This is a Better Model for Insider Trading

Mr. Rajaratnam

The Securities and Exchange Commission settled insider trading charges today against the former tech company chief financial officer alleged to have leaked insider information to imprisoned Galleon Group hedge fund manager Raj Rajaratnam.

In 2006, Xilinx CFO Kris Chellam tipped Mr. Rajaratnam to negative trends in the company’s business at odds with public projections, allowing Galleon to turn a profit of nearly $1 million, according to a press release:

… in the weeks leading up to Xilinx’s December 7 update, Chellam received multiple reports indicating that the company’s third quarter business results were not going to be as positive as projected in October. Chellam learned on November 21 that the top end of the projected revenue range was being lowered from $490 million to $470 million. He attended a December 4 confidential executive staff meeting where the bottom end of the revenue projection was lowered from $476 million to $455 million. On December 5, Chellam telephoned Rajaratnam and tipped him about Xilinx’s worse-than-expected performance. Just minutes after the call, Galleon hedge funds controlled by Rajaratnam sold short Xilinx stock, eventually selling short more than 650,000 shares over the course of that day and the following day.

Mr. Chellam agreed  to pay $1.75 million in fines and disgorgement, which is not so bully for him. But unlike former McKinsey & Co. CEO Rajat Gupta, who was sentenced this week to two years in prison for sharing inside information with Mr. Rajaratnam, but who did not profit directly from Galleon’s illicit trades, at least Mr. Chellam did not go uncompensated for his troubles. According to the SEC’s complaint:

Chellam tipped Rajaratnam not only because the two were good friends, but also because Chellam had a substantial investment in Galleon, including in one ofthe funds that profited from the tips Chellam provided about Xilinx. Chellam was also in discussions with Rajaratnam concerning prospective employment at Galleon. In May 2007, Chellam became the Co-Managing Partner of the Galleon Special Opportunities Fund, a venture capital fund that focused on investments in late-stage technology companies.

Which, if you’re going to break the law, seems like a less noble/more sensible motivation.

  This is a Better Model for Insider Trading