June 18 (Bloomberg) -- Secret recordings of Rengan Rajaratnam talking with his brother, hedge fund billionaire Raj Rajaratnam, prove the two engaged in an insider-trading scheme, prosecutors said at the start of a trial in New York.
“Their own words will show you unmistakably and clearly their decision to commit insider trading,” Assistant U.S. Attorney Christopher Frey told a federal jury in Manhattan today -- an assertion disputed by the defense.
The brothers were targeted in a U.S. crackdown against insider trading at hedge funds. Since August 2009, prosecutors in the office of Manhattan U.S. Attorney Preet Bharara have charged 86 people with insider trading, with 81 cases resulting in convictions, mostly through guilty pleas.
Raj Rajaratnam, 57, was convicted in 2011 after prosecutors placed him at the center of the most wide-ranging insider-trading ring in U.S. history. He is serving an 11-year sentence at the Federal Medical Center Devens in Massachusetts. The U.S. Supreme Court on June 16 rejected his appeal of his conviction and sentence.
Rengan Rajaratnam, 43, who worked his way up through Steven Cohen’s SAC Capital Advisors LP and Galleon Group LLC, the hedge fund co-founded by his brother, faces two counts of securities fraud and one count of conspiracy to commit insider trading, stemming from trades of Clearwire Corp. and Advanced Micro Devices Inc. in 2008. Securities fraud carries a 20-year maximum prison sentence, while conspiracy carries a term of as long as five years.
The U.S. today played two excerpts of wiretaps, including an Aug. 15, 2008, call in which Raj and Rengan discuss an AMD deal with an Abu Dhabi sovereign wealth fund.
“I just heard that ... AMD had a handshake with the ... Arabs to put in $6 billion,” Raj Rajaratnam told his brother, adding he was “buying 250 for you.” Raj was referring to his purchase 250,000 AMD shares on Rengan’s behalf in a Galleon account, according to prosecutors.
“Thanks a lot man, I appreciate it,” Rengan replied.
Trading records refute the government’s argument the brothers swapped illegal tips and traded on the information, according to Rengan Rajaratnam’s lawyer, Daniel Gitner. While Raj Rajaratnam purchased at least 12 million shares of AMD, Rengan sold all of his AMD holdings in his personal account, Gitner said.
Rengan Rajaratnam, the youngest of five children, was a world apart from Raj Rajaratnam, the eldest child, Gitner told the jury in his opening statement.
“These brothers weren’t joined at the hip. They were on different planets when it comes to AMD,” Gitner said. “On every turn, Rengan’s actions show that Rengan didn’t know what Raj knew.”
While Rengan had returned to work at Galleon in late 2007, after closing a hedge fund he founded, the brothers’ relationship “deteriorated” during 2008 when the U.S. says they engaged in insider trading, Gitner said.
Raj Rajaratnam became “enraged,” at Rengan after the younger brother made several disastrous trading decisions, including a bet Bear Stearns would succeed in March 2008 when it collapsed in bankruptcy, Gitner said. The Galleon founder demoted Rengan and prohibited him from trading in Galleon funds, the defense lawyer said.
U.S. District Judge Naomi Reice Buchwald earlier granted prosecutors permission to play some of the more than 45 court-authorized wiretaps of telephone calls used to send Raj Rajaratnam to prison for 11 years, including conversations between the brothers.
The judge ruled before the trial that prosecutors couldn’t tell the jury of Raj’s conviction and sentence.
“Just because his brother is guilty, it doesn’t mean the defendant is guilty,” the judge said.
The prosecutor cited a call in which the two brothers discussed Rengan Rajaratnam’s former classmate at Stanford Graduate School of Business. Frey said the conversation showed the younger brother was trying to corrupt his friend the way Raj Rajaratnam used his former business school classmates.
Frey said prosecutors will call cooperating witnesses, including Anil Kumar and Rajiv Goel, two of Raj Rajaratnam’s former classmates from the Wharton School of the University of Pennsylvania, who had pleaded guilty and testified against him.
Kumar, a former McKinsey & Co. director, provided Raj with the AMD tips, Frey said.
The case is U.S. v. Rajaratnam, 13-cr-00211, U.S. District Court, Southern District of New York (Manhattan).
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