U.S. prosecutors who used wiretaps to make their insider trading case against billionaire Raj Rajaratnam, founder of hedge fund firm Galleon Group, said they will use similar tactics to fight future crimes on Wall Street. U.S. Attorney Preet Bharara (pictured left) in Manhattan said yesterday that the Justice Department will employ the same kind of electronic surveillance traditionally reserved for organized crime, drug syndicates and terrorism prosecutions. Bharara, whose office has jurisdiction over the headquarters of some of the world's biggest financial firms, said investigators relied on wiretaps to build a case against Rajaratnam and former directors at a Bear Stearns Cos. hedge fund. "What's very unusual is that the case is built on wiretaps," said Robert Mintz, a former federal prosecutor and partner in the Newark, New Jersey, office of the law firm McCarter & English. "You need very specific and timely evidence of criminal activity before a judge is going to let you go up on a wiretap." Rajaratnam, 52, faces 13 fraud and conspiracy counts, many of which carry 20- year maximum sentences. Under federal sentencing guidelines, he faces 10 years in prison if convicted at trial, Assistant U.S. Attorney Josh Klein said in court yesterday. Galleon Partners, based in Manhattan, has offices in London, Singapore, Mumbai, and Menlo Park, California. – Bloomberg
Dominant Social Theme: Criminalization proceeds apace.
Free-Market Analysis: We analyzed the Galleon case from our admittedly libertarian point of view the other day. These are made up crimes in our estimation and there is a never-ending supply of them based on the viewpoint that "fairness" in the marketplace must be enforced by jail time and other retribution. One of the reasons for the distinction between criminal and civil litigation in Western society is because it was realized long ago that almost any matter could be criminalized, and that once that happened, society was on the slippery slope toward the kind of decay that did in the Roman empire.
We made a list a decade or so ago when we started to understand what was going on about the kinds of things that could be criminalized in the quest for fairer equity markets – a quixotic quest by the way that will never be realized. This was way back in the 1980s when the one firm's "black box" trading team was raking in millions every week using rudimentary computer power to run pairs-trading strategies. By analyzing stocks that tended to trade in the same pattern and then by betting against the divergences, the firm was able to make a killing. The computers worked all night to come up with divergences that tended, if we remember right, to rectify themselves in the morning. The trading room then worked busily all day to create more divergences for the computers to track next eve.
Then there was a big wirehouse (this was not uncommon) that would bring out an IPO and announce it over the squawk box. Thousands of brokers would busily sell the issue to clients – and the firm would unload millions of shares at a hefty profit. After the initial interest subsided, of course, the stock would go down and the firm's execs would wait a while and then issue another clarion call for the public to buy yet again. Again the stock would begin its rise and the firm would unload still more shares. Thus it went.
And so our list was created. We decided that any brokerage with a national sales force ought to be prosecuted under RICO laws. Management ought to be jailed for stock manipulation, and brokers for fraud. We decided then that any firm that uses unfair computer power ought to be RICO'd as well. Why should we, with our puny PCs and Macs, have to fight the best Wall Street has to offer? Finally, we decided that those with higher IQs – especially mathematically adept individuals, ought to be jailed on the general principal that they will surely tilt the playing field in their favor sooner or later. This goes for artificial intelligence as well. When they finally build a machine that can trade stocks with the same efficiency that supercomputers now play chess, we will demand immediate incarceration and an updating of US federal penal statutes to recognize that computers, if properly cared for, can function almost forever.
OK, please don't take us seriously. It's just that there are endless ways that smart, adept traders and brokers can get the jump on the common person who goes to work and then puts his or her hard-earned money into the stock market hoping against hope to build a retirement. The biggest Ponzi scheme of all of course is central banking, which allocates the right to print money to a handful of individuals who then use their awesome power to create major euphorias and depressions – wiping out the same trusting millions of savers they claim to be protecting.
Conclusion: Ultimately, government is not going to protect individuals against "unfairness" in the marketplace. The only protection one can have is "buyer beware." Trust the regulators, the police or even other market players to protect you and you will be looking for panaceas in places that they likely cannot be found. A mirror is a better place.
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