1. Are information-gathering techniques like Rajaratnam’s common on Wall Street? If so, what could regulators, investors, and executives do to reduce the practice?
2. What are the implications of sharing confidential material information? Is it something that would affect your decision about how to trade a stock if you knew about it?
3. Do you think the secret investigation and conviction of Rajaratnam and other people in the Galleon network will deter other fund managers and investors from sharing nonpublic information?

The Galleon Group was a privately owned hedge fund firm that provided services and information about investments such as stocks, bonds, and other financial instruments. Galleon made money for itself and others by picking stocks and managing portfolios and hedge funds for investors. At its peak, Galleon was responsible for more than $7 billion in investor income. The company’s philosophy was that it was possible to deliver superior returns to investors without employing common high-risk tactics such as leverage or market timing. Founded in 1997, Galleon attracted employees from prestigious investment firms such as Goldman Sachs, Needham & Co., and ING Barings. Every month the company held meetings where executives explained the status and strategy of each fund to investors. In addition, Galleon told investors that no employee would be personally trading in any stock or fund the investors held.

In 2009 Raj Rajaratnam, the head of Galleon, was indicted on 14 counts of securities fraud and conspiracy, as well as sued by the Securities and Exchange Commission (SEC) for insider trading. He and five others were accused of using nonpublic information from company insiders and consultants to make millions in personal profits. Rajaratnam’s trial began in 2011, and although he pleaded not guilty, he was convicted on all 14 counts, fined over $158 million in civil and criminal penalties, and is currently serving an 11-year sentence.

Rajaratnam, born in Sri Lanka to a middle-class family, received his bachelor’s degree in engineering from the University of Sussex in England. In 1983 he earned his MBA from the University of Pennsylvania’s Wharton School of Business. With a focus on the computer chip industry, he meticulously developed contacts. He went to manufacturing plants, talked to employees, and connected with executives who would later work with Galleon on their companies’ IPOs.

In 1985 the investment banking boutique Needham & Co. hired Rajaratnam as an analyst. The corporate culture at Needham & Co. profoundly influenced Rajaratnam and his business philosophy. George Needham was obsessive about minimizing expenses, making employees stay in budget hotel rooms and take midnight flights to and from meetings. The company also urged analysts to gather as much information as possible. They were encouraged to sift through garbage, question disgruntled employees, and even place people in jobs in target industries. Analysts went to professional meetings, questioned academics doing research and consulting, and set up clandestine agencies that collected information. At Needham & Co., Rajaratnam developed an aggressive networking and note-taking research strategy that enabled him to make accurate predictions about companies’ financial situations.

Rajaratnam rose rapidly through the ranks at Needham to become president of the company by 1991. Rajaratnam’s personality also began to impact the company’s culture. Rajaratnam once told a new analyst that Needham’s name was on the company, but he was the real center of power, the one who “makes things happen.” He began to push ethical limits when gathering information about companies. For example, concerns about Rajaratnam’s activities ended stock brokerage Paine, Webber and Co.’s interest in buying Needham. Soon, similar worries spurred complaints from some inside Needham. By 1996, at least five Needham executives were concerned about Rajaratnam’s conduct. Additionally, many of Needham’s clients complained. Rajaratnam’s multiple company roles as president, fund manager, and sometimes stock analyst were a potential conflict of interest situation; investment banks usually separate those roles to prevent clashes between the interests of clients and bank-run funds. In 1996, after 11 years at Needham, Rajaratnam left the company and started the Galleon Group, taking several Needham employees with him.