March 9 (Bloomberg) -- Raj Rajaratnam, co-founder of the Galleon Group LLC hedge fund, relied on newspaper articles, research reports and his company’s own analysis for information to make stock trades, not insider tips, his lawyer said at the opening of his criminal trial.
Earlier today a prosecutor accused Rajaratnam of “greed” and said he “exploited a corrupt network of people” to earn millions of dollars in illegal profits. Among Rajaratnam’s sources were Rajat Gupta, a former managing partner at McKinsey & Co. and a former Goldman Sachs Group Inc. board member, prosecutors said.
“The government has it wrong,” defense attorney John Dowd, of Akin Gump Strauss Hauer & Feld LLP, told jurors. Prosecutors, who used wiretaps to build their case, focused on “snippets” of conversations and “didn’t do their homework,” he said.
Rajaratnam, 53, 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, a billionaire, may spend as long as 20 years in prison if convicted of fraud.
Dowd’s opening statement is the most detail he has provided yet about Rajaratnam’s trades.
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.”
“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 this 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., another stock where 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 stocks at issue -- Marvell Technology Group, Intel Corp., ATI Technologies Inc, Polycom Inc. and many more. 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, saying they’re lying to save themselves from jail. For instance, Anil Kumar, a 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 was 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.
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 inside information, he said.
Rajaratnam had legitimate reasons to trade in Goldman Sachs shares and wasn’t tipped by former Goldman board member Rajat Gupta, the lawyer told jurors. 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 large payment to Goldman Sachs, Dowd said.
That was the reason Rajaratnam bought shares, and not because Gupta told him that Berkshire Hathaway Inc. was buying into the firm.
Weeks later, Rajaratnam chose to sell Goldman Sachs shares after reading in a newspaper about bank layoffs and learning from public sources that a Chinese bank in which Galleon had invested had lost $1 billion.
“That’s why he sold,” and not because of a Gupta tip, Dowd said.
Other trades were based on Galleon research, he said.
Earlier, assistant U.S. Attorney Jonathan Streeter told jurors that they’ll hear Rajaratnam committing crimes in “real time” as they listen to secret government wiretaps of Rajaratnam’s telephone conversations.
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.
Rajaratnam “knew tomorrow’s business news today” because he had inside information, Streeter said. “The sources of his secret information were as different as his investments.”
Friend at McKinsey
Streeter said Rajaratnam got inside information from “a board member at a public company,” “from his own employees,” and from outside consultants including Anil Kumar, a longtime friend who had gone to work for McKinsey & Co., Streeter said.
“The evidence will show that at Galleon, people did their homework but they cheated too,” Streeter said. “At Galleon, people did legitimate research, but they cheated too and that cheating is called insider trading.”
Also today, 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.
Witness testimony is likely to begin tomorrow.
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 email@example.com; Patricia Hurtado in New York at firstname.lastname@example.org; Bob Van Voris in New York at email@example.com;
To contact the editor responsible for this story: David E. Rovella at firstname.lastname@example.org.