Raj Rajaratnam -- Galleon Group Founder Convicted in Insider Trading Case
Raj Rajaratnam, a billionaire investor, once ran the Galleon Group, which became one of the world's largest hedge funds. On May 11, 2011, he was found guilty of fraud and conspiracy, becoming the most prominent figure convicted in the government's crackdown on insider trading on Wall Street.
After deliberating for over two weeks, a federal jury in Manhattan convicted Mr. Rajaratnam of all 14 counts against him.
Mr. Rajaratnam was sentenced in October 2011 to 11 years in prison and fined $10 million. It was the longest-ever prison sentence for insider trading, a watershed moment in the government's aggressive two-year campaign to root out the illegal exchange of confidential information on Wall Street.
The sentence was lower than the range of roughly 19 to 24 years requested by the government.
U.S. District Judge Richard J. Holwell announced the sentence after concluding that Mr. Rajaratnam made well over $50 million in profits from his illegal trades. The judge also said Mr. Rajaratnam needs a kidney transplant and suffers from advanced diabetes, an illness he took into consideration in giving him leniency.
When Mr. Rajaratnam was charged in October 2009, he became the the hub of what developed into a sprawling, multiyear investigation. The Justice Department and the Securities and Exchange Commission accused Mr. Rajaratnam and five others of relying on a vast network of company insiders and consultants to make tens of millions in profits.
During the course of the case, 21 defendants pleaded guilty, including former executives at I.B.M., Intel and Bear Stearns.
The government built its case against Mr. Rajaratnam with powerful wiretap evidence. Over a nine-month stretch in 2008, federal agents secretly recorded Mr. Rajaratnam's telephone conversations. They listened in as Mr. Rajaratnam brazenly and matter-of-factly swapped inside 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.
"One thing we know, this is very confidential, someone is going to put in a term sheet for Spansion," he told a colleague, referring to a proposed acquisition of the technology company.
Mr. Rajaratnam's lawyers argued that all of his supposed illegal trading was grounded in publicly available newspaper articles, analyst reports and company news releases. For instance, the defense presented evidence showing that before Advanced Micro Devices acquired ATI Technologies -- a deal that prosecutors said Mr. Rajaratnam had received an illegal tip about -- 51 news articles and 6 analyst reports speculated on the likelihood of a merger between the two companies.
Prosecutors dismantled Mr. Rajaratnam's defense by acknowledging that Galleon performed legitimate 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. Mr. Rajaratnam sought out information that was confidential, beyond the reach of research, and illegally traded on it.
Mr. Rajaratnam's arrest halted a remarkable 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.
His ascent coincided with both the tech boom of the 1990s and the emergence of hedge funds - a once obscure pocket of the investment world - into a powerful force on Wall Street. When he formed his own hedge fund, Galleon Group, in 1997, his services were in hot demand. Mr. Rajaratnam posted superior investment returns, attracting blue chip investors like New Jersey's state pension fund and UBS, the giant Swiss bank.
Galleon brought Mr. Rajartnam great wealth. Forbes magazine pegged his net worth at $1.3 billion.
Mr. Rajaratnam, born in Sri Lanka, studied engineering at the University of Sussex in England and earned a business degree from the Wharton School, University of Pennsylvania in 1983. He started his career as a lending officer in the technology group at Chase Manhattan Bank before becoming an electronic analyst at Needham & Company, the boutique investment bank. In 1992, he began a hedge fund for Needham clients, many of whom were technology executives themselves.
Mr. Rajaratnam left the firm in 1997, but took the fund and called it Galleon, after the Spanish empire's ships used to ferry gold and spices from the New World. He eventually grew the firm into a $7 billion giant. After suffering losses and withdrawals in 2008, Galleon's funds shrunk to about $4 billion in assets.
Galleon's performance enabled Mr. Rajaratnam to take home more than $300 million in 2006 and $150 million in 2007, according to the magazine Trader Monthly. According to Forbes, he is worth an estimated $2.6 billion.
Mr. Rajaratnam has always remained close to his homeland, Sri Lanka, and often reached into his wallet for causes related to the country. When the island was struck by a tsunami in 2004 he organized a charity to raise money to rebuild homes.
Yet his giving was not without controversy. In 2005 and 2006, the charity he created, Tsunami Relief, gave $1.5 million to the Tamil Rehabilitation Organization, a group officially dedicated to helping victims of the fighting. But prosecutors have since charged the Tamil charity with aiding the rebel group, and its nonprofit status has been suspended.
Information Not Available to the Public
When the case against Mr. Rajaratnam was first brought, Wall Street was aflutter with anxiety that the government was expanding the definition of insider trading. The case signaled a new zeal by authorities to clamp down on Wall Street crime after failing to detect the $68 billion Ponzi scheme by Bernard L. Madoff.
The trial was seen as a moment that would show how the government planned to police modern Wall Street as more and more information poured into the system. It was supposed to redefine the law around "expert networks," those paid services that investors use to gain an edge, and "channel checks," which investors use to ferret out information from suppliers and clients.
But the case against the former hedge fund manager was not about a new form of insider trading. It focused on whether what had happened was old-fashioned insider trading -- passing blatant, black-and-white tips that gave a trading advantage. Over and over, witnesses with inside information testified to breaking the law to provide Mr. Rajaratnam with details of coming announcements and transactions.
