Today hedge fund tycoon Raj Rajaratnam was sentenced to 11 years in prison, one of the most severe sentences for an insider-trading case ever. The Galleon Group founder was convicted in May on 14 counts of conspiracy and securities fraud following a two-month trial. U.S. District Judge Richard J. Holwell, who gave the sentence, said Rajaratnam’s behavior “reflects a virus in our business culture that needs to be eradicated.”
Rogue traders have pretty much been around since the invention of trading. Traders execute orders for the firm they work for, or the firm’s clients, either retail or institutional. Their job is to execute orders they receive, with any special instructions, given by the client; as long as they are compliant with regulations. When salary and bonuses are based on the profits made on company trades, or even on the trades of clients, it can obviously be tempting for some traders to “experiment” with company money in order to create quick profits on short-term moves. This system also presents much opportunity for mistakes to be made in data entry that can lead to major costs for the company.
Of course, all businesses are exposed to potential loss because of employee mistakes and theft. But what if you weren’t the one to make the mistake or commit the crime but trusted your co-worker? Other rogue traders including Kweku Adoboli, Nick Leeson and Jerome Kerviel not only damaged their careers but brought down others with them as well. When a colleague, especially one we’ve known for years, asks us to quickly check, verify or approve something, our natural reaction is to do so. We naturally think they wouldn’t be trying anything that could put us in jeopardy but according to Here Is The City, it is that kind of attitude that enables rogue employees to prosper. When they get caught you become collateral damage. From Here Is The City:
“And it’s not just rogue traders, of course, that this relates to – it’s anyone who is guilty of any kind wrongdoing or, indeed, screws something up at work that causes financial loss or reputational damage. A probe or investigation follows, and your firm won’t be concerned about how busy you were on a given day, about how much you trusted the accused, or how awkward it would have been to question what was going on – your firm will only be concerned with process and procedures. Did you do what you were supposed to do ? Did you follow the rules ? And if not, you are for it.”