Economic Outlook: Hedging bets

By ANTHONY HALL, United Press International  |  May 12, 2011 at 9:06 AM
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With the conviction of U.S. hedge fund manager Raj Rajaratnam, is it possible the list of the world's richest men has need of at least an asterisk or two?

Hedge fund managers are now peppered throughout the Forbes magazine list of the world's richest people, including Rajaratnam, who was convicted Wednesday of 14 counts of securities fraud and conspiracy to commit fraud, which may land him a lengthy prison sentence at his next court appearance, scheduled for July 29.

Rajaratnam, the founder of Galleon Group, was accused of avoiding losses or making profits that amounted to a total of $63 million in ill-gotten gains. The argument in court focused on whether Rajaratnam was simply doing his homework, researching companies on behalf of his clients or banking his success on confidential information.

The jury, after 11 days of deliberation, found Rajaratnam guilty on all counts, with the most damning evidence coming from at least 25 taped phone calls in which he discussed deals he was making and information he had received.

Taking a broader view of the scandal, The New York Times reported the mushrooming hedge-fund industry to date has created more than two dozen billionaires and surpassed a financial milestone recently by managing a record $2 trillion.

Between the date the current insider trading scandal surfaced about two years ago and Wednesday, 36 individuals have been convicted of making deals illegally.

In late 2010, the FBI raided the offices of three prominent hedge funds, a stunning move the Times said sent "shock waves across Wall Street."

Of the three hedge funds targeted in the raid, two have closed.

That doesn't imply 66 percent of hedge funds would shut their operations down if regulators took a detailed peek at their books but it leaves the question wide open. At Galleon Group, taped conversations with Rajaratnam discussing ways to cover up insider trading deals made the firm sound "like a criminal enterprise," the Times said;

Since the investigation became public, security companies have said business they do with hedge funds has grown as companies have increasingly hired firms to check their phone systems for bugs.

In one case last year, the FBI asked market analyst John Kinnucan to tape phone calls with a client and Kinnucan not only refused but wrote to clients that he had "declined the young gentleman's gracious offer to wear a wire and thus ensnare you in their devious web."

It is one thing to refuse to wear a wire, which would certainly have left Kinnucan with the unpleasant reputation of a skunk, but it is another thing to call a law enforcement effort a "devious web." Is there something to be gained by a money manager publicly declaring he is not the type of manager who will rat you out to the devious authorities who are seeking to level the playing field for everyone else?

Apparently, there is.

In international markets Thursday, the Nikkei 225 index in Japan slipped 1.5 percent and the Shanghai composite index in China lost 1.36 percent. The Hang Seng index in Hong Kong dropped 0.94 percent and the Sensex in India gave up 1.34 percent.

The S&P/ASX 200 index in Australia fell 1.76 percent.

In midday trading in Europe, stocks were down across the board. The FTSE 100 index in Britain shed 1.14 percent while the DAX 30 in Germany lost 1.42 percent. The CAC 40 in France dropped 1.41 percent, and the pan-European Stoxx Europe 600 index lost 1.04 percent.

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