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Galleon Conviction Is Expected to Embolden Prosecutors

[NYTimes, Thursday, 12 May 2011 08:17 No Comment]

Andrew Gombert European Pressphoto AgencyRaj Rajaratnam leaves federal court after his conviction. He is scheduled to be sentenced on July 29. Raj Rajaratnam, the billionaire investor who once ran one of the world’s largest hedge funds, was found guilty on Wednesday of fraud and conspiracy by a federal jury in Manhattan, giving the government its biggest victory yet in a widening investigation of insider trading.

The verdict is expected to embolden prosecutors in their campaign to ferret out criminal activity on Wall Street trading floors. By using wiretaps — a tactic normally reserved for Mafia and drug trafficking cases — to secretly record the phones of Mr. Rajaratnam and others, the government now has a new weapon against white-collar crime.

Mr. Rajaratnam, dressed in a dark suit and a gold tie, remained stoic and stared straight ahead as the courtroom deputy read out the verdict — guilty on all 14 counts.

Just as the insider trading cases of the 1980s focused on the major Wall Street figures of that era — risk arbitragers like Ivan Boesky and junk-bond financiers like Michael R. Milken — the recent wave of prosecutions home in on some of the most influential players in today’s markets: hedge funds. As the investment firms have grown in clout and prominence, now managing more than $2 trillion and minting dozens of billionaires, the industry has attracted more scrutiny.

“Mr. Rajaratnam was among the best and the brightest — one of the most educated, successful and privileged professionals in the country,” said Preet Bharara, the United States attorney for Manhattan. “Yet, like so many others recently, he let greed and corruption cause his undoing.”

Mr. Bharara’s office has headed the crackdown on insider trading. His office alone has charged 47 people with insider trading over the last 18 months; of those, 36 have been convicted or have pleaded guilty. Some of those who pleaded guilty were cooperating witnesses in Mr. Rajaratnam’s trial.

The case stoked the worst suspicions of Main Street investors: That the stock market was a rigged game controlled by powerful Wall Street financiers who made fortunes trading on secret information unavailable to the public. Over the two months of the trial, jurors heard evidence that Mr. Rajaratnam used a corrupt network of tipsters to gain about $63 million from illegal trading in stocks, including Google and Hilton Worldwide.

Mr. Rajaratnam, 53, could be sentenced to as much as 25 years in prison. Prosecutors said federal sentencing guidelines would suggest a sentence of 15 and half to 19 and a half years. He could also be forced to disgorge tens of millions of dollars in illegal trading profits.

Judge Richard J. Holwell ordered home detention and electronic monitoring for Mr. Rajaratnam while he awaits his sentencing set for July 29.

John Dowd, a lawyer for Mr. Rajaratnam, said his client would appeal.

Jurors, who reached their decision on the 12th day of deliberations, did not respond to requests for comment.

Over a nine-month stretch in 2008, agents from the Federal Bureau of Investigation taped Mr. Rajaratnam’s telephone conversations. They listened in as he matter-of-factly swapped illegal stock tips with corporate insiders and fellow traders.

“I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” Mr. Rajaratnam said to one of his employees in advance of the bank’s earnings announcement.

For years, Mr. Rajaratnam was lionized as one of Wall Street’s savviest investors. At its peak, his Galleon Group hedge fund managed more than $7 billion in assets. Investment banks counted Galleon, which paid out roughly $300 million in trading commissions annually to brokerage firms, as one of their largest trading clients.

In the early hours of Oct. 16, 2009, federal agents arrested Mr. Rajaratnam at his Sutton Place apartment on the East Side of Manhattan.

Mr. Rajaratnam fought the charges against him, insisting that he had done nothing wrong. Mr. Dowd said that his client’s success as a money manager came from “shoe-leather research, diligence and hard work.”

He based his defense on the so-called mosaic theory of investing. Galleon was famous for doggedly digging for information about publicly traded companies that would form a “mosaic” — a complete picture of a company’s prospects that gave it an investment edge over other investors.

Prosecutors acknowledged that Galleon performed legitimate stock research. But at the same time, they argued, the firm routinely violated securities laws. In the words of a former Galleon portfolio manager who testified during the trial, the firm did its homework — but also cheated on the test.

“Cheating became part of his business model,” said a prosecutor, Reed Brodsky, in his summation.

The verdict marks an end to a Wall Street success story. A native of Sri Lanka, Mr. Rajaratnam came to the United States in 1981 to study business at the prestigious Wharton School at the University of Pennsylvania. He joined Needham & Company, a small investment bank, and carved out a reputation as an expert in technology companies.

Mr. Rajaratnam’s ascent coincided with both the tech boom of the 1990s and the emergence of hedge funds. When he formed the Galleon Group in 1997, investors clamored to put their money with him. Mr. Rajaratnam posted superior investment returns, attracting clients like New Jersey’s state pension fund and UBS, the giant Swiss bank.

Galleon brought Mr. Rajaratnam great wealth, estimated by Forbes magazine at $1.3 billion. During the trial, Mr. Rajaratnam’s former friends told the jury about lavish vacations. For his 50th birthday, he chartered a private jet to fly dozens of family and friends to Kenya for a safari.

Fiercely competitive, Mr. Rajaratnam could be heard on wiretaps speaking in sports and military metaphors. He compared himself to fighting Muhammad Ali in the ring and said during the financial crisis, “I’m feeling the pain, but they can’t kill me. I’m a warrior.”

It was that competitiveness that caused Mr. Rajaratnam, despite a blizzard of incriminating evidence, to fight the charges, according to two former Galleon employees who requested anonymity.

“Raj hated to lose and loved a good fight,” one former colleague said. “He’s a big sports fan, and I think in some ways he viewed this trial as a contest.”

His appeal will take aim at the use of wiretaps, contending that they were unconstitutional and that there was no cause for employing such unconventional investigative tactics.

Legal experts say that the biggest blow to Mr. Rajaratnam’s defense came last November, when Judge Holwell denied his request to prohibit the government from using the recorded conversations at trial.

A breakthrough in the multi-year investigation of Mr. Rajaratnam came in 2006 during an inquiry of a hedge fund run by Rengan Rajaratnam, Mr. Rajaratnam’s younger brother who has not been charged.

While reviewing e-mails and instant messages, a prosecutor discovered incriminating communications between the brothers.

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