5 Raj Rajaratnam
Hedge funds are supposed to hedge—that is, avoid risk. However, their stewards often put them in harm’s way. One of the most common pathways from Wall Street to Sing Sing involves insider trading. Raj Rajaratnam managed the Galleon Group, a $7 billion hedge fund on Wall Street. Using a mole at Goldman Sachs, he found out that Warren Buffet planned to infuse the investment bank with $5 billion in capital to keep it afloat during the 2008 financial crisis. Rajaratnam bought shares of Goldman. His profit? $900,000. His sentence? 11 years.
4 Ivan Boesky
During its heyday in the 1980s, Drexel Burnham Lambert was the most feared investment banking firm on Wall Street. They specialized in hostile takeovers of companies. Investor-genius Ivan Boesky was even greedier. He constantly received inside information from Drexel on their future takeover targets. The investor then bought and sold massive amounts of stocks to benefit from the predictable outcomes. How did he go wrong? He was always right. His amazing “luck” attracted the scrutiny of the SEC, who eventually busted him for insider trading.
3 Albert Wiggin and Chase Bank
Betting against your own company to make a profit would make even the coldest investor shudder with disgust. During the stock market crash of 1929, Albert Wiggin, the chairman of Chase National Bank, did just that. Shorting is a practice in which you bet a company will fail. By hiding behind family corporations, Wiggin made secret short trades that earned him $4 milllion—about $50 million in 2013 dollars—after his bank collapsed. Even worse, in 1929 there was no law against what Wiggin did. In fact, he even got a pension for his service as chairman until public outrage led to him giving it up.
LIBOR stands for “London interbank offered rate.” Banks use this interest rate as a standard for loaning trillions of dollars to each other. Investors often employ a financial instrument known as a “derivative,” whose value depends on market variables such as interest rates. If an investor knows the value of LIBOR next week, he can make a bundle through derivatives. Since the Glass-Steagall act was abolished, banks are no longer prevented from investing in derivatives. Therefore, if banks have insider knowledge of LIBOR (which they determine), they can make a profit on derivatives based on the behavior of the rate. Though only Barclay’s has been caught so far, numerous banks are suspected of working together on some level to profit from LIBOR.
1 Bernard Madoff's Fund
Many disreputable Wall Street investors employ complex schemes that only an economics PhD would understand. Bernie stole money in an old-fashioned Ponzi scheme. He founded a company that provided incredible returns to investors. Those investors then recruited their friends to become part of his fund. Those friends recruited more friends and so on…Madoff's fund was actually a big flop that lost $50 billion before his employees got wise and turned him in to federal authorities.