Guest Post: With Galleon Down, And Hedge Funds Now Actively Wiretapped, What's Next?

Tyler Durden's picture

Submitted by Roger Dadodger

Yep, the yellow water has been falling on the floors of many of Wall Street's finest hedge funds. They're all glued to their toobs watching footage of the insider trading arrest of Raj Rajaratnam, founder of Galleon Group, a prominent New York-based fund firm that manages $3.7 billion. Raj, according to allegations published in the Wall Street Journal, played it fast and loose with insider trading rules by talking to prominent executives inside publicly traded companies and to executives who had specific information on pending deals and earnings at publics. Other hedges are probably not the only ones scared out of their minds. Other fearful parties likely include Gerson Lehrman Group, DeMatteo Monness, and the thousands of "consultants' who work for them. Who are these guys and why should they be afraid of what befell Raj?

Because if this signals a new wave of enforcement of insider trading rules and Reg FD, then Raj and Galleon may only be the first bodies to fall. And everyone whose been around the alternative investment community knows that Raj was an extremely avid  user of expert networks - of Gerson Lehrman Group and DeMatteo Monness, in particular. These networks are ad hoc groups of consultants pulled together by a handful of well-heeled middlemen. The consultants are billed as industry experts. Many are simply that. Others are executives at publicly traded companies who claim they can provide market color without giving out any inside information (such as this guy who works for a prominent Chinese gaming company, Giant Interactive, that has been a hot issue in a very hot sector). Still others are at privately held companies but may have access to highly sensitive information that could possibly cross the insider threshold (such as key managers or sales reps at technology distribution companies or at cell phone distribution companies such as BrightStar, which are prominent distributors of Apple iPhones).

Now, why would Raj pay these networks upwards of $1 million per year to access these expert networks and their Rolodexes? I won't answer that question as I am not a lawyer and can't judge what is and what is not insider trading. But it does seem like an awful lot of money to get market color. All of this said, the expert networks probably will not suffer much even if the SEC rains down subpoenas on them. They keep no recordings of the phone calls that transpire between their hedge fund clients and the expert consultants on their payrolls.

They claim to have no idea of what actually goes on during those calls. And, most importantly, they make the consultants sign rock-solid indemnifications before allowing them to join the expert networks and access the feeding trough that can pay out as much as $400 or $500 for easy phone work talking about an industry they already know. In other words, its the consultants who are on the legal and financial hook -- even though most of the expert networks generally mark up these calls by 100% or more and have profit margins north of 50%. So, how many of these consultants anticipated they would ever stare down at an SEC probe?

Probably none because the SEC had largely been a pussycat when it comes to truly enforcing insider trading. Gerson and DeMatteo do regularly tell their consultants and their clients not to provide or accept inside information, (In fact, Gerson forces its consultants to undergo training and subjects them to regular tests). You would think that if compliance were such a big deal then phone calls would be recorded and transcripts keep on file in order to head of exactly the fate that has befallen Raj. Oh, and they must have papers on record showing that each consultant's superior (or in some cases, the company CEO) knows what is going on and has signed off in their own hand. Um, not really. So could many of these guys be breaking NDAs for a nice hourly rate? Indeed that might be possible, although who am I to judge.

As it stands, a word to the consultants who work for these expert networks and often risk their careers for $500 dalliances with hedge fund managers making seven figure sums -- JUST BE CAREFUL OUT THERE, EXPERT NETWORK CONSULTANTS.

For much more on "Expert Networks" please read here, here and here.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
torabora's picture

They're financial all of us smucks that work for an hourly wage.

Crab Cake's picture

While difficult to detect at first blush, there is a subtle flavorful difference between financial whores, indentured consumers/workers, and wage slaves.  They are all into to bondage though, I give you that.

Cognitive Dissonance's picture

Trying to determine what kind of whore I am brought to mind the lyrics to an old TV show I watched as a young child. Not sure if it's on topic or off but Sundays are made for trips down memory lane.

A horse is a horse, of course, of course,
And no one can talk to a horse of course
That is, of course, unless the horse is the famous Mister Ed.

agrotera's picture

Good show, and unforgetable jingle CD!

ozziindaus's picture

This is all too difficult to police. Third party brokerages can easily be set up under the giese of "prudent" and "diligent" research departments collecting insider information and used to invest on behalf of insiders. The publics memory (and SEC)is too short. Divedends do not have to be paid out immediately or in any form recognisable as traditional capital gains, but instead in a form of credits towards future profits (napkins, envelopes, handshakes etc can be used). Fringe benefits may act as interest payments for future settlement. Anyone who falls due to insider trading is just that. They are fall guy's creating distraction and a false sence of regulation.

