David Prosser: Lessons for Britain from the Galleon insider trading scandal

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The Independent Online

Outlook It took the jury three weeks, but in the end, the Feds got their man. And in securing a guilty verdict on each count levelled against the hedge fund boss Raj Rajaratnam, the US District Attorney Preet Bharara has sent a powerful message to Wall Street. Despite their protests that the line has become blurred, financiers should be perfectly capable of distinguishing between investment research (legal) and privileged information (illegal). Those who cross the line should expect to find investigators emboldened by this verdict.

The Rajaratnam case might also be the cue for some soul-searching in this country. The Financial Services Authority has invested much more time and energy in routing out insider dealing over the past three years. Quite right too. But though the chief City regulator has secured 11 convictions since rediscovering the crime, it has yet to prosecute a case on anything like the scale of Galleon.

To set the FSA's track record in context, in its biggest case so far, Christian Littlewood, the former fund manager who was convicted of insider dealing along with his wife earlier this year, made a profit of £500,000 from illicit trades. The charges against Rajaratnam related to investments that generated profits of more than £38m.

Is this because Britain does not have any big-time criminals making money in the City thanks to inside information? It would be nice to think so, but almost certainly naive. We just haven't caught them – indeed, the consistent characteristic of all those convicted so far in the FSA's crackdown has been small-time amateurism.

Given more time and greater resources, regulators stand a chance of netting some bigger fish. The worry is that neither may be forthcoming when the regulator is restructured and replaced with the Financial Conduct Authority at the end of next year.

Note that the top job at the new body has gone not to the stand-out candidate from the FSA – Margaret Cole, the enforcement director to whom the credit for better results on insider dealing belongs – but to Martin Wheatley, who has spent the last five years running Hong Kong's Securities and Futures Commission (though he too has a good record on cracking insider trading scandals).

In any case, even if the FCA is properly funded, it may not get the results now being seen in the US, where the use of plea-bargaining is routinely used to persuade the small fry to testify against the really big crooks. That would require a change of the law. So too would longer jail sentences – insider dealing in the UK carries a maximum jail term of only seven years.