Galleon Group LLC co-founder Raj Rajaratnam is asking a federal appeals court to set aside his conviction for directing the biggest hedge fund insider trading scheme in U.S. history one day after a key source of his tips was sentenced to two years in prison.
Former Goldman Sachs Group Inc. director Rajat Gupta, a friend and business partner of Rajaratnam who ran McKinsey & Co., appeared yesterday before U.S. District Judge Jed Rakoff in Manhattan seeking leniency for his role in the conspiracy. While Gupta, 63, is the most prominent of 70 people convicted in a four-year U.S. insider-trading crackdown, Rajaratnam, 55, was the mastermind of the hedge-fund scheme that was his downfall.
The case against Rajaratnam, convicted last year of conspiracy and securities fraud, turned on the first significant use of government wiretaps in an insider-trading case. Those wiretaps are now at the center of his appeal. His lawyers argue the U.S., required to exhaust other avenues of inquiry before resorting to electronic surveillance, hid the existence of a related Securities and Exchange Commission investigation from a federal judge when seeking permission for a wiretap.
Rajaratnam’s lawyers, some of whom were present at Gupta’s sentencing, claimed the government made a “long pattern of falsities, misleading misrepresentations and material omissions” to U.S. Circuit Judge Gerard Lynch, who was a district court judge in 2008 when he signed the warrant authorizing a wiretap of Rajaratnam’s mobile phone. They warned the appeals court that the conviction, if upheld, may lead to lower standards for warrants, and thus an increase in wiretapping by federal investigators.
“Imagine what the next wiretap application will look like,” his lawyers wrote the panel of three judges who are hearing arguments today in New York.
Based on the initial warrant and later renewals, the Federal Bureau of Investigation recorded more than 2,200 calls between Rajaratnam and 130 business associates, friends and family over nine months.
During Rajaratnam’s trial, the government introduced 45 wiretap recordings along with documents and testimony derived from the wiretaps, according to filings with the U.S. Court of Appeals in New York. That evidence must be thrown out and his conviction overturned, his lawyers argued.
Rajaratnam is also challenging jury instructions given by U.S. District Judge Richard Holwell, who presided over the trial. Holwell told jurors they could convict the hedge fund manager of securities fraud if they found that his use of illegal tips “was a factor, however small,” in his decision to buy or sell stock.
Defense lawyers argued that the appellate court should reconsider its own previous rulings allowing similar jury instructions. Instead, the court should require prosecutors to prove a stronger connection between inside information and trading decisions, they said.
Rajaratnam was sentenced to 11 years in prison, one of the longest sentences ever imposed for insider trading, and is serving his term at the Federal Medical Center Devens in Ayers, Massachusetts.
He engaged in a seven-year conspiracy to trade on inside information from various sources, including Gupta, corporate executives, bankers, consultants and traders, and gained $63.8 million as a result, according to the government.
Much of the evidence at trial was based on the wiretaps.
Prior to the trial, Holwell held a hearing on whether the surveillance transcripts should be suppressed. He declined, finding that, while prosecutors were “reckless” in omitting the scope of the earlier SEC investigation, the omissions weren’t enough to throw out the warrant.
Prosecutors have argued that Holwell properly denied Rajaratnam’s bid to suppress the wiretaps, though they contend the judge erred in holding that the government made “reckless” omissions, asserting that he applied the wrong legal standard.
From March through November of 2008, the FBI in New York had intercepted numerous conversations on Rajaratnam’s mobile telephone. To obtain those wiretaps, federal authorities obtained the authorization of six federal judges, the U.S. said.
Each judge who signed wiretap authorizations found there was probable cause to believe Rajaratnam and others were committing crimes such as wire fraud in connection with an insider-trading scheme, prosecutors said. The interceptions were necessary because normal investigative techniques “had been tried and failed or were not likely to succeed,” according to the government.
Rajaratnam’s lawyers unsuccessfully argued before trial that the wiretaps should have been excluded, saying the recordings can’t be used in criminal insider-trading cases.
“Congress did not, as Rajaratnam argues, restrict the use of wiretapping to exclude insider trading,” prosecutors countered in court papers.
The defense claimed the U.S. misled Lynch, making omissions and false statements about the background of Roomy Khan, a former Intel Corp. executive whose disclosures prompted the probe and served as a basis for the wiretap request. They also argued that prosecutors failed to disclose the SEC had obtained millions of pages of documents as part of its investigation.
Prosecutors said Gupta, convicted in June of securities fraud and conspiracy, deserved as long as 10 years in prison, one fewer than his friend Rajaratnam received. Gupta sought probation and community service, and his lawyer proposed that he work with the poor in Rwanda.
The sentencing marked the nadir of his career, for a man who rose to the top of corporate America after being orphaned as an 18-year-old in Kolkata. He served on the boards of Procter & Gamble Co. and AMR Corp., and as McKinsey’s youngest managing director, almost tripled that firm’s revenue.
The evidence that Gupta passed illegal information about Goldman Sachs to Rajaratnam was “not only overwhelming, it was disgusting in its implications,” Rakoff said before handing down the sentence.
Gupta was convicted by a jury of leaking tips to Rajaratnam about the New York-based bank, including information on a $5 billion investment by Warren Buffett’s Berkshire Hathaway Inc. on Sept. 23, 2008, and a tip on a quarterly loss.
The jury acquitted Gupta of charges that he leaked information that Cincinnati-based P&G’s organic sales growth would fall below estimates and that he tipped Rajaratnam about Goldman Sachs’s earnings in the first quarter of 2007.
Unlike Rajaratnam’s prosecution, which was based on dozens of wiretaps of his mobile-phone conversations, the case against Gupta was largely circumstantial and built on trading and phone records, business relationships and comments by Rajaratnam or others about Galleon’s sources of information. The jury heard one wiretapped conversation between Gupta and Rajaratnam.
At Gupta’s trial, Goldman Sachs Chief Executive Officer Lloyd Blankfein told jurors that he briefed his board over the phone on the Buffett investment beginning at 3:15 p.m. Within a minute after the call with the directors concluded at 3:53 p.m., Rajaratnam answered a call on his private line from a McKinsey conference room being used by Gupta, according to phone records and testimony.
“I got a call at 3:58, right?” Rajaratnam said on a wiretapped conversation with another trader that was played at the trial. “Saying something good might happen to Goldman.”
The Rajaratnam appeal is U.S. v. Rajaratnam, 11-04416, U.S. Court of Appeals for the Second Circuit (New York); The Gupta case is U.S. v. Gupta, 11-00907, U.S. District Court, Southern District of New York (Manhattan).