Hedge fund founder Raj Rajaratnam was found guilty on all 14 counts of insider trading in a sweeping victory for the government and a vindication of its aggressive use of phone taps to pursue Wall Street crimes.
Rajaratnam, at the center of the biggest insider trading investigation in decades, sat expressionless as the judge’s deputy read the jury’s verdict in a hushed New York courtroom. The Galleon Group founder could face at least 15 years in prison when he is sentenced on July 29.
The prosecution based its case on evidence that Rajaratnam ran a web of highly-placed insiders to leak valuable corporate secrets between 2003 and March 2009, earning an illicit US$63.8 million from trading on the information.
Photo: Reuters
The government’s unprecedented use of extensive phone tapping in an insider trading case, which is more often deployed in organized crime and drug trafficking probes, may have marked a turning point in the prosecution of white collar crimes.
“It’s an historic 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.”
Over the course of the two-month trial, the voices of Rajaratnam and his friends and business associates rumbled over courtroom loudspeakers in 46 digital audio recordings at the heart of the government’s case. The conversations were occasionally laced with profanity.
In these calls and from trial testimony, the jury learned how Rajaratnam worked his mobile phone even when he was on holiday on a beach in Miami or in Europe, making arrangements to deposit money into accounts for friends who had provided him tips.
The tipsters included executives at major blue chip companies such as Intel Corp, and Rajat Gupta, who was once head of elite management consultancy McKinsey & Co and 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 investment bank’s chief executive, to testify at the trial. In a fleeting moment during a break in his testimony, Blankfein shook Rajaratnam’s hand.
On Wednesday, jurors reached their unanimous decision on the 12th day of deliberations — convicting Rajaratnam of five counts of conspiracy and nine counts of securities fraud.
Under federal sentencing rules that are not binding on the judge, Rajaratnam faces between 15-and-a-half years and 19-and-a-half years in prison, prosecutors said. Securities fraud and conspiracy carry a combined maximum penalty of 25 years imprisonment.
Chief defense lawyer John Dowd said Rajaratnam, 53, would appeal the case. In particular, he is expected to challenge the use of secret recordings.
“This is only round one ... We’ll see you in the 2nd circuit,” Dowd said, referring to the appeals court in New York.
After the jury was dismissed, Rajaratnam was released until his sentencing by presiding US District Judge Richard Holwell. He is free under a US$100 million bail package that will now include an electronic monitoring device and house arrest in his Manhattan apartment.
Rajaratnam’s lawyers had stuck consistently to their main theme that his trades were guided by a trove of research and public information. Last November, they lost a bid to suppress the wiretaps after arguing that investigators misled the judges who approved the surveillance.
Galleon had US$7 billion under management at its peak in early 2008. It was wound down without losses to investors after the Oct. 16, 2009 arrest of Rajaratnam, a longtime US citizen and the richest Sri Lankan-born person.
The case was the first Wall Street insider trading trial to draw such wide 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.
New York’s top federal prosecutor Preet Bharara, who has made insider trading cases a priority, said in a statement 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.
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 in New York with phone tap evidence also key to the prosecution evidence.
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