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A couple of weeks ago, the U.S. Securities and Exchange Commission (“SEC”) filed insider trading charges against  billionaire Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP (“Galleon”), alleging that Rajaratnam tapped into his network of friends and close business associates to obtain insider tips and confidential information about corporate earnings or takeover activity at several companies, including Google, Hilton, Intel and Polycom.  The SEC claims that Rajaratnam then used the information insider information to make illegal trades on behalf of Galleon. Last week the SEC added nine people and four companies to the list of those from whom Rajaratnam allegedly received insider information.  That’s nine more people who should start pumping iron to prepare themselves for life inside prison.  The nine who should get the gym membership are Roomy Khan of Ft. Lauderdale, Florida (a hedge fund consultant), Deep Shah of Mumbai, India (a former analyst at Moody’s), Ali Far of Saratoga, California (co-founder and  managing partner at Far & Lee and Spherix Capital), Choo-Beng Lee of San Jose, California (co-founder and managing partner at Far & Lee and Spherix Capital), Ali Hariri of San Francisco, California (a VP at Atheros Communications), Zvi Goffer of New York, New York (a former proprietary trader at Schottenfeld), David Plate of New York, New York (a former proprietary trader at Schottenfeld), Gautham Shankar of New Canaan, Connecticut (a former proprietary trader at Schottenfeld), and Steven Fortuna of Westwood, Massachusetts (co-founder and principal of S2 Capital).

The SEC has no sense of humor about insider trading.  There is no insider trading case that is too small for the SEC to pursue, which leads to the question: Why did these people think they could get away with it, if they are, in fact, guilty?  Hubris is probably the biggest factor.  Another is ignorance; ignorance of the resources and investigative techniques available to the SEC in insider trading cases.

We say that people who get caught trading on insider information have to pay the “stupidity tax,” because insider traders are so easy to spot and catch and because a federal judge can order the insider trader not only to pay back his profits, but to pay a civil penalty equal to three times the gains on the trades or the losses avoided.  If those the SEC has named in the Galleon case are guilty, they will find out the hard way that crime does not pay.