The arrest of Raj Rajaratnam--the alleged kingpin of a massive insider trading ring that swept up hedge fund managers, Fortune 500 executives at the likes of IBM and little IR shops--cannot be ignored. At hedge funds, the general partners would be remiss if they assumed their managers were not capable of this sort of activity. At public companies, big and small, you can't assume that all your top executives are completely clear on Reg FD and exactly what the law requires. 

Whether the timing of the arrests was politically motivated is not the main issue here. What's at stake is your liability. Companies need to review their controls and practices in this area. More than a few might find some deficiencies. 

At top hedge funds, compliance has been a front-burner issue, since the credit crunch got underway. The movement was given an additional bump from the Bernard Madoff scandal last year; much of this was driven by investors. These investors now demand more transparency and better internal controls. For example, many require third-party administrators that can better provide the sort of data and policies they need to feel comfortable.

When it comes to limited partners, it doesn't really matter if the charges are true or not. They don't want their money anywhere near the sort of controversy that ends up on front page of the Wall Street Journal. Investors are already punishing Galleon, which will inevitably close (it's only a matter of time). Still, a lot of hedge funds wonder if the Raj Rajaratnam scandal will open the door to more regulations. Obviously, the arrests came at a sensitive time.  

As for public companies, Reg FD can easily be forgotten by top executives. The SEC understands that and has shown a willingness to extend leniency to companies that have demonstrated sound policies. IR Magazine notes the case of the CFO of American Commercial Lines. After receiving update earnings information, he promptly emailed it to eight analysts. His rationale was that it provided more color that previous estimates. This of course was a gross violation, but the SEC fined the man $25,000 but let the company off the hook. 

Why? Because the SEC was impressed with the companies' policies and strong support of Reg FD. It found, among other things, that ACL "cultivated an environment of compliance by providing training regarding the requirements of Reg FD and by adopting policies that implemented controls to prevent violations." Also, it was satisfied that the CFO acted alone, out of ignorance, and the company took immediate corrective action, which included disclosure via an 8-K the same day.

Which brings us to tiny Market Street Partners, a small investor relations shop. A tipster apparently told Galleon traders that Google would announce below-expectation earnings; the tipster said the information came from someone at Market Street. Now this is a serious allegation. The firm's integrity is on the line. It may or may not have happened this way. But you can bet the firm will redouble its security and compliance measures. We can only hope this is a rumor only. - Jim