The Wall Street trader had engaged in the most widespread instance of “systemic corruption” the government had investigated.
The comment, made by the office of U.S. Attorney Rudolph Giuliani in 1987, came in the sentencing of Ivan Boesky, at the time the highest-profile defendant in what was the biggest insider-trading case the Justice Department had pursued. Prosecutors echoed those words in describing hedge-fund billionaire Raj Rajaratnam, who was convicted yesterday on all 14 counts of conspiracy and securities fraud after a seven-week trial and 11 days of jury deliberation.
With Boesky, then one of the industry’s best-known traders, the government cracked an elite Wall Street clique that included junk-bond king Michael Milken. In contrast, Rajaratnam exploited a sprawling web of mostly lower-ranking underlings at hedge funds and technology companies in the U.S. and Asia. His conviction, while a victory for prosecutors, highlights the challenge they face in staying ahead of the growing ranks of people -- fund analysts, product managers, finance employees -- who are spread around the world and have access to inside information and the inclination to sell it.
“It’s not just in the hands of CEOs and CFOs anymore,” said Adam J. Wasserman, an attorney at Dechert LLP in New York who handles white-collar criminal and securities cases. “The government’s recent insider-trading prosecutions have shined a light on both the recent democratization and globalization of what is allegedly inside information.”
More than 40 people face criminal charges, civil lawsuits or have pleaded guilty in the government probe whose roots go back to 1998 when the FBI began investigating Roomy Khan, a former Intel Corp. product-marketing engineer. Khan, 52, sent Intel semiconductor-pricing and sales data to Rajaratnam’s Galleon Group LLC, according to a criminal complaint. She later worked at the New York-based hedge fund.
Among those charged are Zvi Goffer, a 34-year-old day trader who made $378,608 after getting a tip that 3Com Corp., a computer-networking firm based in Marlborough, Massachusetts, would get acquired, the U.S. Securities and Exchange Commission said in its complaint against him. Goffer, known as “Octopussy” for his multiple sources of information, has pleaded not guilty and awaits trial in May.
Beyond U.S. Reach
Manosha Karunatilaka, 37, a former U.S. account manager at Hsinchu, Taiwan-based Taiwan Semiconductor Manufacturing Co., was arrested in December for selling hedge funds production reports on the chipmaker’s 10 largest customers. He was paid $200 a call by Primary Global Research LLC, an expert-network firm that provided access to company insiders for investors, according to a government complaint. He pleaded guilty today.
Deep Shah, a former junior analyst at Moody’s Investors Service Inc., was charged in November 2009 with leaking information about Blackstone Group LP’s takeover of Hilton Hotels Corp. Shah had fled to India and remains a fugitive.
“For any analyst or portfolio manager, information is more readily available now that the supply chain is predominantly global in nature,” said Peter Rup, chief investment officer of Artemis Wealth Advisors LLC in New York, which allocates money to hedge funds for clients. “The dissemination of material information is beyond the reach and control of U.S. regulators.”
Safer in Asia
Taiwan, in particular, has emerged in the government investigation as a place where confidential information was routinely leaked from the nation’s chipmakers, including spreadsheets containing production and order data that found their way to analysts at securities firms such as JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. That data could provide clues to sales and earnings at technology giants such as Apple Inc. and Dell Inc.
Don Ching Trang Chu, a Primary Global employee arrested in November, had a cadre of Asia-based employees of North American technology companies signed up to feed information to clients, prosecutors said in the criminal complaint against him.
Chu said he liked arranging investor meetings in Asia because regulators weren’t too aggressive.
The SEC is “too strong,” Chu told Richard Choo-Beng Lee in a conversation recorded by the Federal Bureau of Investigation in August 2009, according to a government complaint. “In Asia, there, nobody cares.”
Chu entered a not guilty plea to a new criminal information unsealed April 27 and is negotiating a plea, according to prosecutors. Lee, who began cooperating with the U.S. in April 2009, pleaded guilty to conspiracy and securities-fraud charges in October 2009.
The breadth of the Rajaratnam’s contact network and two related rings -- which the government penetrated using mobile- phone taps and cooperating witnesses who wore concealed recorders -- raises the question of whether trafficking in material, nonpublic information is so prevalent that the Justice Department and the SEC have exposed only the tip of the iceberg.
“We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught,” Preet Bharara, the U.S. Attorney in Manhattan, said today in a statement. Rajaratnam faces 15 1/2 years to 19 1/2 years in prison at his July 29 sentencing.
