Convicted hedge fund founder Raj Rajaratnam discusses insider trading

Raj Rajaratnam, former founder and CEO of Galleon Group and now the author of ‘Uneven Justice,’ out with a possible warning for hedge fund managers and those in the business of finance, in the second of two interviews on Yahoo! Finance.

Video Transcript

[MUSIC PLAYING]

ADAM SHAPIRO: As we continue our discussion with Raj Rajaratnam, I just want to get the record straight. I had said when we were going into the introduction, we were talking with you about the great financial collapse. I threw out Joseph Cassano's name. He was at AIG back then. He wasn't at Morgan Stanley. I just want to make sure people know he was at AIG. Well, we know what happened there.

Let me read this quote, Raj. And may I call you Raj? Because I don't know you personally, but that's how most people address you. Is it OK if I address you that way?

RAJ RAJARATNAM: If you allow me to call you Adam.

ADAM SHAPIRO: You may. I would be honored. You write this. And this is something people on Wall Street should pay attention to. "The ambiguity of insider trading law is a perfect mismatch for the lawful work that hedge fund professionals engage in on a daily basis. It has been a long standing and accepted precedent that financial professionals are permitted, if not encouraged, to 'ferret' out information about publicly traded companies in order to inform trading strategies."

That really was-- that paragraph in your book, to me-- and I don't work on Wall Street in investing. But you alluded to it in the last segment. People talk to one another. They hear different things. And that is the role that those of us who are consumers expect of our financial advisors.

So what would protect those who work on Wall Street from law enforcement when they come at them with charges of insider trading?

RAJ RAJARATNAM: So one, clear and well-defined rules. For example, Mr. Preet Bharara, in 2020, that's 10 years after, or probably 11 years after going after hedge funds, had a task force which concluded that insider laws are murky. And it's incredible confusion for the market participants.

And soon after my trial the commissioner of the SEC said the beauty of insider trading laws is the flexibility for us to interpret it. So clearly, the law enforcement people don't want these laws to be defined because it gives them flexibility.

Adam, since time immemorial, financiers have had a bad rap. Go back to Shakespearean times when Shylock was the bad guy. Wall Street is a favorite whipping boy for the politicians when things get tough.

This go-around, they went after the hedge funds not the major banks. Now, according to the law, collecting bits of information and connecting them is perfectly legal. It's called the mosaic theory of investing.

Now, as a professional we get invited to investor conferences where we get to meet with management in a room and ask questions one-on-one. As a practitioner and investment professional, I am assuming that the CEO or the CFO that I am in a one on one meeting with, when he answers my questions, that he says the same thing to everybody else that asks that question.

It's not for me to police him. It's for his general counsel to tell him what is acceptable to tell investors and what is not.

So my contention is, if you want to curtail insider trading, and I think you should, you should go after the insider, not the market participant who gets millions of data points a month and tries to connect stuff.

Adam, I've been wrong 60% of the time or maybe 50% of the time and maybe right 50% of the time. Where my value added is, when I'm wrong, I want to size it small. And when I'm right, I want to size the position. It's portfolio construction.

ADAM SHAPIRO: What are you doing now? I read one place that you're trading stock. I would imagine you have to do that as a family office. What are you up to?

RAJ RAJARATNAM: Your imagination is right on the money. I have a family office. But what I am doing now is I spend about a third of my time on my family office. I spend a third of my time looking at various charities and helping along. And I spend about a third of my time with my family and my friends.

I must say that the prison experience has a silver lining. In adversity, you know who your friends are. And my family, my immediate family, my extended family, and some of my friends have walked every step of the way with me. And for that, I'm grateful.

I had the Bureau of Prisons record for the number of visitors. We get visitors Friday, Saturday, and Sunday. And every week, I had three days where I had visitors from 8:00 in the morning till 4:00 in the afternoon.

And I'm in a good place, Adam.

ADAM SHAPIRO: I think a lot of people who get confused with the insider trading law and its implementation are glad to hear that you are doing well. I want to remind everybody that the book is "Uneven Justice." In another interview, I heard you say that people should read this because, quote, "Every American should care about civil liberties." And perhaps when you read the book, get an understanding of how perhaps your civil liberties may have been infringed upon. We wish you all the best. Raj Rajaratnam, thank you for joining us. We'll be right back.