Updates to this story
The case against alleged inside-trader Raj Rajaratnam will leave many implicated companies, such as Intel and Goldman Sachs, open to lawsuits as employee witnesses describe information leaks.
Sri Lankan Rajaratnam, co-founder of Galleon Group, will be on trial tomorrow as part of a major US crackdown on hedge fund insider trading, with prosecutors claiming that he was at the centre of a scheme which generated $45 million using information gleamed from a network of traders and employees.
Now it appears that the testimony of company employees could lead to substantial damaging of reputation for a number of firms, with potential legal action on the way from investors.
“If a company made a decision for whatever reason that it wanted to make information available to select individuals, that in my opinion would be unlawful,” said Rifkin, of Wolf Haldenstein Adler Freeman & Herz LLP, to Bloomberg.
While firms cannot be held accountable for the actions of one wayward trader, if it is proved that they allowed information to be passed out then it could be seen as favouring traders in order to manipulate share price, leaving themselves wide open to lawsuits.
One of those to appear is expected to be Rajiv Goel, former Intel treasury department manager, who allegedly offered tips to Rajanaratnam.
Rajanaratnam, who could be banged up for 10 years if he is found guilty, maintains that his trades were merely based on research for Galleon which inevitably meant speaking to those in the know inside major firms for news.
Nevertheless, the three dozen firms from which information was gathered, supposedly including IBM and Morgan Stanley among a raft of others, could suffer more than the mere tarnishing of their reputations, which in itself is cause for concern for reputable businesses.
“Our position is that we appear to be a victim of an insider trading scheme,” said Mike Silverman, a spokesman for AMD, another of the companies implicated.
“We’ve been cooperating with the U.S. Attorney’s Office.”