In Boesky’s day, Wall Street was a smaller, more insular world, and inside information flowed among a tighter circle of people. The insider-trading rings of the day were made up mostly of investment bankers who worked on takeover deals and arbitragers like Boesky who endeavored to make money buying and selling the stocks of merging companies.
Giuliani’s investigation ended with prison sentences for some of the biggest names in finance.
At the top of the heap was Milken, the Drexel Burnham Lambert banker who turned high-yield bonds into a $1 trillion market and took home $1 billion over four years. He spent two years in prison after pleading guilty to six counts of securities-law violations and paid $1.1 billion in civil and criminal fines. Milken now raises money for medical research and is chairman of the Milken Institute, an economic think tank in Santa Monica, California.
Boesky, then the most powerful takeover-stock trader on Wall Street -- and famous for telling graduate students in a commencement speech at University of California at Berkeley’s business school that “greed is healthy” -- served two years in jail and paid $100 million to the government.
The number of participants was relatively small. The government’s first arrest in the Boesky case was in 1986, when it nabbed Dennis Levine, an investment banker at Drexel who said he started trading on nonpublic information as a 25-year-old trainee at Citibank.
Prosecutors said he made $12.6 million in illegal profits, ($25.7 million in today’s dollars). Levine, who pleaded guilty, pointed to Boesky, who in turn gave up Martin Siegel, a well- known investment banker at Kidder, Peabody & Co. who later joined Drexel. Boesky also wore a wire against Milken.
By the time the government’s latest case came to light with Rajaratnam’s arrest in October 2009, insider trading had moved well beyond the world of merger deals and investment bankers. The cast of characters is diverse -- lower-level employees, both male and female -- and hails from countries including the U.S., Taiwan and India. Rajaratnam, 53, is a U.S. citizen born in Sri Lanka.
Hedge funds, a fledgling industry in the mid-1980s, have taken center stage as the big money makers of the finance world. Some managers, including Rajaratnam, made their fortunes betting on short-term moves, often in technology and health-care stocks, triggered by catalysts such as a surprise in quarterly earnings, a surge in customer orders or the announcement of a new product.
Pressure to Produce
There were about 2,600 hedge-fund firms managing $1.7 trillion in assets at the end of last year, according to data compiled by Bloomberg. That compares with about 70 firms with $39 billion in 1990, the earliest year for which the data are available.
“There are a lot more tradable events today than before -- it’s not just mergers,” said Dan Celeghin, a partner at Casey, Quirk & Associates LLC, a financial-consulting firm in Darien, Connecticut. “There’s so much more valuable information out there and the odds of inside information leaking have risen exponentially.”
As the number of hedge-fund firms jumped, so did the pressure to produce top returns, which drove some analysts and portfolio managers to seek out illegal means of getting data.
“Hedge-fund managers live and die by their returns,” Celeghin said. “It’s a more cutthroat business and hard to coast by with mediocre returns.”
That’s especially true for analysts trying to keep their jobs at larger firms and smaller hedge-fund managers hoping to make a name. At least 22 portfolio managers and analysts have been caught up in the government probe, and most worked for firms managing millions of dollars rather than the billions that Rajaratnam oversaw at Galleon’s peak.
The demand for information helped create a new breed of middlemen: expert-network firms, which connect investors with corporate insiders who for a price provide color on orders, sales and corporate strategy. Such data complement research done in-house or provided by Wall Street firms. Using the experts is legal as long as they don’t disclose material, nonpublic information.
Eight employees or outside consultants at Mountain View, California-based Primary Global crossed the line by providing confidential information, according to government complaints.
Primary Global’s network included low- and mid-level managers at U.S. and overseas technology companies who sold secrets about companies such as Apple, Dell and Advanced Micro Devices Inc., sometimes for relatively small amounts of money, the government said.
Winifred Jiau, a former consultant for Primary Global, was arrested in December for allegedly passing tips on firms including Marvell Technology Group Ltd. to hedge-fund manager Samir Barai. Jiau, 43, who has pleaded not guilty, was paid as much as $10,000 a month, prosecutors allege.
Daniel DeVore, a former global supply manager at Round Rock, Texas-based Dell, pleaded guilty in December to leaking information about the company’s products, pricing, inventory and market share to clients of Primary Global. He was paid about $145,000.
