Knight trading loss shows cracks in equity markets

NEW YORK,  Aug 3, 2012 – The software glitch that cost Knight Capital Group $440 million in just 45 minutes reveals the deep fault lines in stock markets that are increasingly dominated by sophisticated high-speed trading systems. But Wall Street firms and regulators have few easy solutions for such problems.

Automated trading can handle massive volumes of transactions in milliseconds, something human traders could never do. But the benefits come at a cost: stock markets have become a jumble of exchanges, market makers, high-frequency traders, and investors using different systems that can interact in unexpected ways.

The May 2010 ‘Flash Crash’, in which U.S. stocks inexplicably sank in a matter of minutes, illustrated how technological problems can cascade. These sorts of problems may be more likely given that many market participants are under pressure to cut costs – including technology spending – as trading margins narrow and regulation costs increase.

Since April, a series of embarrassing and costly technology issues have rocked markets and shaken the confidence of investors.

BATS Global Markets, an exchange, was unable to complete its own initial public offering because of a technical problem. Nasdaq botched the market debut of Facebook due to technical glitches, costing it tens of millions of dollars, while UBS AG lost more than $350 million in trading Facebook shares and is blaming Nasdaq.

“The structure just may be too complicated to work,” said Larry Tabb, founder of Tabb Group, a consulting firm that focuses on capital markets.

Former Goldman board member Rajat Gupta guilty of insider trading

NEW YORK, Fri Jun 15, 2012 – Former Goldman Sachs Group Inc. board member Rajat Gupta was convicted on Friday of illegally tipping his hedge-fund manager friend Raj Rajaratnam with secrets about the investment bank, a major victory for prosecutors seeking to root out insider trading on Wall Street.

A Manhattan federal court jury found Gupta guilty of three counts of securities fraud and one count of conspiracy, ending the four-week trial. He was found not guilty on two other securities fraud charges.

The jury delivered the verdict on the second day of its deliberations. U.S. District Judge Jed Rakoff has set sentencing for Oct. 18.

The verdict marks a stunning fall for Gupta, who is also a former top executive at business consulting firm McKinsey & Co and a former director of Procter & Gamble.

Gupta’s one-time associate Rajaratnam, who was convicted of 14 counts of insider trading at a trial last year, is now serving an 11-year prison term.

Goldman Sachs shareholder sues ex-director Gupta over trades

NEW YORK ― A Goldman Sachs Group Inc. shareholder sued Rajat Gupta, a former director of the investment bank, over trades revealed in civil and criminal insider trading cases against Gupta and convicted Galleon hedge fund founder Raj Rajaratnam.

The lawsuit, filed in Manhattan federal court Monday, said Goldman shareholder James Mercer of Kirkland, Washington, sought judgment for profits from millions of dollars in transactions. It said Mercer wrote to the Goldman board on March 11 explaining that Gupta failed to disclose the details of his conduct and relationship with Rajaratnam as required by statute.

Rajaratnam, 53, was convicted last month on charges of securities fraud and conspiracy for insider trading, including Goldman corporate secrets leaked to him by his friend Gupta.

The former director is an unindicted co-conspirator in the case and denies any wrongdoing. He faces civil charges in the Rajaratnam matter filed by the U.S. Securities and Exchange Commission and is fighting those allegations with his own lawsuit against the market regulator.

Gupta’s lawyer, Gary Naftalis, said the shareholder lawsuit “is without merit and we will vigorously defend it.”

A spokesman for Goldman Sachs declined to comment. The firm was identified as a nominal plaintiff by the shareholder.

During Rajaratnam’s two-month trial, U.S. prosecutors played secretly-recorded phone conversations in which Rajaratnam is heard discussing information he received from Gupta about Goldman Sachs. These and other conversations between the two men in 2008 are also cited in the SEC’s complaint against Gupta.

The shareholder lawsuit focused on short-swing trading ― trading within a period of less than six months. The SEC alleges that profits and loss avoidance amounted to $17 million from tips on Berkshire Hathaway’s $5 billion investment in Goldman at the height of the financial crisis and its second and fourth quarter financial results in 2008.

“Mr Rajaratnam/Galleon engaged in short-swing trading of Goldman Sachs securities, which generated substantial profits,” the lawsuit said. “Mr. Gupta was a beneficial owner of these securities because he had a pecuniary interest in the profits generated by this trading activity.”

It said Gupta “as a statutory insider and beneficial owner of securities traded profitably on the short swing, must therefore disgorge all profits from those trades to issuer Goldman Sachs.”