Hedge fund billionaire Raj Rajaratnam is convicted of fraud

May 11, 2011

Hedge fund billionaire Raj Rajaratnam was convicted on all 14 counts of fraud and conspiracy Wednesday in the biggest insider-trading case in a generation, handing the government a victory after it was pummeled for bringing so few high-profile prosecutions out of the financial crisis.

The verdict is a historic achievement for the Justice Department, which used tactics once reserved for investigations of mobsters and drug dealers to expose financial professionals and insiders trafficking in secrets about pending mergers.

The government secretly recorded Rajaratnam talking to his tipsters, and it used those conversations to show the jury a dark side of the hedge-fund business that was long suspected. Prosecutors also drew upon testimony of co-conspirators whom the government had turned against Rajaratnam.

Rajaratnam, 53, head of Galleon Management, was accused of illegally reaping profits or avoiding losses of about $64 million.

The investment mogul did not testify in his own defense. His legal team argued that he traded on legitimate investment analysis and information in the public domain.

The trial was one of the most widely followed Wall Street cases in years. But it had little to do with the biggest Wall Street scandal in decades: the crisis in the mortgage and financial markets that plunged the nation into a devastating recession.

Lawmakers, activist groups and some financial analysts have questioned why the Obama administration has not brought any major criminal charges against a prominent Wall Street executive involved in the debacle. Congress has summoned top federal investigators over the past year to explain. The Financial Crisis Inquiry Commission, a special Senate investigative panel, and the Securities and Exchange Commission have referred cases to the Justice Department for possible prosecution.

Although many people have been hungering for financial titans to be held criminally accountable for the damage, Columbia Law School professor John C. Coffee Jr. said Wednesday that the government must be embarrassed that not a single high-ranking Wall Street executive has been indicted in connection with the crisis.

Coffee noted that the Rajaratnam investigation began before the crisis, and he said it was an important case for the Justice Department to pursue.

But in an earlier interview, he suggested that the current campaign against insider trading, which the Rajaratnam case symbolizes, offered an element of consolation. “If you aren’t able to bring the cases that probably the public expects, you may want to compensate,” he said.

Anthony Michael Sabino, a professor at St. John’s University in New York, put it this way: “This doesn’t make up entirely for Bernie Madoff, the mortgage crisis and a host of other wrongs, but it’s a start.”

Justice officials have said they are guided by the law and the evidence rather than public passions. “We have and we will continue to investigate aggressively all forms of financial crimes and when we find evidence to prove a crime has been committed, we will not hesitate to charge it,” Justice spokeswoman Alisa Finelli said.

The Justice Department swung and missed in perhaps its biggest financial crisis case when a jury acquitted two Bear Stearns hedge fund managers of lying to investors. It won the conviction of Lee Bentley Farkas, former chairman of mortgage lender Taylor, Bean & Whitaker, in connection with fraud that it said contributed to the failure of Colonial Bank.

The Securities and Exchange Commission, which can bring civil but not criminal cases, reached a settlement with Angelo Mozilo, former chief executive of subprime mortgage lender Countrywide Financial. The Justice Department took no action against Mozilo, and it dropped its investigation of a key player at American International Group, an insurance company that received a taxpayer bailout.

Goldman Sachs paid $550 million to settle SEC charges that it misled investors about a complex investment pegged to subprime mortgages, but the Justice Department has not acted on the matter.

Holding people criminally responsible for the financial crisis would require reconstructing past events and overcoming arguments that broader economic forces were to blame, white-collar lawyers said.

In contrast, the Rajaratnam case involved one of the oldest and simplest crimes on Wall Street: trading on stolen information. Proving insider trading has often been difficult, but the FBI and other authorities were able to build their case in real time, capturing conversations as they transpired.

Rajaratnam “hung himself with his own words, as caught on tape,” Sabino said.

According to government transcripts, this was Rajaratnam talking on the phone on Oct. 24, 2008: “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are gonna lose $2 per share.”

And this was Rajaratnam talking about a deal involving another company on Oct. 7, 2008: “We know because . . . one of our guys is on the board. We know that they’re gonna put $41 million in escrow.”

And this was one of Rajaratnam’s tipsters on July 24, 2008, telling him that a company planned to issue a more pessimistic earnings forecast: “They’re gonna guide down. I just got a call from my guy. I played him like a finely tuned piano.”

One of Rajaratnam’s alleged sources had been a member of the board of Wall Street powerhouse Goldman Sachs and is a former head of the international management consulting giant McKinsey & Co. He allegedly tipped Rajaratnam to the fact that Berkshire Hathaway Chairman Warren Buffett was going to make a crucial investment in Goldman Sachs at the height of the financial crisis.

The parade of witnesses at the trial in federal court in New York included the chairman of Goldman Sachs, Lloyd Blankfein.

U.S. Attorney Preet Bharara said in a statement: “Rajaratnam was among the best and the brightest — one of the most educated, successful and privileged professionals in the country. Yet, like so many others recently, he let greed and corruption cause his undoing.”

Rajaratnam was the 35th person — and the most prominent — to be convicted of insider trading in the Southern District of New York in the past year and a half.

A prosecutor asked the court to have him held in jail until his sentencing in July, but a judge released him to home confinement with electronic monitoring. Rajaratnam had previously posted a bond of $100 million.

A Justice lawyer told the court that, by a conservative interpretation, federal guidelines point to a sentence of 151 / 2 to 191 / 2 years.

Speaking at the federal courthouse in Manhattan, defense attorney John Dowd said he plans to appeal.

The stakes were high for both sides, as J. Robert Brown Jr., a professor at the University of Denver’s Sturm College of Law, noted.

Given the extraordinary evidence the government amassed against Rajaratnam, Brown said, had the verdict gone the other way, “it would have made insider-trading cases against Wall Street traders almost impossible.”

Brown predicted that the verdict will force insider traders to exchange information “in a more devious manner,” but he doubted it would hamper insider trading.

“The money in this area is too big,” he said.

Staff writer Zachary A. Goldfarb contributed to this report.

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