The recent news of Mr Rajaratnam, of Galleon, is sure to spark a debate on the Fund Managers and the definition of 'insider' trading.
In my experience of being on the sell side and interacting with the fund managers, I can say is that they are always looking for an 'extra' edge. They want information first. Typically, the business given to the broker is dependent on how much and how early is 'news' given to the fund manager by the broker. When the fund manager meets a company, I have rarely seen them asking for anything exclusively. If at all, they analyse as to how well the broker knows the company and uses the broker with the best contact, to get news about a company.
Yes, many things the fund managers do, will be borderline as regards absolute ethics are concerned. It is only when a fund manager uses his position to get some personal favour does it cross the boundary. For instance, we had a fund manager who used to pass advance information about his impending trades to a big time broker. The broker would use it to make money, given the poor liquidity of the local stock markets. Of course, he was sacked, but then promptly hired by another large fund house, whose sponsor was close to the broker. I have seen more cases of broker dishonesty or of fund managers passing more business to a particular broker (for obvious reasons) for reasons other than merit.
Yes, there are talks of some fund managers who have made fortunes by passing more business to a broker and by passing on inside info. Also, there have been cases, where a broker does trading based on advance information from a fund manager and then shares the spoils with the fund manager. There are fund managers who have done this and got away.
The competition amongst the brokers is so severe, that they look at every angle to snare a fund manager in to giving more business. Naturally this path becomes a trap for some fund managers, who cannot resist the lure of easy and quick bucks.
I have also met 'foreign' investors, who used to make a point that they want information ahead of others. For instance, I have received requests from fund managers to give them advance notice about any research report that contains any opinion change.
The investment industry structure is such that it encourages or fosters dishonesty. On the buy side, there is everyday pressure on the fund manager to deliver returns better than his peers. The pressure comes from his own sales team. On the sell side, the broker salesman is under pressure to get more business, which he can only do through making his client'churn' as much as possible. And, also to get more business from a fund manager than what is logically coming to him. To do this, he has to give and extra edge to teh fund manager. This can only be in the form of unpublished information or rumour or manufactured gossip.
Insider trading has always existed. After reading Mr. Warren Buffet's bio, you are not sure whether all the practices he did, would pass muster today.
So, I am sure that dishonesty in this industry is endemic and nothing will cure it