The feminine side of insider trading

Insider trading and the Galleon Group are back in the news, and this time there's a little feminine touch to the story.

By InvestorPlace Nov 24, 2009 4:06PM

Woman with lipstick  © Stockbyte/PictureQuest

By Jim Woods


A article, prominently featured on the financial news website's homepage, told the tale of temptress Danielle Chiesi and the role she reportedly played in the sordid insider trading scandal. 


Now, in case you aren't up to speed on this story, last month a number of hedge fund managers and corporate executives -- among them one of the wealthiest men in the world -- were arrested in an insider trading case that government officials claim generated more than $20 million in illegal profits. Raj Rajaratnam was atop the list of those accused of using insider information to trade securities in several publicly-traded companies, including Advanced Micro Devices (AMD), Akamai Technologies (AKAM), Google (GOOG), IBM (IBM) and other technology stocks.


Chiesi is an analyst at New Castle Funds LLC, a New York hedge fund that manages about $1 billion. According to the Bloomberg story, Chiesi did much of her stock research in bars and hotel ballrooms. Apparently, her analytical bag of tricks included short skirts, low-cut tops and the feminine mystique of a former teen beauty queen.


Chiesi would reportedly cozy up to technology company executives, befriend them using her feminine wiles, and then persuade them to give up information on how many microprocessors, or how much software their companies were shipping that quarter.


Well, at the risk of sounding politically incorrect, I find myself perplexed at just what Chiesi did wrong.

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The idea of a woman using her sexuality to garner information, to curry favor or for financial gain should surprise no one. I suspect behavior of this sort has been going on ever since humans appeared on Earth. That's why I find the following quote from the Bloomberg article laughable: "It amazes me that grown, wealthy, successful, hardworking men fell for that," said Deborah Stapleton, president of Stapleton Communications Inc., an investor relations company in Palo Alto, California.


Stapleton, are you not yet aware that men of all sorts -- even grown, wealthy and successful ones -- are many times no match for the allure of what they perceive as an attractive female? If you are a man reading this right now, you know exactly what I mean. If you are a woman reading this, and if you are inflamed at the realities of male sexuality, then I suggest you get over it fast and recognize that men don't turn off their sexuality at the office door. This fact actually makes many of us susceptible to all sorts of feminine charms.


Of course, there is a bigger issue here than vulnerable male sexuality. The real issue here is what I alluded to earlier, and that is, why are Chiesi's actions considered criminal?


Prosecutors allege that Chiesi gave the information she garnered from technology executives -- material, non-public information -- to other hedge fund managers, including Raj Rajaratnam, who in turn traded on and profited from that information. If this is true, then it is technically insider trading. 


But why is this wrong?


After the October arrests, Joseph Demarest Jr., head of the New York office of the FBI, said it was clear that "the $20 million in illicit profits come at the expense of the average public investor." But is this really true? Do insiders really profit at the expense of the individual investor? And just what is wrong with acting on so-called insider information?


The chief argument here is that insider trading is unfair because the information possessed by company executives and/or the hedge fund managers in question is not equally available to every investor on Main Street. But why does the average investor have an equal right to the knowledge possessed by individuals in the know? 


In most cases, insiders are those who have either worked hard to achieve a particular standing at that company (the technology executives who allegedly gave Chiesi information) or who have the capital resources to uncover specialized information about companies (the Galleon Group). 


In Chiesi's case, the information was supposed to have been obtained through the power of female persuasion. But despite any distaste you have for the method involved, why should we punish the people involved because they have knowledge that others don't? I think this question of knowledge egalitarianism must first be addressed before we throw the book at insiders.


I have yet to hear a strong case made for its prohibition that doesn't rely on some kind of zero-sum game analysis of the equity markets. Moreover, I have yet to hear any argument that would persuade me that an individual shouldn't be allowed to dispose of, and/or disseminate information, in his or her possession unless he or she has voluntarily agreed to do so via contractual consent (such as in the case of non-disclosure agreements).


The bottom line here is that laws against insider trading violate the rights of shareholders, i.e. company owners, to decide the manner in which they can dispose of their property and the information concerning that property. 


Regardless of how offended you may be about the methods Chiesi employed to get her information, the fact is that there were no victims here -- no matter how much money Galleon Group allegedly made trading on this information. The only real victim here is the sanctity of property rights.


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