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Hammering inside traders and hedge funds -- while bigger problems fester

Date: Tuesday, November 3, 2009
Author: Vishesh Kumar, Daily Finance

Two weeks after billionaire hedge fund manager Raj Rajaratnam was handcuffed and walked out of his New York apartment by authorities at dawn, the roster of corporate brass at some of America's biggest companies brought down by the Galleon scandal continues to grow.

On Monday, former Advanced Micro Devices (AMD) CEO Hector Ruiz (pictured) stepped down as chairman of Globalfoundries, a chip manufacturer that was spun off from AMD. While at AMD -- the world's second-largest chipmaker -- Ruiz allegedly provided an accomplice of Rajaratnam's with insider information and joins senior executives at corporate titans like IBM (IBM), Intel (INTC) and McKinsey who have seen their careers come to an abrupt end following the allegations.

Ruiz's resignation follows another insider-trading allegation, this time against the former chief financial officer of activist hedge fund ValueAct Capital. The Securities & Exchange Commission has also broadened its inquiry into the Galleon case to include a former executive at hedge fund giant SAC.

On the surface, the crackdown on insider trading seems like a welcome show of force by authorities after years of corporate excess and questionable practices that helped plunge the economy into a steep recession.

Pursuing Justice -- or Saving Face?

However, going after a handful of hedge funds and executives for insider trading could just be a face-saving distraction with little benefit. Rajaratnam's arrest for $20 million in trading gains coincided with the filing of a lawsuit claiming that the SEC might well have been aware of the $60 billion fraud being perpetrated by Bernie Madoff in what was widely known to be a sex- and drug-fueled workplace.

Indeed, according documents released last week by H. David Kotz, the Securities & Exchange Commission's inspector-general, even Madoff was "astonished" that the authorities did not catch on to him sooner.

While insider trading might be rampant in the piranha-like hedge fund world, some make the case that fighting it is a poor use of limited government resources and essentially a victimless crime.

When it comes to tacking real obstacles facing the economy -- such as the lack of loans available to small businesses despite the billions pored into big banks -- officials seem incapable of doing anything. This weekend, for example, Treasury Secretary Timothy Geithner cited the unwillingness of banks to make loans as a risk that could undermine the fragile economic recovery taking shape.

Curious Timing

Hundreds of billions of dollars in taxpayer funds were used to bail out banks and guarantee their bonds so that they could start lending to small business again. Instead, small businesses remain squeezed, and banks have used the access to cheap funds, thanks to taxpayer guarantees, to ring up massive trading profits. Where's the government's effort to lean hard on banks that aren't lending?

Given the public outrage, it also seems suspicious that the initial Galleon arrest came in the wake of the first reports of massive year-end bonuses in the works at investment bank Goldman Sachs (GS). In its insider-trading crackdown, the SEC seems to be trying to create an image of going after the bad guys, but one could argue that in reality it's just part of Washington's fiddling while the financial system is burning.