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Hedge-Fund Founder, Feds Play ‘Chicken’: Ann Woolner

In the 1955 movie “Rebel Without a Cause,” a popular high school bully goads a disaffected outsider (James Dean) into a contest of nerves. A variant of “chicken,” it’s a car race to be won by whomever brakes last as the two teenagers speed in the dark toward a cliff, Natalie Wood urging them on.

Likewise, in the run-up to the insider trading trial of billionaire hedge-fund founder Raj Rajaratnam, you can hear the engines revving. The U.S. Attorney’s Office in Manhattan has during the past week unveiled a new indictment with an additional charge against him and announced a guilty plea from a key Rajaratnam co-defendant, Danielle Chiesi. Ordered to do so by a judge, the government also disclosed more wiretap evidence.

And today, a former trader with Rajaratnam’s Galleon Group LLC pleaded guilty and implicated his former boss. Adam Smith told the judge that he had given Rajaratnam nonpublic information about technology companies.

All that noise signals prosecutors are preening to drive Rajaratnam over the cliff at trial. They appear not the least bit interested in cutting much of a deal for Rajaratnam’s guilty plea. Why would they, given the solid case they claim they have?

Rajaratnam likewise has his foot on the gas pedal and seems unlikely to hit the brake without a decent plea bargain. If he can’t shave significant time off the potential sentence, why not go to trial? He’s got the money to spend, a reputation to defend and a lifestyle to protect. Besides, he might find a soft landing.

Admissions of Guilt

“It’s going to be very difficult for a man of his status, and someone who has accomplished so much and was so revered in financial circles to step up to the plate and accept a plea agreement,” says Christopher Bebel, a Houston-based securities lawyer and former federal prosecutor.

While accused colleagues have been pleading guilty, handing mounds of evidence to U.S. Attorney Preet Bharara’s office and detailing their admitted conspiracy, Rajaratnam has claimed innocence.

His lawyers have said whatever information he used in his trading didn’t come from inside knowledge. Rajaratnam’s funds conduct research and analysis based on publicly available information, the defense says.

All five of the people arrested with Rajaratnam in 2009 have now admitted their crimes, and some will be called to testify against him.

Recorded Conversations

Tapped phone calls have him and admitted insider trader Chiesi discussing how fortunate they were to have as a source Robert Moffat, then a senior vice president at IBM. He’s pleaded guilty, too.

So has Rajaratnam’s former friend and co-defendant, Rajiv Goel, who admits to passing him inside information on Intel and other companies while a managing director in the chipmaker’s treasury unit.

And how to explain away Anil Kumar, a former McKinsey & Co. director who pleaded guilty last January? He admitted he leaked information to Rajaratnam about some of McKinsey’s clients, such as Advanced Micro Devices and its acquisition of ATI Technologies. Kumar’s tips alone made $24.5 million for Galleon, the indictment alleges.

Not only that, but Kumar is said to have helped Rajaratnam wire money to an offshore account where it would be reinvested in Galleon funds and later routed to another offshore entity.

These are not easy things to explain away.

Prosecution Misses

Rajaratnam may take comfort in the fact that some cases that prosecutors painted as slam dunks completely missed the basket. Former HealthSouth Chief Executive Officer Richard Scrushy faced down the testimony of five former chief financial officers to be acquitted of securities fraud in 2005 (only to be convicted in an unrelated case a year later).

E-mail evidence made two Bear Stearns hedge-fund managers look incredibly guilty. A jury found otherwise in November 2009.

As for audio tapes, remember former Illinois Governor Rod Blagojevich, who prosecutors said incriminated himself profanely and repeatedly in phone conversations the feds tapped. But a jury deadlocked on 23 counts in August, convicting him on only one.

Rajaratnam is charged with nine counts of securities fraud, any one of which could send him away for up to 20 years. He’s also indicted on five conspiracy charges, each worth up to 5 years behind bars.

Life Sentence

Perhaps he’s hoping to win acquittal on a few of those. But unless his lawyers persuade jurors he’s not guilty on all securities fraud counts, he could still face 20 years in prison. (Rajaratnam’s spokesman, Jim McCarthy declined to comment.)

Under federal law, there are ways to reach the maximum sentence even when acquitted on most charges. In November a jury found Ahmed Khalfan Ghailani not guilty on 284 counts related to the 1998 bombings of U.S. embassies. Nonetheless, yesterday he received a life sentence for the guilty verdict on a single charge.

In the Galleon case, Chiesi is headed for a sentence of somewhere between three and four years, the judge indicated at her plea hearing last week. Whether convicted by a jury or by a guilty plea, Rajaratnam would be looking at much more than that.

So perhaps he’ll keep his foot on the gas and see where he winds up.

(Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.)

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