In a case with widespread ramifications for the stock market. a federal jury has found Raj Rajaratnam, a billionaire and hedge fund manager, guilty of all 14 counts of securities fraud and conspiracy in his insider trading case.
Mr. Rajaratnam had maintained that the trades he made for the Galleon Group, which once managed as much as $7 billion, resulted from a “mosaic” of publicly available information. However, the jury, which convicted him of 9 counts of insider trading and 5 counts of conspiracy, listened to FBI wiretaps of Rajaratnam receiving information from corporate insiders, including a director of Goldman Sachs.
The Sri Lankan native is expected to appeal the legality of the wiretaps. He is free on $100 million in bail and must wear an electronic monitoring device around his ankle.
While the Justice Department has won other insider trading convictions, Rajaratnam is one of the wealthiest individuals ever convicted. According to some reports, he spent as much as $25 million on his defense, which at times included up to 45 lawyers.
In addition to proving that money can't buy a not-guilty verdict, the conviction provides a much-needed victory in the Justice Department's efforts to reassure investors that the nation's financial markets are fair.
Inside information: 'Rules ... apply to everyone'
“Because someone has access to an individual with inside information, why should that person benefit ... while the public cannot?” asks Stan Twardy, a former federal prosecutor for Connecticut who is now a partner doing white collar defense at Day Pitney in Stamford, Conn.
“[With] inside information, I can avoid taking a loss if something bad happens, or I can make a much bigger profit if something good happens,” Mr. Twardy adds.
“Rajaratnam was among the best and the brightest," said US Attorney Preet Baharara in a statement, "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 from the conviction is clear, said Mr. Baharara. “There are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have.”
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.
“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.