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Galleon Insider Trading - A Case of Misplaced Loyalty?

Kristi Hedges

It’s been nearly six months since the first six defendants were charged in the Galleon insider trading scandal and six months before the last of those six defendants, Bob Moffat (formerly of IBM), entered a plea.

When I first wrote about this topic with an article titled When a Senior Leader is Charged With a Crime, I was both dismayed and outraged that something like this could happen in the IBM family. When I posted the news that Moffat had entered a guilty plea, I received a record number of comments. Most readers feel that justice is being served, but also that this is a sad situation for IBM and the IBM family.

Moffat has admitted he was wrong, and according to statements by his lawyer Kerry Lawrence, Moffat is “deeply sorry for the embarrassment his conduct has caused to his family and to his former employer, IBM”.

So now what happens?

Of the original six defendants, only Raj Rajaratnam (the alleged ringleader and Galleon founder) and Danielle Chiesi (New Castle consultant who allegedly passed on tips from other defendants) are pleading “not guilty”. Their criminal trial will begin in October.

Four defendants are cooperating with the prosecution, including Rajiv Goel and Anil Kumar (two of the original six arrested). Mark Kurland and Bob Moffat have entered guilty pleas but are not cooperating with the prosecution.

Sentencing for Moffat is scheduled for July 26th. According to his plea agreement, he will face up to six months in prison. Other defendants will be sentenced between April and July. All of the defendants are currently released on bail.

There are some key issues to be resolved before the criminal trial begins. Wiretaps were used to obtain key evidence – the defense is arguing this evidence should be thrown out because the government did not follow the requirements of the Wiretap Act in obtaining authorization to record the telephone conversations. A hearing on that issue is scheduled for mid-June. Also, Rajaratnam and Chiesi have asked that their cases be heard separately.

There is a related civil case, which has been delayed until February 2011, to give the lawyers enough time to prepare following an anticipated decision in July on whether the wiretap evidence will be allowed in the civil trial. While the criminal trial may result in some defendants going to jail, the civil trial is where the court will rule on returning monies that were obtained illegally.

More details can be found in this summary from NY Times Dealbook.

The big remaining question is “why?”

It doesn’t appear that greed was the motive in Moffat’s case. From what we know of the charges, he did not profit financially from any of the trading based on the information he provided. It has also been suggested that perhaps Moffat had a more-than-professional relationship with Danielle Chiesi. Indeed, she was the link between him and Rajaratnam.

We may never know the details, but I think it’s possible that the motivation behind this was neither money nor sex. I think it’s very possible that Moffat may have simply gotten carried away with the need for power and prestige – that being a Senior VP at IBM and a contender for the CEO job was simply not enough for him.

What do you think?

