For years, Raj Rajaratnam lived like a Wall Street rock star. His Galleon Group hedge fund managed more than $7 billion in assets. Major investment banks Morgan Stanley and Goldman Sachs considered his firm among their largest trading clients. He was, for all intents and purposes, the Alex Rodriguez of Wall Street — a home run hitter who turned out to be one of the biggest cheaters in the game.
The comparison between steroids and insider trading is not as fleeting as it seems at first glance. In baseball, hundreds of players used steroids to gain an edge over their competitors. The added muscle mass allowed players to recover from injuries more quickly, play at a high level every day, and even put up ridiculous numbers. They harmed the game of baseball itself, because players who chose to compete fairly were put at a severe disadvantage against those who were using steroids.
In the same way, insider traders put the entire market at risk with their activities. If some traders have insider information, they are able to make money not with their skill or even their luck, but with an ill-gained advantage. Would you be willing to put your baseball career up to one at-bat against a Mark McGwire, Jose Canseco, or Alex Rodriguez, all of whom are rumored to have taken performance-enhancing drugs?
Similarly, would you be willing to trade in a market where the folks making all the money are those with insider information, and those who play fairly are left holding the bag? That’s what Rajaratnam was really found guilty of: rigging the game to his advantage.
Keep in mind, for every insider trade that netted him millions, another investor lost out on those millions. Every time he sold out of a stock before it fell, he knowingly sold a lemon to another investor. Would you want to trust your 401k to a market that was rigged? It’s as sensible as betting on a professional wrestling match.
Now that the verdict is in, investors can rest a little easier. The government has proven its case with wiretaps, sealing Rajaratnam’s fate before the jury. He will be going to jail for up to the next twenty years. Honest investors everywhere should rejoice.