In the largest illegal stock-tipping case in a generation, and the first pure insider trading case in which the prosecution introduced wiretapped telephone conversations, Galleon hedge fund co-founder Raj Rajaratnam was found guilty on 5 counts of conspiracy and 9 counts of securities fraud. See “Rajaratnam guilty on all counts in insider trading case,” (InvestmentNews, May 11, 2011). The maximum prison sentence for securities fraud is 20 years, and for conspiracy is 5 years.
The case is noteworthy for the use by prosecutors of more than 40 wiretapped telephone conversations. In some, Rajaratnam can be heard “gathering secrets from his sources,” according to the article. Compared with a mosaic of circumstantial evidence, this is high impact evidence. Rajaratnam’s attorney said the denial of his motion to exclude this evidence will be a ground for appeal.
Rajaratnam was charged with using non-public (“inside”) information to trade ahead of public announcements regarding earnings and other information that could affect the market price of the stock of a publicly traded company. In Rajaratnam’s case, the companies included Intel, Goldman Sachs, Google, ATI Technologies, Akamai Technologies, and Hilton Hotels. Rajaratnam realized ill-gotten gains of $63 million.
Rajaratnam’s sources ? the tippers ? allegedly included former Goldman director Rajat Gupta, Morgan Stanley investment banker Kamal Ahmed.
While prosecutors acknowledged that Rajaratnam obtained some information lawfully through legitimate research, at the same time, he routinely traded illegally on inside information. “Cheating became part of his business model,” Reed Brodsky, one of the prosecutors, was quoted as saying.
Rajaratnam’s conviction is the biggest government win to date in a widespread crackdown on insider trading by the Securities and Exchange Commission and the Department of Justice. Observers expect it to embolden prosecutors, according to a New York Times DealBook article by Peter Lattman and Azam Ahmed entitled “Galleon Conviction Likely to Embolden Prosecutors,” and a Wall Street Journal article by Susan Pulliam and Michael Rothfield entitled “Trial Win Adds to Momentum in Crackdown.”
“This is a landmark case in that it is the frist time prosecutors used wiretap evidence in an insider trading case, former federal prosecutor Robert Mintz was quoted as saying, adding: “This conviction will undoubtedly embolden prosecutors, and we can expect many more of these cases in the future.”
Many of the targets of the crackdown operated hedge funds, which have grown to manage more than $2 trillion. In the past year and a half, 47 hedge fund managers have been criminally charged. Rajaratnam is the 35th to be convicted or plead guilty.
“We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught,” U.S. Attorney Preet Bahara was quoted as saying.
Next in the dock are Zvi Goffer, a former Galleon trader, his broker Emanuel Goffer and a trader, Michael Kimelman, who will stand trial for alleged insider trading later in May. Other pending insider trading cases that could be affected by this verdict include those against Goldman Sachs director Rajit Gupta, an alleged tipper to Rajaratnam; James Fleishman (expert networking form Primary Global Research); Corporate attorney Matthew Kruger and trader Garrett Bauer; and Joseph “Chip” Skowron III, manager of FrontPoint Partners LLC, a hedge fund.
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