The Colour of Galleon’s Money

Here’s one of those strange stories that could be one that blows a story wide open or one that blows over quickly. Hard to tell.

The Financial Times’s Henny Sender writes that the Galleon hedge fund, which collapsed amidst recent insider-trading charges, “paid banks ‘millions’ for edge” as the headline has it. Here’s the lede:

The Galleon hedge fund at the centre of an insider trading scandal paid hundreds of millions of dollars a year to its Wall Street banks and in return regularly received market information that would not have been disclosed to most investors, executives familiar with the matter say.

This is phrased a bit unfortunately. On first read, it implies that the hedge fund specifically paid Wall Street for the information. But the FT is actually saying that Galleon was a huge trading customer and used that as leverage to juice its prime brokers—the FT fingers Morgan Stanley and Goldman Sachs—for info that may or may not be “inside,” at least as it’s considered by the law.

Still, it’s tantalizing and has the potential to be one of those gateway stories that turns a contained, company-specific scandal into a broader one that implicates an entire industry. After all, it’s long been known that Wall Street traffics in information the public doesn’t get—at least until it’s too late.

Although bank policies often prohibit employees from divulging specific information about orders, executives who dealt with Galleon said it regularly received “colour” on market developments, frequently delivered in Wall Street slang.

What was that “colour” Galleon got? You can bet a horde of business reporters are hitting the phones on this one right now. And ambitious prosecutors are going to want to know, as well.

A few days time ought to tell how big the FT’s scoop really is. That’s dependent on whether the Galleon insider-trading scandal turns into a Wall Street one.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.