens when people privy to a company’s secrets use that information to buy or sell a related security. The most famous case in recent years involved Martha Stewart, who dumped more than $200,000 worth of a pharmaceutical company’s stock the day before the Food and Drug Administration blocked one of the company’s new cancer drugs. Stewart was convicted in 2004 of obstructing a federal investigation into the sale; the company’s chief executive, who also sold shares just before the decision became public, was convicted of insider trading and sentenced to seven years in prison.

Rajaratnam is a considerably bigger fish. The Sri Lanka native founded and led the Galleon Group, which was one of the world’s largest hedge funds before his arrest. The feds accused him of making more than $50 million by trading off of significant non-public information gleaned from a well-paid network of investment bankers, consultants and well-placed executives. Although his defense attorney argued that Rajaratnam was simply doing the sort of research that is the hallmark of successful Wall Street firms, testimony and wiretap recordings heard at his trial in New York showed him trying to conceal his relationship with company insiders and make his trades look less suspicious.

The sad truth about Wall Street is that big hedge funds such as Galleon and major financial firms have a huge advantage over everyman investors. Their relationships with the corporate world give them valuable insights about companies, trends and potential market-moving events, and they have the resources to hire consultants to dig up more information gold. The Rajaratnam prosecution showed, though, that paying people for access to company secrets is not “research.” That point is underscored by the feds’ ongoing investigation into “expert network” firms that allegedly plied technology industry workers with cash in exchange for inside information. Even if the playing field will never be truly level on Wall Street, it’s good for prosecutors to remind people that the rules of the game apply to everyone.