Galleon billionaire Raj Rajaratnam convicted in insider trading case

A jury finds the former hedge fund magnate guilty on all 14 counts of conspiracy and securities fraud after a high-profile trial at the heart of a federal crackdown on insider trading.

Galleon Group co-founder Raj Rajaratnam, center, stumbles over a curb as he departs a federal court in New York City with his lawyers. (Reuters / May 11, 2011)

By Nathaniel Popper and Walter Hamilton, Los Angeles Times

A resounding guilty verdict in the insider-trading trial of a high-flying hedge fund magnate represents the biggest victory against Wall Street wrongdoing in two decades — and could invigorate the government's effort to stamp out a crime that's existed for as long as stocks have changed hands.

To win the conviction of Raj Rajaratnam, prosecutors relied on extensive electronic wiretaps, marking the first time illegal trading has been pursued with a tool more commonly employed against organized crime. The episode is likely to send a strong deterrent message to traders in the secretive and lucrative world of hedge funds, experts said.

"Anybody who is engaged in this conduct right now is likely turning it right off," said former prosecutor Bill Currier.

Or as Anthony Sabino, a law professor at St. John's University in New York, put it: "Only the janitors and the file clerks are going to get good nights of sleep on Wall Street. Everybody else is going to be tossing and turning."

Rajaratnam was convicted Wednesday on all 14 counts of conspiracy and securities fraud after a two-month trial in a federal courthouse in lower Manhattan that was closely followed on Wall Street.

The government presented evidence showing that Rajaratnam, founder and head of fund operator Galleon Group, made more than $50 million in illicit profits by acting on secrets provided by a web of contacts at elite American corporations such as Google Inc., Hilton and Goldman Sachs Group Inc.

Defense lawyers argued that their client, whose success with Galleon made him a billionaire, used legitimate research gleaned from public information.

But in wiretapped calls played for jurors, Rajaratnam gloated about information he accumulated and told colleagues to keep "radio silent" about the trading.

In one recording, he told a trader about a clandestine conversation with Rajat Gupta, a Goldman Sachs board member who divulged that the investment bank soon would report an unexpected quarterly loss.

"I'm gonna whack it, you know," Rajaratnam said, apparently referring to his plan to sell Goldman stock to avoid losses.

Several times in their deliberations, jurors asked to listen to replays of wiretaps.

The case — considered the biggest insider-trading prosecution since Ivan Boesky went to prison in the go-go 1980s, and the biggest ever against hedge-fund figures — was a further blow to Wall Street's image, already severely dented by the mortgage meltdown and financial crisis.

The trial also drained some of the mystique of hedge funds, which are professionally managed investment pools catering to wealthy individuals that are known for their often-aggressive strategies.

Although a growing majority of hedge funds make trades using super-fast computers and sophisticated mathematical formulas that are beyond the realm of ordinary investors, the trial served as a reminder that some funds remain dependent on an old-fashioned commodity — information, obtained legally or not.

The government depicted Rajaratnam as desperate to gather the tiniest kernels of knowledge to get an edge over rivals.

"It demystified the process," said former prosecutor Robert Mintz. "It underscores the fact that many of the old-school techniques of gathering information are still very important in the industry."

The Rajaratnam case also has taken some heat off prosecutors, who have been criticized for a paucity of criminal cases against executives for their roles in the financial crisis.

After the verdict, defense lawyer John Dowd told reporters that Rajaratnam would appeal the verdict.

The case has highlighted unseemly behavior at the top levels of the financial world, but the successful prosecution of this behavior could serve to restore confidence among disillusioned individual investors who have been rattled by fears that the market is rigged in favor of the financial elite.

[Source : latimes.com]