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Ex-Hedge Fund Analyst Gives Perspective on Insider Trading After Serving Time in Prison

November 04, 2015
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Chhaochharia khan cava

From left to right: Vidhi Chhaochharia, associate professor of
finance, Roomy Khan and Anita Cava, professor of business law

In the past 20 years, Roomy Khan has seen the highs and lows of the hedge fund industry. As a stock trader who focused on semiconductor industry, she earned more than $50 million a year in the technology boom of the late 1990s. But a decade later, she became involved in an FBI investigation of illegal insider trading practices, and spent a year in prison.

"I was blinded by my own success, and my bosses and colleagues rewarded me well for inside information," Khan told more than 100 School of Business students at presentation, "Getting it Right” in November. "But nothing is worth breaking the law. I’ve been lamenting my activities for seven years and am still searching for absolution."

Anita Cava, professor of business law and director of the School's Business Ethics Program, led a question-and-answer session with Khan on her personal experiences and reflections on the $3.2 trillion hedge fund industry.

A native of India who came to the U.S. in 1982 planning a career in physics, Khan became fascinated by the technology activity in Silicon Valley, particularly the financial aspects. “Making a decision to buy or sell a stock is like solving a puzzle every day,” she said. “If you make good choices and can stand the constant pressure, you can make a lot of money.”

Because hedge fund managers are active traders who can make money for clients in both up and down markets, researchers and analysts are encouraged to get timely information on public companies, such as pending mergers and acquisitions, the launch of a new product or the firing of a CEO, Khan said. “You can be well-compensated for getting information ahead of everyone else,” she added. “So, even though the laws forbidding insider trading are very clear, it’s easy to cross the line. Unlike embezzling or ‘cooking the books,’ insider trading seems like a victimless crime.”

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Roomy Khan and Ana Cava, professor of business law, in
discussion with audience members

Later in the session, Stephen Halpert, professor of law, noted that some of the most devastating financial activities are “victimless crimes” committed by corrupt leaders in emerging markets, who divert revenue into their own pockets. “Given Wall Street’s psychology, no amount of policing can defeat insider trading,” he said.

Khan agreed, but suggested that requiring regular reminders about illegal insider trading practices could be helpful, particularly for younger professionals just getting into the financial industry. “Repeated warnings could be a deterrent that might cause people to think twice before making a decision to break the law,” she said.

Khan herself stepped over the line in the late 1990s, and became involved in an insider trading investigation of billionaire Raj Rajaratnam, co-founder of Galleon Group, one of the nation’s largest hedge funds. In 2007, the FBI asked Khan to record her phone calls with Rajaratnam and other active traders and analysts. Her role as a cooperating witness led to Rajaratnam’s arrest in  2009. He later paid a $250 million fine and received an 11-year prison sentence.

Khan said her secret role in the case placed a severe strain on her marriage and her role as a mother. After Rajaratnam’s arrest, she says she was attacked in the media by many of her former associates. Although she has been out of prison for more than a year, Khan can no longer work in the financial services industry and hopes to rebuild her career as a teacher.

“If you’re thinking about working for a hedge fund, you should know that the government is aggressively enforcing the insider trading law,” she told the business students. “If you engage in this behavior, it’s only a matter of time before you get caught.”

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