The Galleon hedge fund at the centre of an insider trading scandal paid hundreds of millions of dollars a year to its Wall Street banks and in return regularly received market information that would not have been disclosed to most investors, executives familiar with the matter say.
A person familiar with Galleon, whose founder, Raj Rajaratnam, was charged with insider trading this month, said it paid about $250m to its banks last year. Executives who dealt with the fund said it paid more in fees and other charges during the boom years of this decade.
Morgan Stanley, which counted Galleon as one of its top-five hedge fund clients, and Goldman Sachs were Galleon’s top providers of hedge-fund services – or prime brokerage.
Galleon, which had about $7bn in assets at its peak, paid large amounts to banks because it specialised in short-term trading strategies, which put its officials in close contact with Wall Street traders and salespeople. As it grew, the hedge fund became known for pushing its contacts at banks for hints about market developments such as big buy and sell orders.
Although bank policies often prohibit employees from divulging specific information about orders, executives who dealt with Galleon said it regularly received “colour” on market developments, frequently delivered in Wall Street slang. One example would be traders discussing a “page one seller” of shares – a reference to the first page of the Bloomberg list of top holders of listed companies.
One executive who dealt with Galleon said: “They wanted anything the public did not have. They got various pieces and put them together and that was their edge.” A former Goldman executive who provided services to funds including Galleon said: “They were tough and aggressive. They cared about short-term returns and cared a lot about the impact of their trading and the costs. They expected a lot of market information.”
Market “colour” has not usually figured in insider-trading enforcement. Prosecutions – including the charges in the Galleon case – have focused on leaked corporate information.
“There is a big distinction between information from corporate issuers and information from elsewhere, and information about companies and about the market,” said David Moody, a New York securities lawyer.
However, market participants say the Galleon case could have a chilling effect on the distribution of market “colour” – possibly affecting other hedge funds that trade frequently to make quick returns. “High-velocity hedge funds aren’t really about investing,” said one hedge fund founder. “It is a cat and mouse kind of thing, a game.”
Goldman, Morgan Stanley and a Galleon representative declined to comment.
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