Fake email trails purporting to document legitimate reasons for insider trading? It turns out that such emails were just one of many tactics that traders at Galleon Group allegedly used to conceal the trading they were doing based on inside information.

Bloomberg reports that according to Adam Smith, a witness in the Raj Rajaratnam trial who testified yesterday, Galleon reportedly employed a number of other techniques to try to keep itself out of trouble down the road, including:

selling small quantities of stock that the firm owned and expected to rise in coming days. For example, Smith testified, Rajaratnam told him "how the trades worked. If Galleon owned 100,000 shares of a stock expected to rise in two days, traders would sell 25,000 shares that afternoon, buy 50,000 shares the next morning and sell 25,000 later the same day, he said;"

manufacturing unneeded research to "support" transactions;

avoiding unusual trading patterns in options and other securities; and

communicating with overseas analysts by fax instead of e-mail, because faxes were not typically stored on computers.

My experience has been that it is usually only after they are contacted by regulators that insider traders scramble to look for legitimate support for the trades that are at issue. It is interesting to see that this group of traders allegedly took the initiative to plant such "support" in their emails and research files along the way just in case the SEC came calling later.

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