Khan Gets One Year in Prison in Insider Trading CasePatricia Hurtado and Bob Van Voris
Roomy Khan, the former Intel Corp. executive twice convicted of passing illegal tips to Raj Rajaratnam, was ordered to serve one year in prison for obstructing justice after she agreed to help the U.S.
“The message from this court is that you cannot have it both ways. This is too serious,” U.S. District Judge Jed S. Rakoff in Manhattan said yesterday as he imposed the sentence. “You cannot have it both ways -- to cooperate and then obstruct justice.”
Defense lawyers and prosecutors sought leniency for Khan, 54, saying she helped the government win convictions against hedge fund managers Rajaratnam, Doug Whitman and others. Khan was convicted in 2001 and again in 2009 of passing illegal tips to Galleon Group LLC co-founder Rajaratnam.
Manhattan U.S. Attorney Preet Bharara’s prosecutors cited Khan’s cooperation in a letter to the judge, despite her having lied, destroyed evidence and tipped off co-conspirators to the government’s investigation when she was working with federal agents.
Another cooperator in the governor’s insider-trading crackdown, Jason Pflaum, a former Barai Capital Management LP analyst who testified against an expert networking consultant convicted by a jury in 2011, yesterday was spared a prison sentence.
Pflaum, a key government witness at the trial of former Primary Global Research LLC consultant Winifred Jiau, was ordered by Rakoff to serve two years’ probation and forfeit $500,000.
Pflaum’s lawyer, Michael Grudberg, said in an e-mail that the forfeiture amount is based on the illegal profit made by Barai Capital, not by Pflaum personally. The forfeiture is to be paid by Pflaum and his co-conspirators in the case, Grudberg said.
In Khan’s case, Rakoff said he couldn’t ignore the fact that, after pleading guilty and agreeing to cooperate with a federal investigation of Rajaratnam in California, she returned to insider trading and passed the fund manager illegal tips. He said that Khan obstructed justice after she agreed to cooperate with federal investigators in New York in 2007.
“The obstruction cannot be ignored, not only what it says about her duplicitous state during that period but also about the very important message that any court needs to send when that cooperation is tainted by obstruction,” the judge said.
“It wasn’t misconduct over a day or two. It wasn’t one mistake. It was a whole series of lies.”
Khan, whose information helped the U.S. get a court-authorized tap on Rajaratnam’s phone, asked for five years’ probation. She offered to speak at colleges and business schools about her experiences to warn students against insider trading, her lawyer, Stanislao German, told Rakoff yesterday.
The judge ordered Khan to surrender to a federal prison by April 30 and said he would recommend a federal prison in Southern Florida. Rakoff also directed Khan to forfeit more than $1.5 million she earned as a result of the scheme.
“I would like to say sorry to the court,” said Khan, her voice breaking. “I have lost all my money and my education is rendered useless. I have been ostracized by most of my family and friends and lead my life as a pariah in isolation.”
Khan, who has a degree in physics from Delhi University, a master’s in electrical engineering from Columbia University and a master’s in business administration from the University of California at Berkeley, said she earned $50 million while trading stocks. Trading losses wiped out her portfolio, her lawyer said.
Khan said she lied to agents with the Federal Bureau of Investigation after pledging to help them in order to shield her friends from government scrutiny.
“I, and I alone, am responsible,” she said. “I lied to the government to protect myself, my friends, and my family from getting in trouble. To protect my life and status, I engaged in insider trading. There is no excuse for the decisions I took. They were wrong and I broke the law. I should have known better as I had just gotten a break. As a look back, I am horrified at the choices I made.”
Khan pleaded guilty in October 2009 to one count of conspiracy to commit securities fraud and one count of securities fraud. Rakoff said Khan had faced a term of eight to 10 years in prison under federal sentencing guidelines, which aren’t binding upon the court.
German argued that Khan’s work with prosecutors, in addition to helping the government win convictions that sent others to prison, enabled the U.S. to secure $250 million in fines, forfeitures and SEC settlements.
Dozens of people have been convicted of insider trading as part of overlapping investigations tied to Rajaratnam’s hedge fund and related cases, German said. Rajaratnam, convicted in 2011, is serving an 11-year prison sentence. German said that other cooperators in the Galleon probe were spared prison terms and given probation.
