Sunday, December 6, 2009

The Charges Re: Galleon Go Way Back

This week, a federal district court in California unsealed documents indicating that Raj Rajaratnam received confidential information, wrongly forwarded to him by an employee at Intel, in 1999.

That is of course a full decade before insider-trading charges were brought against Rajaratnam this October.

Roomy Khan was a products marketing manager at Intel. It appears that she faxed confidential sales and pricing information to Raj's hedge fund, Galleon, in 1998. She was charged with, and in time (in 2002) pleaded guilty to, wire fraud in this connection.

I have to wonder: how material is such information? Obviously in principle sales and pricing information could lead a trading in receipt of such a leak to the conclusion that Intel's latest sales are in excess of projections -- and that when this fact becomes public, the price will rise to reflect it. Or the other way around. Such information could then inspired buying or selling, respectively. But how big a piece would her leak have been without the over-all mosaic of information relevant to whether the price of Intel stock will rise or fall on a given day?

Imagine just for the sake of a hypothetical that Intel made the following two announcements on the same day: it is planning a new stock issuance, and it had just sold more chips than it had expected. If these two announcements are the only bits of news relevant to Intel's value that day, and if there is nothinng industry-wide or economy-wide that swamps their effect, then the relative size of the two developments will presumably determine whether the dilutive effect of the former announcements sends the over-all stock value down, or the value-enhancement of the latter sends it up. It isn't like looking at the back of the book of the teacher's edition of a textbook to cheat on your homework.

In the market, there is no teacher's edition, except for the actual passage of time, and the real movement of that stock.

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