Raj Rajaratnam, billionaire Sri Lankan, arrested for hedge fund insider trading

Today I saw a rather interesting sight that shows how diverse our World has become: an rather large man, Indian, named Raj Rajaratnam, was perp-walked by law enforcement officials.
Mr. Rajaratnam, billionaire founder of hedge fund firm Galleon Group, who's the richest Sri Lankan in the World, is charged with hedge fund insider trading. But before I get into that, the scene today reminded me of the insider trading arrests of the 1980s which formed the basis for the movie "Wall Street" by Oliver Stone.
Back in the 80s, the people in handcuffs were white and male; now it doesn't matter what color or sex a person is in the financial world as five men (including Raj Rajaratnam) and one woman: there are people who work within the law and those who operate outside of it. Apparently, Raj Rajaratnam worked outside of it.

What's a hedge fund?

The stories on this start without explaining what a hedge fund is. A hedge fund is an agressively managed set of investments that are designed for high-net-worth people of generally over $1 million in annual income.
The idea of a hedge fund is to have an at times constantly moving set of investments designed to essentially take advantage of Worldwide price movements. The idea is to have a constantly moving "Net Asset Value" and fees are paid to managers like Raj Rajaratnam from that increasing Net Asset Value.
There are a large number of ways to achieve that objective, from long equity / short selling (where stocks may be sold one hour after, say a company goes public, thus taking advantage of what's called a "pop", where other stocks with more robust prices are held for longer terms, like oil and utility stocks) to investments in undervalued companies who's bonds may be at "junk" levels (the bet here is that the company will take off and provide a higher return on investment).
The hedge fund industry has been for all practical purposes the "wild-west" of the financial world, with more liberal regulations and little scrutiny - or so it seemed until today's developments.

Fees of over $20 million

Raj Rajaratnam generated fees of over $20 million, making this the richest case of its kind in history.
What Rajaratnam is accused of doing is insider trading in several tech funds he started which included the stocks of Google, Polycom, Hilton Hotels, Sun Microsystems, Advanced Microsystems and International Business Machines. Insider trading is buying and selling stocks based on information not available to the public.
Basically, Rajaratnam, Rajiv Goel, the managing director of strategic investments at Intel, Anil Kumar, a director at management consulting firm McKinsey & Co., and Danielle Chiesi of New Castle, which is the equity group of Bear Stearns Asset Management with Mark Kurland, the senior managing director of Bear Stearns Asset Management and IBM’s Robert Moffat are accused of sharing information on companies and that led to the complaint filed by Preet Bharara, US Attorney for the Southern District of New York.

Insider trading and record profits

Is there any connection between this kind of alleged activity of insider trading and the record Wall Street profits by banks that received bailout funds?
That's not clear, but one obvious advantage of the bailout, according to the NY Times and Talking Points Memo, is the new ability of traders to take bigger investment risks, which is a common practice in the hedge fund industry, because their money is leveraged.
But this insider trading case had nothing to do with the bailout system. The wiretaps used to collect the evidence go back to 2006. That written, this is only the tip of what seems to be a large iceberg of possible future complaints. The AIG bailout helped a number of hedge funds. Business Insider reports:

Documents reviewed by the WSJ reveal that some of the banks listed as the beneficiaries of the AIG bailout were themselves middlemen for hedge funds. So AIG is a conduit to conduits to hedge funds. It seems that the investment banks sold credit default swaps on mortgage backed securities, and then hedge their risks by buying CDS from AIG. The swaps payoff if mortgage defaults rise above a certain level.

Did anyone of the hedge funds know the bailout was coming and profited from it? The US Attorney General, the FBI, and the SEC sent a powerful message to the hedge fund community that they are watching its moves.

Source: sfgate.com