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Rajaratnam Guilty in Insider-Trading Case

By David Glovin, Patricia Hurtado & Bob Van Voris - 2011-05-11T21:21:37Z

Raj Rajaratnam, the hedge-fund tycoon and Galleon Group LLC co-founder at the center of a U.S. insider-trading crackdown, was found guilty of all 14 counts against him in the largest illegal stock-tipping case in a generation.

A jury of eight women and four men in Manhattan returned its verdict today after hearing evidence that Rajaratnam, 53, engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs Group Inc. (GS) He gained $63.8 million, prosecutors said.

The trial came as Manhattan U.S. Attorney Preet Bharara promised to crack down on “rampant” illegal trading on Wall Street. Rajaratnam was convicted on five counts of conspiracy and nine counts of securities fraud. Prosecutors today said he faces 15 1/2 years to 19 1/2 years in prison at his July 29 sentencing.

“Rajaratnam, once a high-flying billionaire and hedge fund manager, is now a convicted felon, 14 times over,” Bharara said in a statement after the verdict. “Rajaratnam was among the best and the brightest -- one of the most educated, successful and privileged professionals in the country. Yet, like so many others recently, he let greed and corruption cause his undoing.”

Jury Note

The jury, which had filled out a verdict sheet at 10:11 a.m., sent a note to U.S. District Judge Richard Holwell nine minutes later telling him it had reached a decision, according to copies of the documents released by the court.

“Please, we do not want to meet with press,” the foreman, Robert Jirmnson, added in the note.

Five deputy U.S. marshals stood guard at the back of the courtroom as the verdict was announced. Rajaratnam showed no reaction as the courtroom deputy read the verdict. The defendant blinked frequently and kept his arms clasped in front of him.

After the verdict, Holwell thanked jurors for their service and told them not to discuss their deliberations with others. “They should remain secret among the 12 of you,” he said.

Jirmnson declined to comment when reached by phone after the verdict.

“I’m really tired. I’m tired, man,” said Jirmnson, a native of Manhattan’s Lower East Side who worked for two years as a graphic artist for Apple Inc. and now lives in the Bronx.

The jury originally began deliberating April 25. The panel restarted deliberations May 4 after a juror was replaced by an alternate for medical reasons.

Home Detention

Rajaratnam remains under home detention and electronic monitoring at his Sutton Place residence in Manhattan pending sentencing.

“We started out with 37 stocks, we’re down to 14,” defense attorney John Dowd said at a press conference outside the courthouse, standing next to his client. “The score is 23 to 14 for the defense. We’ll see you in the Second Circuit.” Dowd said earlier that he would appeal the verdict to the U.S. Court of Appeals for the Second Circuit in Manhattan.

Rajaratnam, wearing a dark suit, gold tie and white shirt, was mobbed by reporters as he entered a silver sedan after today’s proceeding.

Galleon was among the 10 largest hedge funds in the world in the early years of the last decade. It managed $7 billion at its peak in 2008. Rajaratnam’s net worth of $1.3 billion made him the 559th richest person in the world, Forbes Magazine said in 2009.

Research Focus

Before his arrest on Oct. 16, 2009, Rajaratnam had claimed that Galleon analysts had an advantage over rivals because most were trained as engineers and all focused their energies exclusively on research. At the trial, his lawyers said his trades were based on Galleon research.

“They don’t get blindsided by the marketing hype,” Rajaratnam said of his analysts in “The New Investment Superstars: 13 Great Investors and Their Strategies for Superior Returns,” by Lois Peltz.

Adam Smith, a former Galleon trader, testified at the trial that the New York-based hedge fund gained its advantage through other means. Rajaratnam emphasized “getting the number” -- or learning revenue figures before they became public -- from insiders at Intel Corp. (INTC), Intersil Corp. and other publicly traded companies, he said.

“Research is sort of doing your homework ahead of time,” Smith testified after pleading guilty to insider trading and agreeing to cooperate with prosecutors. “Getting the number is more like cheating on the test.”

Wiretapped Targets

The case was the first one focused exclusively on insider trading in which prosecutors wiretapped their targets’ telephone conversations, a tactic used in organized-crime investigations. Jurors heard more than 40 recordings of Rajaratnam, in some of which he can be heard gathering secrets from his sources.

“They’re gonna guide down,” Danielle Chiesi, an analyst at New Castle Funds LLC, told Rajaratnam on July 24, 2008, after she got an insider’s leak that Akamai Technologies Inc. would lower its forecast. “I just got a tip from my guy.”

Dowd said he would appeal the use of wiretaps, telling the judge the matter was “very substantial.”

Rajaratnam used inside information to trade ahead of public announcements about earnings, forecasts, mergers and spinoffs involving more than a dozen companies, according to the evidence at the trial. Among them were Santa Clara, California-based Intel, New York-based Goldman Sachs, Google Inc., ATI Technologies Inc., Akamai and Hilton Hotels Corp.

Goldman Director

Prosecutors said Rajaratnam’s sources included Rajat Gupta, who until last year was a director at Goldman Sachs, and Kamal Ahmed, a Morgan Stanley investment banker who prosecutors said passed tips through Smith. Both deny wrongdoing, and neither has been criminally charged.