Anonymous's picture

I bet if the 'consultation' is set up as a political meet-n-greet then everything would be legal. If Raj Rajaratnam announces that he was doing an exploratory for running for office hes' home free.

JohnKing's picture

I guess most of us would think that insider information is furtively passed semi-incognito but these guys do it out in the open. Clearly no one is minding the store, just do it out the open boys. High quality consults.. uh yeah..

Coleman Research Group offers its clients the opportunity to consult one-on-one with industry experts over the telephone. Consultations are scheduled promptly and with experts of the highest quality.

But wait..there's more

Referring to a recent luncheon speaker, a NY-based hedge fund manager says: "I think it was very helpful - primarily because the speaker was able to articulate not only the key drivers and obstacles in the industry, but also shed some light on who stands to gain or lose. He clearly spoke to us with the understanding that we were there looking for ways to make money."

No shit Sherlock.

Howard_Beale's picture

Andy, you are very level headed--I don't need to get out the 4 footer to know that. The problem is with the likes of Chanos and their networks is that they can shut down the system in a matter of days. Why do you think there were demands for $30 puts 4 days before Bear went down when it was trading at $55. The players put forth in the work by Deep Capture and others of that ilk are at the heart of this problem and all the people that are for sale are just cheap junkie hookers. The players are far better than the MIT blackjack rings because they aren't just counting, they are counting on it due to inside information. Tap them all. Shut 'em down. It's lunacy to think that these networks aren't far more expansive than Raj the turd.  

The big hedge boys say illegal short selling is not a problem--since they can do it anytime they want and make a fortune. These expert networks are criminal enterprises that have cost the taxpayers more money than can be counted--with no conscience at all since they are sociopaths. The scope of it is much larger we can imagine...nuff said.

wallstreetwino's picture

i'm curious about the level of collusion among fund managers

Veritas's picture

More than you know,or could imagine

deadhead's picture

thanks for shedding additional light on this subject.  i recall zh discussing expert networks not too long ago and it was the first time that i had heard of this tactic.  very educational stuff here and most enlightening.

If President Obama would be kind enough to get rid of Mary Schapiro immediately and replace her with an aggressive and strong prosecutorial type, we could get the truth and transparency ball rolling. 

Anonymous's picture

First, Mary Schapiro is not going to be gotten rid of until they want to change over to someone else or, her hitch is up and she is free to return to the money machine. She is there because those in power want her there.

Second, while it is obvious to me from articles I have read on this matter, the Galleon skullduggery must and has to be common practice for any and all successful hedge funds nowadays. Point being, in order to take pressure off the SEC for not only not looking into corrupt practices but, being caught actively avoiding looking into corrupt practices, they've thrown one HF over. Every once in a while when a Madoff sort of thing comes along you will see the SEC do a facial on one of these funds in order to show the world that they are the "watchdog of the markets" rather than the "lapdog of the markets" which is what they really are.

Careless Whisper's picture

This investigation was started two years ago (before Madoff) supposedly by an insider to Raji Raj. It sounds like there's much more to the story. It's being portrayed as a crackdown on insider trading, but with the use of wiretaps two years ago, I don't buy it.

As for Mizz Shapiro, why would southside Barry fire her? She is there to protect the squid and she's doing a fine job.



Anonymous's picture

Why would a guy, who put up $100,000,000 just for bail, be worried about anything other than not being able to continue to amass even more riches through insider trading?

The only difference between him (and other "Fundamentalists") and Martha Stewart is the fact that Martha would likely want to continue to live here in the United States whereas the fundie managers, like Raj, could give two shits about living here when they can go anywhere in the world. And if he is still around to be tried and convicted, he will disappear faster than a bride's virginity on her wedding night.

These people assume they will be caught, and I doubt they are sweating it. Their plans are already in place along with their luxurious ex-pat domicile.
They likely see the writing on the wall of the precipitous decline of the United States and the inconvenient civil unrest that follows from it, far ahead of the rest of us.

Phillycheesesteak's picture

Let the perp walks begin.  And get more FBI agents on these, as Elizabeth Warren suggests.  The regulatory capture at the SEC is a joke.

Anonymous's picture

While this post raises some excellent points, I would like to add some color:

1) Just as many long-only "traditional" managers use expert networks now as hedge funds. In fact, that is a large part of why compliance is so strict at GLG and other networks. In order to grow their businesses they had to adopt standards that long only funds would find satisfactory. If you own an actively managed mutual fund that is run by any of the top 20 fund families, chances are VERY high that the analysts and PMs who run your fund have exactly the same access to expert networks as the top hedge funds.

