Wall Street Panics In Wake Of Galleon Insider Trading Case

flee Courtesy of John Carney at Clusterstock

Traders at hedge funds and Wall Street trading desks are quaking over the news that the FBI tapped the phone lines of Galleon founder Raj Rajaratnam.

The news that the government is (finally) employing techniques typically used against organized crime or international drug cartels is raising fears about who might be next.

We spoke to traders at two prominent hedge funds who both described the feeling at their firms as “panicked.”

“Suddenly you are wondering about every conversation you’ve had about a public company, wondering if the Feds were listening in,” one trader said.

Traders spend a lot of time exchanging information with colleagues and reaching out to people in the industries they cover in hopes of gaining an edge. Rumors, gossip and loose talk are their bread and butter.

Most of this is fair game. But if the ultimate source is an insider or the news is about a major deal that has yet to be announced, the trader can step into dangerous legal territory.

Even when traders learn inside information, there is usually little chance of getting caught. The SEC watches unusual trading activity but an active trader will usually get a pass if he’s buying or selling stocks that he usually trades in anyway.

Even those cases that do come up are hard to prosecute, especially if no one confesses. So occasional civil cases are brought but almost no criminal cases emerge involving traders.

This case shattered that pattern because the government used the tools it uses against hardcore drug criminals and terrorists to uncover the alleged insider trading.

Traders are now living in a very different world. Legally speaking, trading is far more dangerous than anyone knew.

Now see the scandal in photos >

Raj Rajaratnam, Founder of $3 Billion Galleon Group Hedge Fund, Arrested (GOOG, AMD, AKAM, CLWR)

Prosecutors and the FBI have announced that they have filed charges against several people involved with the Galleon Group hedge fund, including founder Raj Rajaratnam. Galleon is a major hedge hund player known for its investment in technology stocks…

Most notably, the government is filing criminal charges related to insider trading in a number of securities going back to 2006. So this is much more than a standard SEC civil charge.

Rajaratnam was charged with four counts of conspiracy and eight counts of securities fraud. He was arrested in his apartment last night.

The Galleon Group has something like $3 billion under management.

The charges stem from trades on stocks including Hilton Hotels, AMD (AMD), Clearwire (CLWR) and Google (GOOG), Akamai (AKAM).

A number of other individuals were named in the complaint, including an executive from Intel Capital, the venture capital arm of Intel, and one from McKinsey & Company.

The news was broken by David Faber at CNBC.

Here’s the indictment (via DealBook)