Devastating wiretap evidence and the testimony of cooperating witnesses led a Southern District jury yesterday to convict Raj Rajaratnam on all counts in the Galleon Group hedge fund insider trading scandal.
A two-month trial and marathon deliberations climaxed with Mr. Rajaratnam being found guilty of five conspiracies and nine substantive counts of securities fraud for trading on, and passing along, material non-public information about more than a dozen companies.
Mr. Rajaratnam faces a prison term under the advisory U.S. Sentencing Guidelines of 15 1/2 to 19 1/2 years when he is sentenced by Judge Richard Holwell on July 29, but the judge has the discretion to go above that range based on a number of factors, including the amount of money involved.
Mr. Rajaratnam, 53, sat motionless as the verdict was read and was somber as court was adjourned.
The verdict was a huge win for the prosecution team of Assistant U.S. Attorneys Reed Brodsky, Jonathan Streeter and Andrew Michaelson and represents the culmination of a wide-ranging insider trading sweep that has netted 21 guilty pleas to date from persons in some way connected to the Galleon case.
The convictions yesterday were secured with the testimony of cooperating witnesses who pleaded guilty to their roles in the scandal bolstered by the first large-scale use of wiretaps in an insider trading case. Prosecutors relied on both to prove the one-time billionaire made more than $63 million in illegal trades based on material non-public information on Goldman Sachs, Intel, Akamai and other companies through tips from consultants, company board members and other insiders.
The voice of Mr. Rajaratnam was heard on a series of tapes played for the jury during trial and replayed several times during deliberations that began on April 25. The jurors heard still more tapes after they were forced to begin deliberations anew on May 4 when Judge Holwell dismissed a juror for medical reasons and replaced her with an alternate.
Mr. Rajaratnam was defended by John Dowd, a partner with Akin Gump Strauss Hauer & Feld. Mr. Dowd argued without success that his client was either trading on information that was already in public circulation or was not material. His attempt to attack the cooperating witnesses as self-dealing liars apparently fell on deaf ears.
One of the biggest fights came pretrial, as Mr. Dowd fought in vain to persuade Judge Holwell to bar the wiretaps in evidence because insider trading is not explicitly listed as one of the predicate crimes in the federal wiretap law (NYLJ, Nov. 26, 2010). Yesterday, Mr. Dowd made clear that the use of the wiretaps in evidence will be a major issue when the case moves to the U.S. Court of Appeals for the Second Circuit.
After the verdict, as Mr. Streeter was arguing for Mr. Rajaratnam to be jailed immediately, he spoke of the difficulty of prosecuting a hedge fund insider trading case and said the “necessity of the wiretaps” was proved out at trial.
“I don’t think it’s a close question whether the wiretaps were appropriately” deployed in this case, Mr. Streeter said.
Judge Holwell denied the prosecution’s request and said Mr. Rajaratnam would not be remanded pending sentencing but instead will remain under home detention.
Mr. Rajaratnam, who was also represented by Terence J. Lynam, William E. White, James E. Sherry and Michael Starr of Akin Gump, will be wearing an electronic monitoring bracelet as he awaits sentencing.
Southern District U.S. Attorney Preet Bharara issued a statement, saying that his office has charged 47 people with insider trading crimes and that Mr. Rajaratnam is the 35th conviction.
“Unlawful insider trading should be offensive to everyone who believes in, and relies on, the market,” he said.
“We will continue to pursue and prosecute those who believe they are above the law and too smart to get caught.”
Power of Wiretaps
Trial observers and legal experts say it is not easy to obtain convictions on insider trading cases.
“It was an impressive performance by the U.S. Attorney’s office in terms of taking a very complicated set of facts and breaking it down and making it understandable for the jury,” said Gregory Little, a partner at White & Case and a former trial attorney with the Securities and Exchange Commission. “It’s also a credit to the jury that they seemed to work very hard to understand all that evidence.”
Assistant U.S. Attorney Reed Brodsky smiles while talking to the media outside federal court following the verdict.
Photo: Rick Maiman/Bloomberg via Getty Images
Mr. Little and other experts said that, aside from the defendant’s notoriety and the use of wiretaps, this was, in essence, a garden-variety insider trading case.
But the successful use of wiretaps, they said, should pave the way for stepped up enforcement efforts against a crime that is difficult to prove.
“This was not a novel legal theory but it certainly was a novel case,” said Artur Davis, a partner at SNR Denton in Washington, D.C., who is a former federal prosecutor and former congressman from Alabama and member of the House Judiciary Committee. “The use of electronic surveillance was imported from mob world, narcotics world and political corruption world.”
