Tag Archives: investors

A Free Lunch in a Perfect Storm

Dr. H. Nejat Seyhun, contributing writer to The BusinessThinker magazine, is the Jerome B. & Eilene M. York Professor of Business Administration and professor of finance, Ross School of Business, University of Michigan. He is an internationally recognized authority on financial issues and Derivatives.

As we welcome 2012, it is a good idea to take stock of the lessons of the roller-coaster stock market of 2011. The year ended on a mixed note.  The Dow Jones Industrial Index was up about 6%, S&P 500 index pretty much flat and Russell 2000 down about 4% for the year. Overseas, European and Asian stocks fared worse.   MSCI Europe ETF and iShares S&P Asia 50 Index ETF were both down about 15%.

Investors’ concerns in 2011 were about existential issues.  They worried about a possible collapse of euro, wide-spread European sovereign and bank defaults, and possible global depression.  Investors also worried about disorderly Greek, Irish, Portuguese, Italian and Spanish defaults.  A new term was coined, Private Sector Involvement (PSI), to euphemistically refer to private investor’s losses on their European sovereign debt holdings, a concept that would have been unthinkable a year earlier.  Consequently, the prices of European periphery sovereign debt plummeted and their yields skyrocketed.

Against this dooms day scenario, a surprising bright spot was the U.S. economy.  The U.S. economic picture steadily improved during the year.   The U.S. GDP growth rate rose from 0.4% in the first quarter to 1.8% in the third.  Retail sales increased about 8% year-on-year and unemployment declined from 9% to 8.6%.  Forecasts of S&P 500 stock earnings in 2012 surpassed $100.

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Insider Trading in the Post-Rajaratnam World

H. Nejat Seyhun, contributing writer to The BusinessThinker magazine, is the Jerome B. & Eilene M. York Professor of Business Administration and professor of finance, Ross School of Business, University of Michigan. He is an internationally  recognized authority on financial issues and Derivatives.

Hedge Fund billionaire Raj Rajaratnam has been found guilty of all 14 counts of securities fraud and conspiracy charges against him.  The case now goes to 2nd Circuit appeals court.  If upheld, Mr. Rajaratnam is facing the possibility of a maximum 190 years in prison, though he is likely to receive about 7 to 8 years based on the precedents.  Based on press reports, Mr. Rajaratnam may have spent $40 million on his defense, while government has spent $30 million to prosecute Mr. Rajaratnam.  Clearly, litigation required immense resources on both parties.  Meanwhile, the government has charged almost 50 people ranging from traders, hedge fund managers, lawyers and experts with similar crimes over the past year and a half.  What are the likely takeaways from these trials for investors, hedge fund managers and students of the market?

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Anatomy of an Insider Trading Trial

H. Nejat Seyhun, contributing writer to The BusinessThinker magazine, is the Jerome B. & Eilene M. York Professor of Business Administration and professor of finance, Ross School of Business, University of Michigan. He is an internationally  recognized authority on financial issues and Derivatives.

The insider trading case of billionaire Raj Rajaratnam who has been charged with 14 counts of securities fraud and conspiracy in lower Manhattan federal court is now in the hands of a jury, which has been deliberating since Monday.  Government claims that Mr. Rajaratnam made over $60 million in abnormal profits using illegally obtained inside information.  To prosecute its case, the government indicted 26, obtained 21 guilty pleas, and taped over 1,000 private telephone calls.

The stakes are obviously high for both sides:   If the jury convicts on any one of the fraud charges, Mr. Rajaratnam could be facing more than 10 years in prison.  While losing his freedom after having his hedge fund business destroyed is obviously important to Mr. Rajaratnam, the stakes are also high for the government.  The government invested massive resources to prepare and prosecute this case.  If the government fails to obtain a single guilty verdict in any of the charges in spite of its massive effort and expense, this case will once again underscore the difficulty of obtaining convictions for insider trading cases and jeopardize government’s current and future efforts to limit insider trading.

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