Rajaratnam Exploited `Corrupt Network' for Trades, Prosecutor Tells Jurors

Raj Rajaratnam’s criminal trial for insider trading began with the prosecution saying the Galleon Group LLC founder used an illegal network of secret sources to earn millions of dollars in illicit profits, while his defense claimed he made decisions based only on public information.

Rajaratnam is the central figure in the largest investigation of hedge-fund insider trading in U.S. history. The Sri Lankan-born money manager is accused of making $45 million from confidential information leaked by corporate insiders and hedge-fund traders. Rajaratnam faces as long as 20 years in prison if convicted of fraud.

“He exploited a corrupt network of people,” Assistant U.S. Attorney Jonathan Streeter said yesterday of the 53-year- old Rajaratnam. “Using this network, he bought business information. Using this network, he had his employees go out and bring information to him. This was all information that ordinary people didn’t have.”

“Mr. Rajaratnam traded on such information again and again and again,” Streeter said “He knew what he was doing was illegal.”

Streeter told jurors that they’ll hear Rajaratnam committing crimes in “real time” as they listen to government wiretaps. Rajaratnam told his accomplices to “trade stocks in a way that would hide” their insider trading and to “create a paper trail” that would conceal the illegal tips, Streeter said.

Though Rajaratnam “knew tomorrow’s business news today” because he had inside information, Streeter said, he didn’t know that “the FBI was listening in.”

Suspicion

In the closing days of the scheme, when Rajaratnam began to suspect that he was under U.S. investigation, he told an associate to use a pre-paid cell-phone so they could hide the scheme, Streeter said.

“The sources of his secret information were as different as his investments,” Streeter said. He got information from his own employees, “a board member at a public company” and outside consultants including Anil Kumar, a longtime friend who had gone to work for McKinsey & Co., Streeter said.

“He had access at the highest levels of corporations,” Streeter said of Kumar, who has pleaded guilty and is testifying for prosecutors in exchange for leniency.

In return for tips, Rajaratnam made payoffs to a Swiss account that Kumar had set up, and the funds in the Swiss account were later sent back to Galleon and invested in an account in the name of Kumar’s housekeeper, Streeter said.

Goldman Board

Streeter named Rajat Gupta, a former managing partner at McKinsey and a Goldman Sachs Group Inc. (GS) board member, as one of the people who leaked inside information to Rajaratnam. The two men had “close” ties, Streeter said.

Gupta tipped Rajaratnam in 2008 about an investment in the bank by Warren Buffett’s Berkshire Hathaway Inc., Streeter said. Gupta hung up the phone after learning of the Berkshire investment at 3:53 p.m. and called Rajaratnam two minutes later, Streeter said.

Two minutes after that, Rajaratnam bought $43 million worth of Goldman Sachs stock.

“This order was so big, even the biggest brokerages house on Wall Street couldn’t fill it,” Streeter said.

The investment reaped a $1 million profit for Galleon, Streeter said. “$1 million, two minutes,” he said.

Streeter detailed another tip by Gupta about Goldman Sachs losses, which prompted Galleon to sell its shares and avoid millions of dollars of losses. Jurors will hear a tape of Rajaratnam telling a colleague, “I heard yesterday from somebody that was on the board of Goldman Sachs that they were going to lose $2 a share,” the prosecutor said.

Intel Tips

Streeter said that Rajiv Goel, a former managing director in Intel Corp. (INTC)’s treasury group, tipped Rajaratnam about his company’s earnings. Goel, who pleaded guilty on Feb. 8, 2010, to conspiracy and securities-fraud charges, will testify for the government at the trial.

“At Galleon, people did legitimate research, but they cheated too and that cheating is called insider trading,” Streeter said.

“The government has it wrong,” defense attorney John Dowd, of Akin Gump Strauss Hauer & Feld LLP, said in his opening statement. Prosecutors, who used wiretaps to build their case, focused on “snippets” of conversations and “didn’t do their homework,” he said.

