Between warnings on what to say in e-mails, sweeps for listening devices and lessons on securing laptops, life has become more constrained at hedge funds since Raj Rajaratnam was arrested for illegal insider trading.
In the 17 months between the arrest of the Galleon Group co-founder and the start of his Manhattan trial this week, the $1.9-trillion (U.S.) hedge fund industry has scrambled to change its image from a band of freewheeling traders to compliance-conscious businesses by putting new rules and practices into place.
Fund firms such as Paulson & Co. and Millennium Management have spent millions to hire former regulators as advisers. Others have restricted employees' personal trading and warned about the use of personal cellphones on the job. Still others have brought in lawyers and consultants to host seminars on how to keep data safe - that includes always keeping a hand on company laptops loaded with client information and trading strategies while in airports.
Some are even shunning so-called expert networks as the government's probe intensifies into whether these middlemen might be passing along non-public information, said hedge fund managers, investors, industry lawyers and consultants.
"For some time, hedge funds have clamped down, tightening compliance procedures, and making sure that they've got their staff trained on them," said Peter Turecek, senior managing director at risk consulting group Kroll Inc. in New York.
While compliance lacks the sexy ring long associated with millionaire hedge fund managers making big and noisy bets, it is now the key to survival in an age where the tiniest whiff of scandal sends investors running for the exits.
For example, three of the four hedge funds raided late last year as part of the ongoing insider trading probe that began with Mr. Rajaratnam have shut down. They were levelled, in part, by heavy investor redemptions even though no one at any of the firms was accused of wrongdoing.
The fourth raided firm, Diamondback Capital Management, is still in business after taking investor-friendly steps including frequent e-mail updates and phone calls to - for now, at least - keep on board big-name clients such as New Mexico's and New York's pension funds.
While the bulk of hedge fund managers are probably not relying on insider information to make trades, industry experts are busy warning people to beware of what they write and say.
"Employers have the right to look at e-mails," said Kroll's Mr. Turecek, whose company has been hired to help many hedge funds with assessing risks. "Even after you hit the delete button, the e-mail can still be found. People write the most inappropriate things, whether it is about interoffice love affairs or ethical issues," he said.
But the government's revelation that it intercepted more than 2,400 of Mr. Rajaratnam's and at least 130 other individuals' private telephone conversations might have had the biggest effect on the industry, said hedge fund managers and lawyers. Mr. Rajaratnam lost his bid to suppress the evidence from trial.
"For those in the hedge fund world who are used to speaking without concern that anyone is overhearing them, there has been a bit of chill that's run through that community," said Richard Strassberg, a partner at law firm Goodwin Procter.
The Galleon wiretaps
Jurors on Thursday for the first time heard the voices of accused hedge fund manager Raj Rajaratnam and some of his high-placed friends as they discussed stocks in wiretapped conversations that authorities argue show he traded illegally on company secrets.
"They've shaken hands. You can go ahead and buy."
Anil Kumar, a former McKinsey & Co. consultant and a co-operating witness, on an Aug. 15, 2008, call to Raj Rajaratnam, discussing allegedly confidential details of a deal involving Advanced Micro Devices Inc.
"And I know the deal's gonna get done at $12.25 which is three bucks above, right?" Mr. Rajaratnam.
"Right." Former Intel executive Rajiv Goel.
"We know because one of our guys is on the board. We know they are gonna put $41-million in escrow. It's a $250-million deal." Mr. Rajaratnam.
Prosecutors allege Mr. Rajaratnam placed trades on behalf of Mr. Goel in a brokerage account, based on information Mr. Rajaratnam obtained from a board member of the company whose shares were being traded.