2) I think if you question the analysts and PMs at most hedge funds, you would find that expert networks stopped delivering actionable information about 3 years ago. They got too big, the more aggressive experts began making outbound calls like sell side analysts, and GLG partnered with MS, CSFB and other IBs to give their sell side analysts access to the networks.

3) The Galleon case appears to be about Raj's own connections, not those built through expert networks.

4) Only a very small fraction of experts get paid $400 and up. The vast majority - 90%+ - are at $200, which is very much the stock rate. Similarly, your mark up calculation is wrong. GLG and most expert networks do not price per call. The sell access to verticals based on industry for a fixed period of time.

Your bottom line conclusion, needless to say, is spot on 100% accurate.

Keep stuff like this coming!

Anonymous's picture

Another fool who thought he can join the club. A Sirilankan (from the Tamil minority)thought that just because he is a billioneer,he got a ticket to the big boys club.(the first one was the Iranian option guy).....

SilverIsKing's picture

Do you think they're wiretapping Goldman too?  Nah, forget I even asked.

Miles Kendig's picture

Metadata is collected from everywhere.  Other levels of information collection potentialities are broad indeed.  Never say never.

Miles Kendig's picture

Just because no one at either end of these communications supposedly monitors or records the communications does not mean that there are no records.  If the government really wanted to send a message they would claim market stability is essential to the national security of the nation which has already been done to process the actions to date regarding the "financial crisis".  Under that guise the full weight of the NSA, DIA and other interested parties including contracted services providers outside of nominal government channels could apply their skills to surveillance and accumulation.  Then there are those that access these communications through exposed aspects of the target communications, human networks or meeting places.  Of course, an individual could always undertake efforts to make a record of their engagement as a safely procedure and bargaining chip via secured third party monitoring.

It is noteworthy that many of these consultants work far cheaper than other professionals in the hospitality and personal entertainment industries.  I will give only passing mention to the work accomplished by international trade and industry associations in cooperation with various governments, their agencies and the chum circle that surround them.  Both even more prime sources of quasi open and fully closed source intelligence.

I cannot but speculate that however remote the potential, there could be a play underway to effectuate the trade of information, favors, access and group efforts both nationally & internationally.  These effected business and those that have operated freely within it for years or decades having forgotten that all that it would take to ruin their whole day is change in outlook by key players to reestablish greater control and through it fear & compliance.  We will know more by Easter '10 if this is just a case of passing gas or something more.

waterdog's picture

I heard that a hedge fund manager jumped from his 10th floor office on Saturday morning. Just before he hit the soft part of the concrete, the ground opened up. Experts that spoke on condition of anonymity because they are idiots said they believe he is on his way to that special place in hell.

laughing_swordfish's picture

To my mind, a complete lack of technological sophistication.

You would never catch the Squid doing this.

IMHO, The Squid (and all the other big boys) have the technological tools to ferret out this type of privileged information electronically without having to pay consultants $500 a pop for "tips". What is more likely is that the Squid and the others are more often than not the sources of this consultant-touted information.

I'd bet any amount of money that The Squid knew all about the HLT-Blackstone deal before Galleon did - and probably profited off both the debt and equity sides of the deal.

You know, that's just so Squid-like.


KptLt. Laughing Swordfish

9er Unterseeboote Flotille







You Cant Handle the Truth's picture

"they make the consultants sign rock-solid indemnifications"

Rock-solid indemnifications?  What's next, Bigfoot and the Loch Ness Monster?

Gordon_Gekko's picture

It is a clear signal to everybody out there that only the TBTF Fed-supported/owning banks ala GS, JPM et. al. are allowed to perform illegal and criminal activities in the markets; that it is solely their turf and anbody/anything found encroaching upon it - even 1/1000th the scale of what the TBTF banks engage in - will be dealt with severely.

agrotera's picture


Anonymous's picture

In 3 years or so the SEC might get a conviction on two charges, later to be overturned. Raj will be far poorer and will always wonder if he should have changed his name to James. All the Mikes are thanking their moms right now for bearing them in America. The short straw has been drawn. Game over.

Anonymous's picture

I believe Stevie Cohen's sphincter had a 'major movement' on Friday - what do you think?

Anonymous's picture

They should have already deployed wiretapping of Wallstreet firms. To bad no 'terrorists' suspicions are a concern with no one over at Goldman Sachs to allow for wiretapping. I believe to do so, would collaspe the company, i bet there are some good skeletons in that closet. By the way, I wonder how many interviews CNBC did with Raj. Maybe CNBC should be wiretapped as well see how far all these 'dealings' really go.