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New York court finds Raj Rajaratnam guilty of insider dealing
Billionaire hedge fund boss Raj Rajaratnam is facing up to 20 years in prison after being found guilty of insider dealing in a New York court – convicted by a series of recorded phone calls in which he received illegal tips from a network of highly placed informants. Rajaratnam has become the highest profile scalp in the biggest insider trading investigation in US history. He will be sentenced in July in New York.
The eight women and four men of the jury took 11 days to reach a verdict. Their decision was delayed after one juror was excused on medical grounds and a replacement had to be brought in. In the end, they found the 53-year-old co-founder of the Galleon Group hedge fund guilty of 14 charges of securities fraud and conspiracy. The judge rejected prosecution calls for his immediate incarceration and put Rajaratnam on home detention pending sentencing. His bail was set at $100m (£61.2m) and he will have to wear an electronic tag.
The conviction is a major victory for prosecutors who had accused the Sri Lankan-born billionaire of making $63.8m from tips provided by corporate insiders and hedge fund traders. Controversial surveillance techniques were employed to secure the conviction.
Rajaratnam was arrested in October 2009 and the government's investigation has now widened to other hedge funds, banks, technology companies and so-called "expert network" firms that pay company executives and other experts to provide non-market-sensitive intelligence about business issues. Some 19 people have so far pleaded guilty in the investigation.
The trial began on 8 March and involved some of the biggest names in US business: Rajaratnam's was the most prominent corporate prosecution since the credit crunch. Unlike fraudster Bernard Madoff, Rajaratnam maintained he was innocent and assembled a high-powered defence team to fight the case. Lead defence attorney John Dowd said he planned to appeal.
The case brought some of the biggest names on Wall Street to the court, albeit as spectators and witnesses for the prosecution. Goldman Sachs boss Lloyd Blankfein was called to give evidence after prosecutors alleged former Goldman director Rajat Gupta had leaked confidential information he had received from Blankfein. Gupta – once the chief executive of global management consultancy group McKinsey – was just one of a network of highly placed insiders that Rajaratnam was accused of using. Other informants included an executive at Intel and former McKinsey partners.
Prosecutors secretly recorded thousands of conversations between Rajaratnam and his associates, a technique more usually associated with crackdowns on mafia rings and drug traffickers. His defence team fought unsuccessfully to have the wiretaps declared inadmissible, and the scale of the surveillance has concerned civil liberties organisations.
The jurors asked to hear dozens of the tapes again as they deliberated. Among the conversations they wanted to hear again was one between Rajaratnam and Danielle Chiesi, a former beauty queen turned trader who has since pleaded guilty to insider dealing. The two discussed investing in chipmaker AMD ahead of a deal for the company to spin off its manufacturing business in 2008. "I'm a little nervous because, you know, people are going to investigate me. I really believe that," Chiesi said on the tape.
This week the jurors asked to hear tapes of conversations between Rajaratnam and Rajiv Goel, a former Intel executive, and Anil Kumar, a former McKinsey consultant, both of whom pleaded guilty.
Kumar told the court Rajaratnam had paid him $500,000 a year through an offshore account in his housekeeper's name for insider tips. One of those tips concerned AMD's takeover of ATI Technologies in 2006. That deal generated a profit of nearly $23m for Galleon, almost half the illegal profits Rajaratnam was convicted of making. The hedge fund manager argued that he had based his trades on research and information that was already in the public domain.
US attorney Preet Bharara, who has led the crackdown on insider trading, is currently in the midst of pursuing other large insider-trading investigations. In a statement he said: "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. The message today is clear – there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have."
Professor James Cox, a white-collar crime expert at Duke University, said prosecutors would now use a lot more wiretaps in corporate crime cases. "I'm glad to see that the justice department will use a lot of resources to prosecute insider dealing cases," he said. "But let's not get away from the fact that this had nothing to do with the credit crisis. Neither Rajaratnam nor Madoff had a damn thing to do with that and there are still real questions to be asked about who is responsible for the credit crisis."
The jurors were instructed not to talk about the case. But outside the court one juror spoke to the New York Post: "All I can say is I hope God will protect him and his family as best as He can," said Relesta James, a customer service representative for the Metropolitan Transport Authority.
Key players
Rajat Gupta The ex-boss of McKinsey is a UN adviser, chairman of the International Chamber of Commerce and a philanthropist who mixes in the same circles as Bono, Bill Clinton and Bill Gates. He is also facing SEC charges that he fed tips to Rajaratnam gleaned in the Goldman Sachs boardroom. He denies the charges.
Danielle Chiesi A former Bear Stearns trader who compared insider dealing to an orgasm, she dealt alongside Rajaratnam in AMD and was arrested at the same time. She is also alleged to have received insider information from former IBM executive Robert Moffat. Moffat was jailed last year and Chiesi pleaded guilty to insider dealing last month.
Rajiv Goel A former Intel executive, Goel admitted leaking secrets to Rajnaratnam about its $1bn investment with Clearwire to develop an ultra-fast wireless internet service. The court heard tapes of conversations between the pair on which Goel's children could be heard giggling. When asked by Rajnaratnam if he had "hyenas" there, Goel explained that the children laughed when he was on the phone to the Galleon boss because he "spoke so softly".