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ANALYSIS - Thrills, links critical as greed in insider trading

NEW YORK (Reuters) - Insider traders may have taken the greed-is-good mantra to heart, but it’s not the only thing that motivates them.

Galleon hedge fund partner Raj Rajaratnam (L) is escorted by FBI agents after being taken into custody in New York October 16, 2009. Insider traders may have taken the greed-is-good mantra to heart, but it's not the only thing that motivates them. REUTERS/Brendan McDermid

People may be spurred to leak or misuse confidential information for many reasons: the thrill of risky behavior, financial or work pressures, ignorance about what constitutes insider trading, even the idea that you can get away with it.

“People who have millions and millions of dollars (can be) motivated just by being in the game and the adrenalin rush it provides,” said Blake Coppotelli, a former prosecutor who now works at Kroll’s business intelligence and investigations unit. “And sometimes, there is no rhyme or reason.”

The week before last, regulators charged six people, including billionaire Galleon Group co-founder Raj Rajaratnam, for netting a profit of more than $20 million from trading in the stocks of Google Inc, Sun Microsystems Inc and others.

And to underline how much focus prosecutors are putting on the problem, a Canadian man pleaded guilty on Tuesday to U.S. and Canadian criminal charges stemming from a 14-year insider trading scheme involving as many as 40 pending corporate deals. He did so a day after his alleged accomplice, a Canadian lawyer, apparently committed suicide.

As with most insider trading schemes, greed may have been the main motive. But in the Galleon case it appears that senior executives at top companies such as IBM and Intel were passing on tips simply because they were friends with hedge fund managers.

Passing on information, whether it is a tip about an impending merger or quarterly earnings, is one of the easiest things to do, insider trading experts said. That could be why insider trading is especially pernicious. Since 1994, the Securities and Exchange Commission has taken action in roughly 800 insider trading cases.

“It’s the easiest white-collar crime to make money off,” said Utpal Bhattacharya, a professor of finance at Indiana University’s Kelley School of Business. “The only cost is the cost of getting caught.”

Insider trading -- where people trade in public company stocks based on information obtained before it is made public -- is both a criminal and civil offense and is punishable by fines and imprisonment.

ARROGANCE AND IGNORANCE

Bhattacharya, who has studied insider trading cases, recently coauthored a paper, “Do They Do it for the Money,” in which he explores the motives that drive people to pass on tips or trade on it.

A sense of “psychological hubris” drives many insider traders to act the way they do, because they think they can get away with it, he said.

Insider traders also rely heavily on personal relationships to glean tips. As more evidence emerges in the Galleon scandal, it appears personal connections played a key role in getting people to spill information.

Regulators’ complaints show that New Castle Partners’ portfolio manager, Danielle Chiesi, who is among those indicted, extracted tips from executives at IBM and Akamai Technologies Inc who were also friends.

“I think that people get under pressure,” said former SEC chairman Harvey Pitt. “We are living in incredibly difficult economic times and there comes a point in time when people sacrifice morality for what they think is expediency.”

Pitt, who runs business consulting firm Kalorama Partners, added that many people who engage in this behavior don’t “have any idea of the propriety of what they’re doing.”

That may be because leaking confidential information -- unlike, say, stealing from a store -- does not feel like theft, experts said. The same could be said for copyright violations.

WHAT CAN YOU DO ABOUT IT?

But information is company property and company stocks can suffer when targeted by insider trading.

The Galleon scandal, which involves executives at many technology companies, will likely force managers to enforce stricter guidelines on employee behavior, consultants said.

“Companies need to move with light speed in distancing themselves from the individual,” said Michael Robinson, a senior vice president at strategic communications firm Levick. “They need to be seen as trying to bring an end to the problem, not as a convenient conduit.”

Intel Corp, IBM Corp and management consultancy McKinsey & Co have all placed the executives who have been charged on leave and are conducting their own investigations.

Google has suspended its relationship with Market Street Partners, the investor relations firm whose former employee is said to have leaked information to a former Galleon employee.

The complaints also cite the involvement of unidentified executives from Akamai, Polycom Inc and Advanced Micro Devices Inc. Polycom placed a senior executive on leave without providing a reason. Akamai and AMD have not yet announced any action.

Kroll’s Coppotelli said companies need to tighten up their information-sharing procedures, monitor emails and telephone calls, and train employees.

“Corporate America is getting better with compliance and ethical initiatives,” Coppotelli said.

But people will always be tempted to cheat, he added.

(Reporting by Anupreeta Das; editing by Andre Grenon)

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