New York: Hedge fund founder Raj Rajaratnam was found guilty on all 14 counts in a sweeping insider trading verdict on Wednesday that vindicated the government’s aggressive use of phone taps to prosecute Wall Street figures.
Rajaratnam, founder of the Galleon Group and the central figure in the broadest Wall Street insider trading probe in decades, will appeal the use of the secret recordings, tactics historically deployed in organized crime and drug trafficking cases, not white-collar probes.
One-time billionaire Rajaratnam, the richest Sri Lankan in the world, faces a potential minimum of 15-1/2 years in prison after the verdict in Manhattan federal court convicting him on all 14 counts of conspiracy and securities fraud.
The jury’s decision, which many legal experts had predicted given the phone tap evidence and trial testimony of three friends-turned-government witnesses, affirmed the prosecution case that Rajaratnam ran a web of highly-placed insiders between 2003 and March 2009 to leak valuable corporate secrets that earned him an illicit $63.8 million.
The tipsters included executives at McKinsey & Co consultancy and Intel Corp and Rajat Gupta, a former Goldman Sachs Group Inc board member. Gupta’s involvement as an unindicted co-conspirator prompted the government to make the unusual move of calling Lloyd Blankfein, the influential Wall Street bank’s chief executive, to testify at the trial.
Silence, little emotion
Rajaratnam, 53, showed little emotion during the two month-long trial and sat expressionless between his lawyers as the verdict was read in the tense courtroom. The court was silent apart from the sound of the judge’s deputy reading “guilty” 14 times.
“It’s an historic verdict. It’s a dramatic verdict,” said Bill Singer, securities lawyer with Gusrae, Kaplan, Bruno & Nusbaum.
“It will likely set the stage for a dramatic change not only in the way that the Wall Street insider-trader activities are investigated and prosecuted, but most likely this will have a chilling effect on individuals and companies that trade.”
The case was the first Wall Street insider trading trial to draw such wide public attention since the mid-1980s scandal involving speculator Ivan Boesky and junk bond financier Michael Milken.
Prosecutors said Rajaratnam traded illegally on at least 15 stocks, many of them technology companies such as chipmakers Advanced Micro Devices Inc, and ATI Technologies Inc and search engine Google Inc.
The jurors walked slowly into the courtroom in mid-morning for the verdict to be read. The official read from the jury’s completed verdict form, saying “guilty” in a loud voice for each of the five counts of conspiracy and nine counts of securities fraud. He then confirmed the verdict with each individual juror.
After the jury was dismissed, Rajaratnam was released until his 29 July sentencing by presiding US District Judge Richard Holwell. He is free under a $100 million bail package that will now include an electronic monitoring device and house arrest in his Manhattan apartment.
His main lawyer, John Dowd, told dozens of reporters outside the courthouse that his client would keep fighting.
“We’re gonna take an appeal for this conviction,” Dowd said. “We’ll see you in the 2nd circuit” a reference to the appeals court in New York.
Greed and corruption
Manhattan US Attorney Preet Bharara, New York’s top federal prosecutor, said in a statement after the verdict that Rajaratnam “let greed and corruption cause his undoing” - echoing a theme pressed by trial prosecutors in their statements to the jury.
“We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught,” Bharara said.
The trial lasted two months and the verdict was read on the 12th day of deliberations by jurors, whose occupations ranged from workers in New York’s education and transportation departments to computer graphics. The jurors declined to be interviewed on the trial or their deliberations, which lasted longer than many observers expected.
Meanwhile, across the country in Las Vegas where one of the hedge fund industry’s biggest conferences was getting under way, managers and investors buzzed with the news. “Did you hear? Guilty on all charges,” one attendee whispered.
Litigation experts said the phone taps strengthened insider trading charges, which historically have been difficult to prove because they rely on circumstantial evidence.
Rajaratnam’s lawyers had stuck consistently to their main theme that his trades were guided by a trove of research and public information.
Most litigation experts said the prosecution had a strong case using FBI phone taps and witness stand testimony of three former friends and associates of Rajaratnam - former McKinsey & Co partner Anil Kumar, former Intel treasury group executive Rajiv Goel and former Galleon employee, Adam Smith.
All three pleaded guilty to criminal charges and agreed to cooperate with the government in the hopes of lighter sentences.
Prosecutors played two recordings in which Rajaratnam is heard discussing information he received from Gupta about Goldman Sachs, including the first quarterly loss in its history in 2008.
“I just heard from somebody who’s on the board of Goldman Sachs, they are gonna lose 2 dollars per share,” Rajaratnam was heard telling a colleague on one call. “So what he (the board member) was telling me was that, uh, Goldman, the quarter’s pretty bad.”
Rajaratnam is the only one out of 26 people charged in the broad Galleon case to go on trial so far.
Twenty-one pleaded guilty and one defendant is at large.
A second trial of three former securities traders, one of them a former Galleon hedge fund employee, is scheduled to start on Monday with phone tap evidence also key to the prosecution evidence.
The case is USA v Raj Rajaratnam et al, US District Court for the Southern District of New York, No. 09-01184.