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Hedge fund manager Raj Rajaratnam convicted of insider trading

Hedge fund manager Raj Rajaratnam was recorded getting inside information from hired experts. After the jury heard the wiretapped conversations, they convicted him of all 14 counts of insider trading and conspiracy.

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Rajaratnam’s conviction may cause some high-flying hedge funds to think twice about practices like the use of so-called “expert networks.” In the Galleon case, some of the "experts" gave specific, non-public corporate information.

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“There is nothing wrong with experts – if they follow the rules,” says Twardy, who is not involved in the Rajaratnam case. “But people may hesitate to serve as experts – or use them – until all this sorts itself out.”

Some of the most damaging evidence in the Rajaratnam case came from FBI wiretaps. One captured a former director of Goldman Sachs, Rajat Gupta, telling Rajarantam of Goldman's interest in a commercial bank. Rajaratnam made $17 million on Goldman Sachs trades, according to the Securities and Exchange Commission, out of a total of $64 million illegally garnered. [Editor's note: The original version of this paragraph misidentified which information was recorded by the wiretap played during the trial.]

Role of white-collar wiretaps

In the past, it was harder to prove insider trading cases. When the government tried Martha Stewart in 2004, the home fashion and party guru, she was charged with – and convicted of – lying to the government, not insider trading.

That has started to change, with the government now seeking court permission for white-collar wiretaps.

“Having learned the value of electronic surveillance in organized crime cases, the government will now employ the same tactics against the ‘Wall Street Mob,' ” said Anthony Michael Sabino, a professor of business at St. John’s University in New York, in a statement.

Rajarantam's jury repeatedly asked to listen to the wiretaps during deliberations.

“The wiretaps were essential to the prosecution,” says Twardy. “You can’t cross examine a wiretap – unlike a witness. The only words heard by the jurors were spoke by Rajaratnam.”

The wiretaps' legality will likely be one of the bases for Rajaratnam's expected appeal.

Twardy doubts that such an appeal will be successful. “Unless the US attorney blatently misrepresented the reason for them, the courts will uphold the wiretaps. It is highly unusual to see the evidence from a wiretap dismissed.”

Rajaratnam is scheduled for sentencing on July 29. He could face as much as 25 years behind bars, but will probably remain free until the last of his appeals is finished, says Twardy.

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