Galleon Warnings May Have Come A Decade Ago

The SEC missed a number of signals in the Bernie Madoff case. Some concerns were raised by his clients and Barron’s years before he was caught. It seems that a similar pattern holds true with Raj Rajaratnam and his firm Galleon. Several press reports say that information was being passed between Intel (NASDAQ:INTC) and Galleon as early as 1998. An FT story claims that a JP Morgan (NYSE:JPM) employee raised a red flag about Galleon in 2001.

The SEC has said a number of times that the reason that large incidents of fraud are missed by its investigators is that the agency is understaffed and incapable of covering all the ground which is part of its mandate, and that is almost certainly true.

What also appears to be true is that Intel had a person associated with it for many years who was passing sensitive information to a Wall St. firm and that the concerns of a JPMorgan employee were apparently ignored. The companies have at least some measure of responsibility to make certain that illegal actions, some of which go on for long periods, do not continue right under their noses.

The recriminations about who could have known about Galleon and who could have helped ferret out its alleged illegal activity years ago are about to begin. The SEC will likely be the target of most of the complaints. The Madoff matter has made it an easy choice as a whipping boy. To some extent, flogging the SEC will miss the point.

JPMorgan should have done something to press internal concerns about Galleon and Intel should have known that valuable trade secrets do not always stay secret.

Douglas A. McIntyre