Dowd told jurors that Rajaratnam’s firm “conducted the best research” in the business, had the benefit of expert analysis, and reached decisions “based only on public information.”

Mosaic of Information

“He assembled a mosaic of information and did his own calculations,” Dowd said after outlining for jurors how Rajaratnam -- or “Raj, to his friends” -- launched Galleon after emigrating to the U.S.

It’s “natural” for “people like Raj” to develop information, Dowd said. “Talking to corporate executives is what Raj did for a living,” Dowd said. “It’s what investors hired him to do.”

Dowd said the stock trades at issue in the case are just a “tiny percentage” of the billions of dollars of trades that Galleon did each year. “The information Raj gathered was available to anyone willing to work hard,” he said. Galleon “hired professional research consultants,” and its traders “questioned executives from companies themselves,” he said.

“They would analyze company’s published statements and regulatory filings,” as part of “exhaustive research,” Dowd said. “The evidence will show that Raj did not cheat.”

Listen for Context

A critical piece of the government’s evidence is secret government wiretaps of Rajaratnam’s phone calls. Those taps will show Rajaratnam talking about “his work, the buying and selling of stocks,” Dowd said. He said prosecutors will rely on “snippets” of these conversations to try to prove their case.

“Listen for the context of these conversations,” Dowd told jurors.

Dowd assailed the government’s witnesses, saying they’re lying to “save their own skins.”

Dowd used most of his opening to offer detailed explanations for Rajaratnam’s stock trades. He said, for instance, that Rajaratnam was “building a long position” in one stock long before he allegedly got the illegal tip. News of impending layoffs by eBay Inc. (EBAY), another stock in which Rajaratnam is alleged to have traded illegally, had been public before he received another alleged tip, Dowd said.

“The whole world knew Hilton” was for sale, Dowd said, referring to Hilton Hotels Corp., another stock at issue in the case.

Stocks at Issue

One by one, Dowd went through the many stocks at issue in the case, including Marvell Technology Group, Intel Corp., ATI Technologies Inc. and Polycom Inc. (PLCM) Reading from a script, he explained Rajaratnam’s reason for trading in many of the stocks in the case.

The lawyer assailed many of the prosecution’s witnesses. Kumar, the former McKinsey partner, was caught defrauding his partners and cheating on his taxes and is now testifying only to save himself from prison, Dowd said.

Payments that Rajaratnam made to Kumar were for Kumar’s legitimate research on the Indian and South Asian stock markets, Dowd said. Kumar didn’t share those payments with his McKinsey partners, Dowd said.

Hedge Fund Trader

Dowd took aim at hedge fund trader Danielle Chiesi, who was captured on wiretaps leaking what prosecutors said was inside information that she received from Hector Ruiz, then the chairman of Advanced Micro Devices Inc. (AMD)

Chiesi was all “talk, gossip and exaggeration,” which she used to “impress others and insinuate herself” into transactions, Dowd said. She didn’t understand what company executives were telling her and she never passed along inside information, he said.

Rajaratnam had legitimate reasons to trade in Goldman Sachs shares and wasn’t tipped by Gupta, Dowd said. On Sept. 23, a Washington consulting firm that Galleon had hired told Rajaratnam that the U.S. Troubled Assets Relief Program would be enacted into law and result in a $10 billion payment to Goldman Sachs, Dowd said.

That was the reason Rajaratnam bought shares, and not because Gupta told him that Berkshire Hathaway was buying into the firm, according to Dowd.

ICBC Investment

Weeks later, Rajaratnam decided to sell Galleon’s holdings in Goldman Sachs after a public announcement that the bank would have to lay off 4,000 employees and pay $800 million in severance. Dowd said Rajaratnam learned from public sources that Goldman Sachs was going to lose $1 billion from an investment in Industrial & Commercial Bank of China (601398) Ltd., known as ICBC, so he had Galleon sell its Goldman Sachs shares, Dowd said. He said Rajaratnam realized the loss might cost Goldman Sachs stockholders $2 a share.

