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Q+A-The case against hedge fund manager Rajaratnam

[Reuters, Monday, 7 March 2011 15:26 No Comment]

Raj Rajaratnam, the former head of the Galleon Group hedge fund that once managed $7 billion, goes on trial in New York on Tuesday on charges of insider trading.

The following are some questions and answers about the jury trial in Manhattan federal court of the central figure in the biggest U.S. probe of insider trading at hedge funds.

WHO IS RAJ RAJARATNAM?

He was born in Colombo, Sri Lanka on June 15, 1957. After attending schools there and in England, he earned an MBA from the Wharton School at the University of Pennsylvania in 1983. He has lived in America for about 30 years and is a U.S. citizen.

Rajaratnam worked at Chase Manhattan Bank and Needham & Co investment bank as a stock analyst before founding Galleon in 1997. Forbes magazine listed him in 2009 as the 236th richest American and the richest Sri Lankan-born person. He is married with three children and lives in New York. He has been free on bail since his October 2009 arrest.

WHAT DOES THE GOVERNMENT ACCUSE HIM OF DOING?

Federal prosecutors and the U.S. Securities and Exchange Commission say Rajaratnam is among 26 executives, lawyers and traders, some of them ex-Galleon employees, who illegally gathered, swapped and traded on inside company information.

The government claims Rajaratnam made $45 million in illicit profits from 2003 to March 2009. The case involves trading in about 35 stocks, including Google (GOOG.O) and eBay (EBAY.O).

WHAT MUST PROSECUTORS PROVE FOR THE JURY TO CONVICT?

The government must convince the jury that evidence shows Rajaratnam knew he was receiving secret information about companies from someone who had a fiduciary duty not to disclose it. Prosecutors could present up to 173 recordings of telephone conversations and six cooperating witnesses. The jurors must reach a unanimous verdict for a conviction.

HOW IS RAJARATNAM DEFENDING HIMSELF AGAINST THE CHARGES?

Rajaratnam has vowed to prove his innocence at trial. His defense team has challenged the legality of FBI wiretaps and the prosecution’s theory of what constitutes insider trading.

The defense contends that it was Rajaratnam’s job in managing investors’ money to know something about companies whose stock he might buy and sell. They argue that insider trading laws do not criminalize conversations that brokers, hedge fund managers and traders have about stocks and companies.

In the wider Galleon case, 19 people have pleaded guilty. Five others face trial on May 9. One defendant is at large.

WHY IS THE TRIAL IMPORTANT TO HEDGE FUNDS AND PROSECUTORS?

The trial is a test of the government’s suspicions that insider trading is commonplace, especially in the lightly regulated $1.9 trillion hedge fund industry.

The unprecedented broad use of wiretaps in the probe sent shudders throughout hedge funds. The case spawned a broader probe of whether consultants for so-called expert networking firms have leaked company secrets to hedge funds.

WHAT IS ON TAPES OF THE FBI’S SECRETLY RECORDED CALLS?

Only prosecutors and defense lawyers know everything that is said on mobile phone audio recordings and text messages that could come into evidence.

Excerpts of the tapes are included in some court filings by prosecutors, who contend they have an overwhelming body of evidence to support a conviction. But some legal experts say the defense might be able to show prosecutors took the recordings out of context or did not correctly interpret them.

IF THE JURY CONVICTS RAJARATNAM, WHAT ARE THE PENALTIES?

The charges of securities fraud and conspiracy to commit securities fraud together carry a possible prison sentence of up to 25 years, plus forfeiture of illegal profits.

Typically, people convicted of insider trading serve much lighter prison terms, or even avoid prison and serve probation, than those prescribed by federal sentencing guidelines. But most of those are cooperators who pleaded guilty.

If convicted at trial, Rajaratnam could face a prison term of 10 to 15 years, according to legal experts.

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