Written by Sara Klein
Edited by Sarah Mejia
As a specific situation associated with business ethics, insider trading is generally an action that is prohibited by the federal government. Insider trading results in asymmetric information – a situation in which one party has an unfair, unbalanced access to information. The person without access to the information trades at a disadvantage. As the government desires a level playing field in the financial markets, it is illegal for individuals to trade on inside information. In the end, Galleon Group was accused of using insider information provided by Intel employee Rajiv Goel as stated in the Wall Street Journal article “Key Galleon Witness Gets Probation”.
Government prosecutors indicted “Galleon Group hedge-fun founder Raj Rajaratnam” for insider trading, relying heavily on the help of Rajiv Goel, who was arrested in 2009 and has been aiding the government in the investigation of Galleon Group. When arrested in 2009, Mr. Goel immediately offered his assistance to investigators. He has made deeply apologetic statements, and has been “sentenced [to] two years of probation, fined $10,000 and ordered to forfeit $266,649”(Albergotti).
Judge Barbara Jones stated that Mr. Goel’s cooperation was vital to the conviction of Raj Rajaratnam. Mr. Rajaratnam was sentenced to 11 years in prison, but is still “appealing his conviction”(Albergotti). Mr. Goel and Mr. Rajaratnam were college friends and even vacationed together; furthermore, Mr. Rajaratnam helped Mr. Goel’s family with monetary support in the past. Mr. Rajaratnam used this personal leverage to push Mr. Goel for information on Intel’s earnings and major stock deals.
Mr. Goel was placed into an ethical dilemma. The money he had received in the past, from Mr. Rajaratnam, was in the form of interest-free loans and gifts. Mr. Goel clearly may have felt pressured to help Mr. Rajaratnam with his insider trading.
Mr. Goel’s actions are an example of what is known as “blow-through ethics”, which feature scenarios that seemingly contain short-term and low-level distributed harms (Albergotti). Though Mr. Goel was convicted, he continued to help the government investigate and prosecute the primary target, Mr. Rajaratnam, therefore taking what the author believes was the correct moral action. He knew that if he did not provide assistance, the government would have a more difficult time prosecuting Mr. Rajaratnam. Failure to assist would result in Mr. Goel receiving a harsher punishment. He realized that his role in the insider trading actions was wrong; however, he not only faced the punishment, but he aided in convicting Mr. Rajaratnam.
As for Raj Rajaratnam, his hedge fund was closed in 2009 when it was discovered that he used inside information in order to earn illegal returns. Raj Rajaratnam, as a hedge-fund founder, had a responsibility to his investors to be deal ethically in the financial markets. By failing to do so, he put both his investors and his company at risk. Thus, an agency problem occurred, whereby the agent (Raj Rajaratnam) failed to act on behalf of the principals (his shareholders). Investors, in turn, depend heavily on internal monitoring, especially when there is differentiation of ownership. If Galleon Group had used more effective internal monitoring, Mr. Rajaratnam would have been caught sooner and the damage to the company could have been reduced or avoided.
In order to prevent this occurring in the future, new governance procedures need to be put into place. First, there needs to be more internal oversight and control. People with responsibility need to oversee traders within the company to make sure their actions are in line with the company’s policy. Second, there needs to be a separation of ownership and management. Raj Rajaratnam was a founder and owner, but he should not be the only person involved with directly investing funds. With more differentiation comes fewer opportunities to make mistakes. In order for the company to move forward, they need to revise their internal monitoring and corporate governance procedures.
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Albergotti, Reed. “Key Galleon Witness Gets Probation.” The Wall Street Journal 25 Sept. 2012, Money and Investing sec.: C3. Print.