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The Dark Underbelly of Finance

CHICAGO – If you thought that America’s financial sector had gotten enough of bad publicity, think again. The insider-trading trial of Raj Rajaratnam, a billionaire hedge-fund manager, has now begun. It is likely to provide an especially lurid exposé of the corrupt underbelly of the financial world.

Rajaratnam’s trial is remarkable in many ways. First, it is one of the few insider-trading cases ever to be brought against a professional hedge-fund manager. Historically, both state and federal attorney generals have preferred to prosecute “occasional” traders, who stick out like a sore thumb.

For example, when a tiny Italian bank received from someone who never traded a large order for shares of US Shoe shortly before the company was acquired by Italian eyewear maker Luxottica, it was not difficult to smell a fish. In other words, precisely because occasional traders trade rarely, it is much easier to prove the nexus of causality between their trades and an illegal tip. By contrast, it is much more difficult to identify a problem when a person makes hundreds of trades every day.

In Rajaratnam’s case, the possibility of establishing such a link has come through telephone surveillance. This is the trial’s second remarkable aspect: it is the first insider-trading case to rely on an instrument generally reserved for pursuing drug or mafia cases. When the contents of these conversations are revealed in court, they will not allay the public’s already considerable distrust of the financial sector, to say the least.