“Insider trading cases have historically been built on trading patterns and statements of defendant co-conspirators, so they were more or less circumstantial cases or swearing contests,” he said in an interview. “It’s not just the power of the tapes in this case. The use of tapes here is going to inform government investigations in the future. Prosecutors will probably be prodded to use electronic surveillance and informants even more aggressively.”
Mr. Little agreed, saying the conviction “sends a potent reminder to Wall Street, hedge fund traders and executives involved in U.S. capital markets that there are many ways for authorities to uncover illegal activity, including telephone conversations.”
“Careless communications about confidential information could alter careers and ruin reputations,” Mr. Little said.
Judge Holwell told the jury of eight women and four men after the verdict that their deliberations “should remain secret.” Some judges, but by no means all, commonly caution juries that they do not have to speak to the press, saying they are free to do so but that it might not be wise.
In any event, the jury indicated in a note that it did not wish to discuss its deliberations or what led to the complete sweep on all counts.
But there was little doubt that the tapes of phone conversations were critical as the jury heard some of the tapes three or four times between trial, Mr. Brodsky’s closing argument, and during deliberations.
They heard McKinsey & Co. director Anil Kumar, who pleaded guilty and testified for the government, tell Mr. Rajaratnam in 2008 that McKinsey client Advanced Micro Devices Inc. and ATI Technologies Inc. had “shaken hands” on a deal. Mr. Rajaratnam responded, “I’m buying,” and he moved from 1 million shares on Aug. 14 to 11 million shares days later.
The jurors heard the voices of Rajiv Goel, a former executive at Intel, and Galleon portfolio manager Adam Smith, both of whom pleaded guilty and testified for the government; and they heard the voice of former Galleon employee and stock trader Roomy Khan, who pleaded guilty but was kept on the sidelines at trial as the government elected not to call her as a witness.
And several times the jury heard the raspy voice of hedge fund trader Danielle Chiesi of New Castle Funds, who called Mr. Rajaratnam “baby” as she phoned for advice and swapped information with the Galleon Group founder in advance of an AMD deal.
“Do you think in this environment, I know everyone is being investigated, do you think I could buy it here, honestly?” Ms. Chiesi asks amid the financial meltdown of 2008.
The jury heard her say she is “a little nervous” about being investigated “because there are assholes in this world. Because every hedge fund is going to go out of business…and they’re jealous.”
Mr. Rajaratnam is heard on the tape advising Ms. Chiesi, who pleaded guilty but did not cooperate with prosecutors, on how to mask trades based on inside information on AMD by using a buy-sell pattern, telling her “What I would do is buy a million shares and sell 500,000 shares.”
The prosecution effectively presented evidence concerning Rajat Gupta, a Goldman Sachs board member who allegedly fed Mr. Rajaratnam tips in 2008 on information he received the second he emerged from two board meetings. First, Mr. Gupta reported that Warren Buffett and Berkshire Hathaway were throwing Goldman a $5 billion lifeline and, later, that the company was about to announce it had lost $2 a share.
Prosecutors matched phone records, taped conversations between Mr. Rajaratnam and employees and records of stock trades to show that Mr. Rajaratnam accumulated shares immediately after the Buffett meeting and shorted the stock immediately after the meeting on negative earnings news.
Goldman chief executive Lloyd Blankfein testified at trial as to the material non-public nature of the board information and said that, if Mr. Gupta had indeed tipped off Mr. Rajaratnam, it would be a violation of Goldman policy.
After the verdict, Mr. Rajaratnam and his lawyers took the elevators down from Judge Holwell’s 17th floor courtroom at 500 Pearl St. and emerged on the Worth Street side of the building to fight their way though a large scrum of television, radio and print reporters and cameras and climb into a waiting car.
Before leaving, Mr. Dowd told the media, “We started out with 37 stocks and we’re down to 14 so the score is 23-14 in favor of the defense. We’ll see you at the Second Circuit”
As the defendant and his lawyers moved toward the car, Messrs. Brodsky, Streeter and Mr. Michaelson emerged from the courthouse. Mr. Brodsky was grinning broadly as Mr. Streeter said the prosecutors had no comment and would instead speak though a press release from Mr. Bharara.
He then nodded toward Mr. Brodsky and said, “That smile says it all.”
@|Mark Hamblett can be reached at email@example.com.