“I understand the court’s reasoning and logic in giving a sentence, but considering individuals who went to trial and got two years, and a one-year sentence for Ms. Khan is a lot under the circumstances,” German said in an interview after court yesterday.
German said Khan wouldn’t appeal her sentence.
The case was Khan’s second round of insider-trading charges. She pleaded guilty in 2001 to wire fraud and was sentenced in 2002 to home detention after agreeing to cooperate with a federal probe of Rajaratnam in California.
Two years later, Khan said “untenable” financial pressures caused her to return to passing insider tips to Rajaratnam to give him an “edge.”
“As I reflect upon the choices I made, it makes me feel aghast at these decisions,” Khan said in a Jan. 22 letter to Rakoff. “No circumstances justify breaking the law. Because everyone is doing it provides no excuse to engage in this behavior. Especially I should have conducted myself better because I had gotten a break in the past!”
Khan said the strain of maintaining an extravagant lifestyle was the “albatross” around her neck that led her back to insider trading.
Prosecutors said Khan’s cooperation was flawed, noting that she alerted Deep Shah, a former analyst at Moody’s Investors Service who the government says was one of her sources of illicit tips, to the federal probe. As a result, Shah, who was in India at the time, hasn’t returned to the U.S., the government said.
The U.S. has said Khan first came to the attention of federal investigators in Northern California in 1998 after a complaint from her then-employer, Intel Corp.
Intel suspected Khan of passing information to Rajaratnam, then a lead semiconductor analyst at Needham & Co., according to testimony from a hearing in Rajaratnam’s case. A video camera installed by Intel over a fax machine captured images of her as well as the number she dialed, which the FBI later identified as Rajaratnam’s. The Santa Clara, California-based company fired Khan after conducting an internal probe, the U.S. said.
After pleading guilty to wire fraud and agreeing to cooperate with the U.S. in 2001, Khan was sentenced in July 2002 to six months’ home detention and ordered to pay a $30,000 fine and $120,000 in restitution, according to court records.
No charges were filed against Rajaratnam and prosecutors closed that case in August 2002, FBI agent B.J. Kang testified. The U.S. said in Khan’s 2002 sentencing memo that Rajaratnam couldn’t be tied to illegal insider trading.
The government started looking at Khan a second time after the U.S. Securities and Exchange Commission opened a probe of Rajaratnam in 2006. A parallel probe started in March 2007 by the FBI in New York and the Manhattan U.S. Attorney’s office stalled until Kang approached Khan in late 2007 and asked her to become a cooperator, U.S. officials said.
Khan agreed to begin working with the government in November 2007 and helped investigators win authorization to wiretap Rajaratnam’s mobile phone in March 2008, prosecutors said. Rajaratnam was ultimately convicted of directing one of the largest hedge fund insider-trading cases in U.S. history.
At the trial, the government introduced 45 wiretap recordings, along with documents and testimony derived from the wiretaps.
Pflaum, who worked for Barai from March 2008 to January 2011, pleaded guilty in February 2011 to conspiracy and securities fraud charges.
His testimony helped convict Jiau of illegally passing tips about Nvidia Corp. and Marvell Technology Group Ltd. to hedge fund managers, including Pflaum’s former boss, Samir Barai.
Pflaum also provided help to the government on numerous other investigations and led the U.S. to Noah Freeman, a former SAC Capital Advisors LP portfolio manager who was a friend of Barai’s, prosecutors said.
During Jiau’s trial in New York in June 2011, Pflaum testified that he listened to and recorded phone calls between Jiau and Barai, who is hearing-impaired. Pflaum also said he wrote contemporaneous electronic instant messages to Barai to help him keep up the conversation with Jiau, as she passed tips about publicly traded technology companies.
Pflaum also testified that at least eight people provided Barai with nonpublic information about technology companies. Pflaum said he destroyed the files related to those tippers without deleting files related to Jiau.
The cases are U.S. v. Khan, 09-cr-00991, and U.S. v. Jiau, 11-cr-00161, U.S. District Court, Southern District of New York (Manhattan).