Rajaratnam thrived in the new global world where information could be gleaned from hundreds of sources, legitimate and illegitimate. It was widely suspected that he sought out and profited from nonpublic information for most of his career, say former employees and hedge-fund investors who met with him.
A former colleague at Needham & Co., an investment bank where Rajaratnam was president before co-founding Galleon, remembers him walking into the trading room before Intel reported quarterly earnings and telling the assembled crowd what the exact numbers would be.
Rajaratnam told potential clients that if his analysts needed to take someone’s secretary out to get information on a company, he’d gladly foot the bill for the date, said people who met with him.
Throughout the trial, Rajaratnam’s lawyers denied any wrongdoing, saying he based his trades on research including analyst reports, news accounts and stock trading trends.
While Milken, Boesky and Siegel generated hundreds of millions from their illegal activities, and emerged from prison with much of their wealth intact, insider trading today at less- rarified heights has proven to be a lot less lucrative. Rajaratnam, the biggest money maker among the government’s current batch of criminals, made $63.8 million in profits and losses he avoided, according to prosecutors.
“Rajaratnam was among the best and the brightest -- one of the most educated, successful and privileged professionals in the country,” Bharara, the U.S. Attorney, said today in a statement. “Yet, like so many others recently, he let greed and corruption cause his undoing.”
John Dowd, Rajaratnam’s attorney, said he will appeal the verdict to the U.S. Court of Appeals for the Second Circuit in Manhattan.
Arrested on the same day as Rajaratnam was Danielle Chiesi, 45, an equity portfolio manager and analyst at New Castle Funds LLC, a New York-based hedge fund that has since closed. Her presence in his network of conspirators contrasts with the Boesky era, when women were virtually nonexistent in the ranks of traders.
“There was an absence of women the last time,” said Thomas Donaldson, professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School, where Rajaratnam got his master’s in business administration.
Robert Moffat, a former International Business Machines Corp. executive who is married with four children, said he had an “intimate relationship” with Chiesi and gave her confidential tips about IBM and other technology companies that she passed on to Rajaratnam and others traders. Moffat, who had been named as a possible successor to IBM Chief Executive Officer Sam Palmisano when he retires, didn’t make money from any of their transactions, according to court documents. Moffat, 54, pleaded guilty and was sentenced in September to six months in prison.
On a wiretapped conversation between Rajaratnam and Chiesi, she alluded to an intimate relationship with Hector Ruiz, a former CEO of Advanced Micro. A trial witness had also testified that she had such a relationship. Ruiz, 65, who hasn’t been formally accused of any wrongdoing, has denied having a relationship with Chiesi.
In conversations with Rajaratnam that were taped by the government and played in court, she was sometimes boastful of her ability to get information from sources. In July 2008, she bragged that she played one technology executive “like a finely tuned piano.”
At other times, she was scared about getting caught.
“There are people who hate me,” she told Rajaratnam in a tape made in August 2008. “I am a chick in this business.”
Chiesi pleaded guilty to three counts of conspiracy to commit securities fraud in January and has yet to be sentenced.
One throwback to the Boesky days of high-level conspirators in the Rajaratnam case was Rajat Gupta, the former Goldman Sachs and Procter & Gamble Co. board member who the prosecution has called an unindicted co-conspirator.
The SEC said in a civil proceeding that Gupta leaked confidential information about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs in 2008, as well as quarterly earnings for the New York-based bank and for Procter & Gamble.
The tips generated more than $18 million in profits for Rajaratnam, the SEC said. Gupta, 62, hasn’t been criminally charged, and his lawyer said he was never paid for information.
With the Rajaratnam conviction under its belt, the government has no plans to slow down in its pursuit of insider trading at all levels.
“A government win gives them more confidence to bring bigger cases going forward,” said Joan McKown, former chief counsel of the SEC’s enforcement division and now a partner at law firm Jones Day in Washington.
After the arrests of Boesky, Siegel and Milken, commentators marked the moment as the end of the era of greed that had led to the savings-and-loan debacle and the leveraged- buyout boom and bust that dominated the 1980s. Though the Rajaratnam conviction will mean more cases are coming, commentators are less naïve today.
“These are powerful instinctive human drives,” said Bruce Baird, 63, a partner at Covington & Burling LLP in Washington, who worked on the Boesky-era insider-trading cases as a young assistant U.S. Attorney in Manhattan. “Insider trading can’t be stopped by a case or two. The most you can do is make them think twice for a while.”
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).
To contact the editor responsible for this story: Christian Baumgaertel at firstname.lastname@example.org