Raj Rajaratnam, a Sri Lankan manager of the Galleon Group hedge fund, is charged with fourteen fraud and conspiracy cases. He had created a network of insiders, including executives from big companies such as Goldman Sachs and McKinsey, who would give him information about stock marketing. The information is nonpublic and, therefore, could compromise or jeopardize a company. In the case of Goldman Sach, Raj had gotten information about Warren Buffet’s intentions of paying $5 billion on Goldman Sach’s shares. The announcement was discreet, and only the company’s directives were aware. However, before the information was announced, Raj had bought some of the company’s shares at $175,000 and sold them the following day at a profit of $900,000 (Raj Rajaratnam Insider Trading Case – Financial Ethics, n.d.). The action led to the fall of the financial stock. It is believed that Raj got the information from Rajat Gupta, former director of Goldman Sach, and thus, after the charges, Raj pleaded guilty to engaging in insider trading (Raj Rajaratnam Insider Trading Case – Financial Ethics, n.d.). Insider trading is considered an illicit business as it puts companies and investors at risk of losing their money to fraudsters and manipulators who have knowledge of the prices of shares and want to make extra money from illegal business. These fraudsters will impact the stock markets and break investors’ trust and confidence in companies.
Answering the case questions
According to the SEC, insider trading is the buying or selling a security in breach of a fiduciary duty or other relationships of trust and confidence based on material, nonpublic information about the security (Ganti, 2023). Insider trading involves trading a public company’s stock or security with someone with nonpublic material information about the company. According to the SEC, insider trading is very illegal if the material information is nonpublic, as it compromises the security of a company and destroys the investors’ trust (Ganti, 2023). Although most people believe that insider trading is very uncommon, from the case study, Raj’s case was just one amongst 47 other cases, signifying that insider trading was prevalent (Raj Rajaratnam Insider Trading Case – Financial Ethics, n.d.). However, it is believed that there are people who can predict the stock markets and prices of shares who do not depend on insider trading. However, their predictions may not be a hundred percent true as sometimes they may fail to align with the stock markets. If the information about a company’s stock price is shared with a lot of people, these people may share the information outside, resulting in a case of insider trading. Moreover, not all information sharing can be considered insider trading (Patel & Putniņš, 2020). Once the material information is valuable, it can be shared into the wrong hands and result in a case of conspiracy or insider trading (Patel & Putniņš, 2020). After the arrest of Raj Rajaratnam, however, the accuracy of prediction reduced, signifying that most people relied on insider trading. However, insider trading today is rare due to the penalties implemented and the policies for arrest and charges for anyone arrested engaging in such an illegal affair.
If a friend of mine working for XYZ Corp told me inside news about the company that would likely raise its stock price, it would leave me in an ethical dilemma on whether to use the information to my advantage and gain some profits or to follow my ethical principles and standards. I will not use the information to buy the stock from the company because it is very illegal and might compromise the company. However, I might be tempted to buy the stock. I will not buy the stock because it may interfere with the stock market, and also, the investors interested in the stock may feel less privileged for investing in a stock with a lower value, which is very unfair. It is essential to allow honesty to prevail and for honest investors to have confidence in the financial system. Consequently, the good of the society will not be achieved in the long run. I might be able to make a profit, but the money will only benefit me and not society, which is very selfish.
From Raj’s case, it is evident that not all people uphold societal ethics. Raj’s use of people to obtain material information is wrong as it creates unfairness to the people who honestly invest in the stock market without the information. Those who engage in such cases should be charged heavily since it is a crime to disclose the company’s information and breach the company’s and investors’ security or safety. The ethical misbehavior happened because Raj and the other company directives were selfish and wanted extra money for themselves. Their selfishness causes the stock to fall and investors to lose trust and confidence in the financial system. Such cases may also occur due to the value of the information and the number of people who have access to it and can share it with outside people. Moreover, ethical misbehavior happens today because people are trying to justify insider trading as victimless or that it leads to an increase in market efficiency, which is untrue and wrong. The people’s views on insider trading contribute to its practice illegally and make it difficult to be terminated in society. Another challenge that impacts insider trading today is the lack of strict regulations against insider trading. People may engage in insider trading, claiming to be legal insiders who will use the title to hide their unethical activities. Policies need to be implemented to terminate or discourage insiders from illegally sharing specific information about a company’s stock market, and heavy penalties and charges must be implemented for those who will be found guilty of such crimes. Legal insiders must also follow regulations and rules while engaging in their activities.
Ganti, A. (2023, September). What Is Insider Trading and When Is It Legal? Investopedia. https://www.investopedia.com/terms/i/insidertrading.asp#:~:text=The%20U.S.%20Securities%20and%20Exchange
Patel, V., & Putniņš, T. J. (2020, January 11). How Much Insider Trading Happens in Stock Markets? Papers.ssrn.com. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3764192
Raj Rajaratnam Insider Trading Case – Financial Ethics. (n.d.). Seven Pillars Institute. https://mail.sevenpillarsinstitute.org/case-studies/raj-rajaratnam-and-insider-trading-2/