Galleon Relied On ‘Market Color’ From Banks, Brokers

Oct 29 2009 | 2:57am ET

Much ink has been spilled in recent weeks identifying the tipsters who greased the alleged Galleon Group insider-trading ring. But the hedge fund’s best sources of information may not have been rogue individuals, but its banks and brokers.

Galleon, whose founder, Raj Rajaratnam, has been charged with participating in the insider-trading circle, relied heavily on so-called “market color” from the banks it dealt with, the Financial Times reports.

“They were tough and aggressive,” a former Goldman Sachs executive told the FT. “They cared about short-term returns and cared a lot about the impact of their trading and the costs. They expected a lot of market information.”

Goldman is one of Galleon’s top prime brokers.

Insider-trading cases rarely—if ever—deal in the shadowy world of market color, which deal more with market developments rather than specific information about trades. That’s certainly true of the case against Rajaratnam and his alleged co-conspirators, which has relied heavily on taped phone calls between the alleged circle participants and their sources of information, as well as each other.

But Galleon, which manages more than $3 billion in assets before it liquidated most of its holdings after Rajaratnam’s arrest, paid handsomely for its access to color. The hedge fund paid its banks and brokers about $250 million last year, according to the FT. In previous years, when the markets were booming and Galleon managed closer to $7 billion, the firm paid even more.

“They wanted anything the public did not have,” an executive who dealt with Galleon told the FT. “They got various pieces and put them together, and that was their edge.”

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