Earlier today, billionaire investor Raj Rajaratnam was found guilty on all 14 counts of securities fraud and conspiracy by a federal jury in Manhattan. A jury of twelve deliberated for twelve days after a trial that had started in early March. The 53-year founder of the Galleon Group hedge fund could face up to 25 years in prison; under federal sentencing guidelines, his recommended sentence could be as much as 19 and a half years.
As the Wall Street Journal says, Rajaratnam’s conviction gives the US “a significant win in a push to prosecute insider trading on Wall Street and in corporate America.” Galleon accumulated $63.8 million in illegal profits and avoided losses through its illegal trading in stocks including Google and Hilton Worldwide, according to government calculations.
At its peak, the Galleon Group hedge fund managed more than $7 billion in assets and was one of the largest trading clients of investment banks including Goldman Sachs and Morgan Stanley.
Crucial to the prosecution’s case against Rajaratnam were 45 wiretaps which revealed how Rajartnam “trafficked in insider tips provided to him by a web of contacts at the top tier of American business.” The Wall Street Journal notes that the prosecution’s successful use of wiretaps opens the way for more extensive use of a tactic that had been mostly used for drug and terrorism cases, not white collar crime. Some details about the wiretap evidence from the New York Times Dealbook blog:
Over a nine-month stretch in 2008, federal agents secretly recorded Mr. Rajaratnam’s telephone conversations. They listened in as Mr. Rajaratnam brazenly and matter-of-factly swapped inside stock tips with corporate insiders and fellow traders.
“I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” Mr. Rajaratnam said to one of his employees in advance of the bank’s earnings announcement.
“One thing we know, this is very confidential, someone is going to put in a term sheet for Spansion,” he told a colleague, referring to a proposed acquisition of the technology company.
“So yesterday they agreed on, at least they’ve shaken hands,” a tipster told Mr. Rajaratnam about an upcoming deal involving another publicly traded business. “So I think, uh, you can now just buy.”
Rajaratnam was arrested on October 16, 2009, by federal agents at his apartment on Manhattan’s Upper East Side. 25 others — 21 of whom have pleaded guilty — including former executives at I.B.M., Intel and Bear Stearns have been charged with insider trading. Three are scheduled for trial next week.
Rajaratnam reportedly showed no emotion as the verdict was read. He holds properties in his native Sri Lanka and in Singapore and the prosecution had asked that he be placed in custody, saying that he was at flight risk. Judge Richard J. Holwell ordered home detention with electric monitoring; Rajaratnam has posted $100 million bond, secured by $20 million in cash or property. His sentencing is set for July 29th. As the New York Times says, he and his lawyers plan to appeal the guilty verdict, so the case is not yet over.
In a statement, Manhattan U.S. Attorney Preet Bharara described Rajaratnam as “one of the most educated, successful and privileged professionals in the country.” However, as Bharara continued:
“Yet like so many others recently, he let greed and corruption cause his undoing. Unlawful insider trading should be offensive to everyone who believes in, and relies on, the market. It cheats the ordinary investor….We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught.”
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