Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Breaking Views

A lesson from the Galleon scandal

Allegations of insider trading against fund founder Raj Rajaratnam is a reminder that investors should check up on fund governance.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Richard Beales, breakingviews.com

(breakingviews.com) -- Galleon may have been holed below the waterline. The indictment of Raj Rajaratnam, the technology-focused hedge fund firm's founder, on insider trading charges is likely to scare investors away. Amid the shock and the intriguing details of the allegations, there's a broader lesson for investors about hedge fund governance.

Rajaratnam is alleged to have made more than $20 million for his funds by using inside information -- from tipsters at places ranging from chip maker Intel (INTC, Fortune 500) to rating agency Moody's (MCO) and consultancy McKinsey.

If he is guilty, it's hard to see why he bothered. The winnings were a drop in the ocean compared to Galleon's $3.7 billion under management and its Sri Lankan founder's $1.3 billion personal wealth, as calculated by Forbes.

Galleon said it was "shocked" and hadn't even known about the investigation. That's alarming. If the boss did the things he's accused of and the compliance staff didn't check, didn't spot them or didn't have the clout to follow up, it sounds like the firm's controls were inadequate.

The prominent figurehead of the fund firm now faces a barrage of potentially ruinous allegations, although he will be free on $100 million bail. With such a close association between founder and firm, and questions over the solidity of internal processes, it's hard to see how most investors can justify anything other than taking their money out of Galleon as soon as possible.

That would be a blow to Galleon's unsuspecting staff. It might cost the investors some money, too. Although the group said its assets were "highly liquid", rival hedge funds and traders could try to try to profit from any scramble at Galleon to liquidate positions.

All hedge fund investors should learn from the Galleon example: take a hard look beneath the performance and portfolio composition. Weaknesses in the infrastructure -- internal checks and balances, outside verification, depth of leadership and investors' rights -- can sink a fund group. Many managers could do a better job. Investors should insist they do. To top of page

Company Price Change % Change
Bank of America Corp... 14.88 0.18 1.22%
Coca-Cola Enterprise... 51.55 0.69 1.36%
Baxalta Inc 45.53 -0.17 -0.37%
Apple Inc 100.35 -0.06 -0.06%
Micron Technology In... 12.31 0.36 3.01%
Data as of May 27
Index Last Change % Change
Dow 17,873.22 44.93 0.25%
Nasdaq 4,933.51 31.74 0.65%
S&P 500 2,099.06 8.96 0.43%
Treasuries 1.85 0.03 1.54%
Data as of 1:07am ET
More Galleries
15 top-paid CEOs The 15 highest-paid corporate chiefs in America took home nearly $700 million last year -- about $47 million apiece on average. Expedia's Dara Khosrowshahi tops the list -- with $95 million in total pay. David Zaslav, who was no. 1 last year moves down to no. 15 this year. More
Driving Bentley's new SUV Spending an afternoon in Bentley's luxurious new $230,000 SUV. More
Best cars for the super-rich The Robb Report has selected these as the best new cars and SUVs for anyone who doesn't have to worry about how much they spend. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play