Wednesday, March 16, 2011

Motive Doesn’t Matter

The insider trading trial of the century has started in Manhattan featuring Raj Rajaratnam, his Galleon hedge fund and a diverse set of characters ranging from a former Goldman Sachs director to consultants and naturally, other hedge fund managers. The trial is providing plenty of grist for the mill, but I wanted to focus on one interesting article that appeared the other day in the Wall Street Journal entitled “Motive for Stock Leak Can Be Respect, Love”. The story looks at the motivations for some of the people that leaked inside information to hedge fund manager Raj Rajaratnam and others involved with the Galleon hedge fund. It turns out that not all of them did it for the money.

Mind you, the ultimate recipient of the information appears to have been in it for the money, profiting handsomely from the information given to him by his network of informants. And filthy lucre also appears to have been a part of one of the initial witnesses at the trial who testified to being paid $2 million. (As an aside, it’s kind of hard to argue that you don’t know you were doing something wrong when you’re being paid in an offshore account in your housekeeper’s name.)

However, others appear not to have been motivated by money or to even have profited by their leaks. In the case of one Intel executive, friendship appears to be the motivating factor. In the case of an IBM executive, a desire to impress a woman with whom he had become intimate was the reason cited by the executive in explaining himself the judge in his case.

But here’s the thing that any prosecutor worth his salt will tell you when you start to trot out non-monetary motivations: IT DOESN’T MATTER. Knowingly passing along inside information is a crime and it makes not a whit of difference if you made millions as a result of the information or you did it for the love of mankind. There might be some distinction made by the judge between the two when you get sentenced, but make no mistake, if someone has acted on inside information that you knowingly passed along, the government has the obligation to track you down, take you to trial and convict you.

So here’s the point, from an investor relations and compliance viewpoint: A good IR Disclosure Policy and program will drive home the point that it is the disclosure of non-public information that can get you in trouble, not being paid for it. Most people can easily understand that if someone offers to pay them for confidential information, it is probably illegal. Harder for them to understand is that if they pass along the information because they wanted to impress their friend, or were out in a social situation and wanted to appear important, or they had a long standing friendship with the person they gave the information to, they can just as easily get into trouble.

So find a way to get people with access to inside information to understand that they don’t have to profit from passing along inside information in order to break the law. And just to drive the point home, remind them that whatever friend they pass the information to will not be serving jail time for them when everything unravels.

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