The central role of wiretaps in the insider trading case against hedge fund manager Raj Rajaratnam shows even the best regulated financial markets can have pools of private information that are not available to most investors. For example, Rajaratnam got advance information of losses at Goldman Sachs from Rajat Gupta, one of the directors of the investment bank. Gupta has denied he did anything illegal.
Efficient financial markets require authentic information, available to all investors. But a lot of privileged information continues to be exchanged within closed networks of contacts, even in India. US investigators used 45 recorded phone chats between the hedge fund investor and his friends. The Rajaratnam verdict could be a game changer, both for the readiness of regulators to use tapped phone conversations as evidence, and the challenges the insider trading revelations present companies as far as their governance goes.