Born in Sri Lanka’s capital, Colombo, Rajaratnam was educated there at St. Thomas’ Preparatory School before leaving for England, where he studied engineering at the University of Sussex. He came to the U.S. to get his master’s of business administration, graduating from the University of Pennsylvania’s Wharton School in 1983.

Two of his Wharton classmates -- Anil Kumar, who became a partner at McKinsey & Co., and Rajiv Goel, who was a managing director at Intel -- testified against him at the trial, telling jurors how their relationships began at the school and how they turned to crime. Both have pleaded guilty.

Blankfein Testifies

Also testifying for the prosecution was Goldman Sachs Chief Executive Officer Lloyd Blankfein, who said Gupta violated the company’s confidentiality policies by allegedly telling Rajaratnam about its earnings and strategic plans. Rajaratnam didn’t take the stand in his own defense.

Rajaratnam’s first job after graduation was at Chase Manhattan Bank, where he was a lending officer in the group that made loans to high-tech companies. In 1985, he joined Needham & Co., a New York-based investment bank that specialized in technology and health-care companies.

He started as an analyst covering the electronics industry and rose through the ranks, becoming head of research in 1987, chief operating officer in 1989 and president in 1991. A year later, at 34, Rajaratnam started a fund, Needham Emerging Growth Partners LP, according to Galleon’s marketing documents.

Forming Galleon

Rajaratnam and Needham colleagues Krishen Sud, Gary Rosenbach and Ari Arjavalingam formed Galleon Group in January 1997. By the end of that year, they were managing $830 million, much of it from technology company executives Rajaratnam had gotten to know throughout his career, according to “The New Investment Superstars.”

Rajaratnam’s case was the most prominent amid a widespread U.S. crackdown on insider trading. Bharara, who is directing the nationwide probe, said his office has charged 47 people with insider-trading crimes during the past 18 months, and that Rajaratnam is the 35th person to be convicted.

“We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught,” Bharara said in the statement.

Among others charged are executives affiliated with Primary Global Research LLC, a Mountain View, California-based networking firm that links investors with industry experts who work for public companies. A related case against former Galleon trader Zvi Goffer is scheduled for trial next week.

U.K. Probes

The U.K.’s Financial Services Authority will focus its insider-trading investigations on senior London financial workers as part of its deterrence strategy, the finance watchdog’s acting enforcement chief said hours before the Rajaratnam jury delivered its verdict.

“We recognize the need to go after bigger fry, not because they’re wealthy or high profile -- we want to go after the people we actually think are causing the most damage to the market,” the FSA’s Tracey McDermott said in an interview in London.

The FSA was set up in 1997 and prosecuted its first criminal case of insider trading in 2008. The regulator in February secured the longest-ever U.K. sentence for insider trading when former Dresdner Kleinwort banker Christian Littlewood was imprisoned for 40 months after admitting illegally trading over a 10-year period, along with his wife and an accomplice.

Bail Dispute

Assistant U.S. Attorney Jonathan Streeter argued unsuccessfully to have Rajaratnam, who is free on $100 million bond, taken into custody after the verdict.

“He has tremendous incentive to flee at this time,” Streeter told Holwell, saying that Rajaratnam holds U.S. and Sri Lankan citizenship. “The defendant has very substantial overseas ties.”

Streeter said that in the 22 years the U.S. has had an extradition treaty with Sri Lanka “not one single Sri Lankan citizen has ever been extradited.”

Rajaratnam has placed $70 million in a U.S. bank account as security, Dowd argued. He said his client “has been faithful and obedient” to court orders and “repatriated 95 percent of his assets” to the U.S.

“He’s not a danger to the community,” Dowd said. “He has his family here, his children are here, his parents are here.”

Rajaratnam surrendered all his travel documents as a condition of his bail. He agreed to hand over his U.S. and Sri Lankan passports to court authorities at the time, according to a person with direct knowledge of the case who declined to be identified because the information wasn’t public.

Rajaratnam “joins the pantheon of Ivan Boesky and Gordon Gekko,” said Peter Henning, a professor at Wayne State University Law School in Detroit, citing the real-life stock trader who was jailed after pleading guilty to conspiracy in 1987 and the fictional “Wall Street” film character who came to symbolize the financial scandals of the 1980s. “It is a defining case,” Henning, a former federal prosecutor, said before the verdict was handed down.

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 Manhattan federal court at glovin@bloomberg.net; Patricia Hurtado in Manhattan federal court at phurtado@bloomberg.net; Bob Van Voris in Manhattan federal court at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

Enlarge image

Raj Rajaratnam

Rick Maiman/Bloomberg

Raj Rajaratnam, co-founder of Galleon Group LLC, center, exits federal court with his attorney Terence Lynam, second from right, in New York on May 11, 2011.

Raj Rajaratnam, co-founder of Galleon Group LLC, center, exits federal court with his attorney Terence Lynam, second from right, in New York on May 11, 2011. Photographer: Rick Maiman/Bloomberg