“That’s why he sold,” and not because of a Gupta tip, he said.

Earlier, U.S. District Judge Richard Holwell completed the selection of a panel of jurors who will sit in judgment for the next two to three months. Rajaratnam faces five counts of conspiracy to commit insider trading and nine counts of securities fraud.

The 18 jurors chosen include teachers, retirees, municipal workers, a Federal Reserve employee and an unemployed 35-year- old whose band, he said, could really use a drummer.

Juror 1, 49, said he works as a station agent for the Metropolitan Transportation Authority and lives with his wife and daughters.

Juror 2, 70, a retired bookkeeper with past criminal jury experience, said she was briefly a volunteer with the Israeli Defense Forces. She watches “Two and a Half Men.”

‘True Blood’

Juror 3, a 27-year-old Bronx woman, told Holwell that she’s an activities therapist for a private nursing home. She said she enjoys family trips and watching the programs “True Blood” and “Grey’s Anatomy.”

Juror 4, 49, a woman who lives in East Harlem, has worked in food service for the city’s Board of Education for 31 years and likes watching television, particularly soap operas, she said. Her education is through the 11th grade, she said.

Juror 5, a 61-year-old nurse, lives in Westchester County and has a son in the Navy, she said. The juror has three years of college and doesn’t read newspapers. She said she babysits her grandchildren in her spare time.

Oprah, Letterman

Juror 6, 52, who is also from Westchester County and works for the New Jersey Board of Education, said she is a fan of Oprah Winfrey.

Juror 7, 68, lives alone in Manhattan, reads the New York Daily News and watches “The Late Show” with David Letterman on television, he told the judge. He said he works as a receiving clerk and attended school to the eighth grade.

Juror 8, a 46-year-old woman from the Bronx, teaches blind and visually impaired children, she said. She likes reality television shows and loves baseball, she said.

Juror 9 is a 56-year-old graphic artist working for Apple Inc. He moved to the Bronx after living about eight blocks from the downtown Manhattan courthouse. His favorite television shows include “Man v. Food” and sports programs on the ESPN network, what he called “the basic guy stuff.”

Juror 10, 48, a man from the Riverdale section of the Bronx, said he works for the New York City Administration for Children’s Services.

Juror 11, 53, a lifelong resident of Westchester County, said she has worked for Verizon Communications Inc. (VZ) for 31 years. She watches “Oprah,” “Dateline” and “America’s Most Wanted,” she told Holwell.

Five Newspapers

Juror 12, a 55-year-old Manhattan resident, works as a customer service representative for the Metropolitan Transportation Authority. He said he is active in his church and is a bird watcher. He reads five newspapers, and has a bachelor’s degree in business administration, he said.

The alternate jurors include a science teacher from the Bronx, a New York City teacher who lives in Westchester County and restores churches, a Parks Department foreman who lives in Mount Vernon, a school aide from the Bronx, and an information technology specialist for the Federal Reserve Bank of New York.

Alternate juror 6 told Holwell he is unemployed and lives in Harlem with his girlfriend and two roommates. He has a bachelor’s degree in English and has held temporary jobs at the American Stock Exchange and NASDAQ. He said he enjoys reading and video games and belongs to a band that’s looking for a drummer.

College Misdemeanor

In college in the early 1990s, he was charged with a misdemeanor for receiving stolen property and pleaded guilty, he said.

“It was a street sign that was in my room and they threw as much of the book as they could at me, but I got away from it,” he told Holwell.

Witness testimony is likely to begin today. The trial may last 2 1/2 months, Holwell said.

Federal prosecutors in Manhattan have announced charges against more than three dozen traders, corporate insiders, expert networking consultants and lawyers since Rajaratnam’s arrest in October 2009. The investigation may last another two years, prosecutors have said.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York at dglovin@bloomberg.net; Patricia Hurtado in New York at pathurtado@bloomberg.net; Bob Van Voris in New York at rvanvoris@bloomberg.net

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net

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