Dozens have admitted guilt and are now co-operating
The conviction of hedge fund billionaire Raj Rajaratnam will herald an unprecedented wave of insider trading cases, according to legal experts.
Rajaratnam's conviction on 14 counts of fraud and conspiracy came amid the largest insider dealing investigation in US history. In the last 18 months, US authorities have charged 47 hedge fund managers and others with insider trading. Rajaratnam was the 35th defendant to be convicted or to plead guilty.
More cases are pending. Next week Zvi Goffer, a former employee of Rajaratnam's Galleon hedge fund, faces trial on insider dealing charges. Goffer, known as "Octopussy" because of his reputation for having his hands on so many sources of information, is being tried with his brother Emanuel Goffer and Michael Kimelman, a trader. They have all pleaded innocent.
The US authorities are also building a case against Rajit Gupta, a former Goldman Sachs director and global managing director of McKinsey, who is accused of leaking non-public information about Goldman board discussions to Rajaratnam.
Robert Mintz, a former federal prosecutor and now partner at law firm McCarter & English, said he expected the Galleon investigation to lead to an "unprecedented" number of insider trading prosecutions.
Rajaratnam's conviction came after the jury heard damning taped evidence of him discussing trades using insider information. The hedge fund manager and his associates had been covertly taped in the what is probably the largest use of wiretaping in a white-collar crime case.
The use of wiretapping is common in mafia and drug dealing cases but is expensive and controversial and has been less widely used in white-collar investigations. Wiretaps have to be monitored in real time as they must be switched off when their subjects discuss matters unrelated to the case. They have to be sanctioned by a judge who will regularly monitor progress. But Mintz said that after such a high profile conviction, more wiretaps were inevitable. "The cost is high but the evidence can be blockbuster," he said.
Prosecutors have thousands of hours of taped evidence to sift through as they build new cases. On top of that dozens of people have pleaded guilty in the Galleon case and are now co-operating. "Insider trading is going to be the crime du jour for federal prosecutors for the next several months if not years," said Mintz.
Preet Bharara, Manhattan US attorney, has described insider trading on Wall Street as "pervasive". In a statement after the conviction he said: "We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught." Bharara is investigating so-called "expert-network" firms, which arrange conversations between employees and investors seeking insight into companies and industries.
Wiretaps have also put pressure of Steven Cohen, one of the world's top fund managers, and Noah Freeman and Donald Longueuil, two former managers at Cohen's SAC Capital Advisers. Freeman pleaded guilty first and wore a wire to tape conversations with Longueuil, who originally pleaded innocent.
According to court filings the US authorities are now looking at trades made in SAC accounts. There has been no allegation of wrongdoing against either Cohen or SAC.Tom Dewey, a partner at Dewey Pegno & Kramarsky, said that in the past "insider dealing cases have been small and discrete". But the global nature of trading and the networks of information and communication made available by new technology had fundamentally changed the scale of insider dealing cases, he added. "Since Preet Bharara took office he has made it clear he believes that insider trading is a top priority. There are many more shoes about to drop," he said.