Mr. Rajaratnam has had legal problems before. In 2005, he paid $20 million in back taxes, penalties and interest to settle a federal investigation into a sham tax shelter that he used, according to a previously undisclosed lawsuit. His Galleon Group funds were entangled in an earlier fraud case, and were found to have violated Securities and Exchange Commission rules.
A Prominent Executive Ensnared
In early March 2011, the Securities and Exchange Commission accused Rajat K. Gupta, a former director of Goldman Sachs and Procter & Gamble, of passing illegal tips -- including word of Warren E. Buffett's $5 billion investment in Goldman Sachs in 2008 -- to Mr. Rajaratnam. As a longtime senior executive at McKinsey & Company, Mr. Gupta is the most prominent business executive ensnared by the government in the wide-ranging investigation. He ran McKinsey from 1994 to 2003 and counts as friends and associates some of the most powerful people in business.
The S.E.C. filing contends that Mr. Gupta provided details about Goldman's financial health and plans after the collapse of Lehman Brothers rocked the financial markets. On Sept. 23, 2008, the Goldman board met via telephone to consider and approve Mr. Buffett's $5 billion purchase of preferred shares in Goldman.
"Immediately after disconnecting from the board call, Gupta called Rajaratnam from the same line," the S.E.C. filing said. A minute later, Galleon funds bought more than more than 175,000 shares of Goldman just minutes before the market closed, the agency said. After the close, Goldman announced the investment, and its shares rallied on the vote of confidence by Mr. Buffett. The Galleon funds netted a profit of more than $900,000, the S.E.C. said.
In another instance, the S.E.C. said that Mr. Gupta passed along an illegal Goldman tip to Mr. Rajaratnam after a call that previewed Goldman's positive quarterly earnings results one week before they were publicly announced. Soon after, Mr. Gupta is said to have initiated a flurry of telephone calls with Mr. Rajaratnam, who then directed his fund to load up on Goldman stock and call options. When the stock rose the next day, Mr. Rajaratnam exited his positions and earned more than $13.6 million in profits, the S.E.C. said.
Mr. Gupta was also accused of disclosing information to Mr. Rajaratnam about P.& G.'s 2008 fourth-quarter earnings on the eve of their release.
"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 an employee on one tape. "The Street has them making $2.50."
Jurors also listened to Mr. Rajaratnam coaching colleagues on how to create what he called an "e-mail trail" to make it appear that Galleon purchased stock based on legitimate reasons rather than illegal tips. They also were shown records of a sham Swiss bank account and a stealth investment in Galleon made in the name of a tipster's housekeeper.
A Crucial Web of Friends
Over the years, Mr. Rajaratnam forged connnections that gave him access to the inner secrets of dozens of publicly traded companies. His vast Rolodex of tipsters included former business school classmates, fellow hedge fund traders and technology industry executives whose origins, like his, were from the Indian subcontinent.
In many respects, he was no different from the thousands of Wall Street stock pickers who diligently network with corporate executives and industry experts to gain an investment edge. But the edge that the Sri Lankan native honed came from confidential information that beyond the reach of research, and he illegally traded on it.
The guilty verdict in May 2011 punctuated a stunning downfall for Mr. Rajaratnam. What made him stand out was not his proprietary computer models nor his skills in security analysis. Instead, colleagues marveled at the deep set of contacts he had cultivated inside Silicon Valley executive suites and on Wall Street trading floors.
Many of Mr. Rajaratnam's tipsters came from the South Asian immigrant community, a relatively small group of Indians, Pakistanis and Sri Lankans who over the past several decades have made their mark in finance and technology. He met several important sources of illegal information through the South Asian club at the Wharton business school at the University of Pennsylvania. He connected with another primary informant through his philanthropic support of the Indian School of Business, a prestigious graduate school in Hyderabad, India.
All these contacts formed the core of Mr. Rajaratnam's vast information network. From his office on Madison Avenue, Mr. Rajaratnam collected data about technology companies and then swapped it with sources across the globe. He spoke of getting an edge to beat the stock market, and for Mr. Rajaratnam, that edge was information.
Fiercely competitive, Mr. Rajaratnam could be heard during the trial on wiretaps speaking in sports and military metaphors. He compared himself to fighting Muhammad Ali in the boxing 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 his facing a blizzard of incriminating evidence, to fight the charges against him, 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."
Another said that Mr. Rajaratnam took great pride in his accomplishments and refused to admit to any wrongdoing. "This way, Raj can say he was wrongfully accused," he said.
Origins of the Case
The origins of Mr. Rajaratnam's case stretch back more than a decade, but a turning point came in 2006 during an investigation of a hedge fund run by Rengan Rajaratnam, Mr. Rajaratnam's younger brother and a former Galleon employee. While reviewing e-mails and instant messages, Andrew Michaelson, now a member of the team that prosecuted Raj Rajaratnam, discovered incriminating communications between the brothers.
Rengan Rajaratnam, who has not been criminally charged, emerged -- through several wiretapped conversations -- as a colorful figure during the trial. On a call in August 2008, Rengan told his brother about his efforts to press his friend, a McKinsey consultant, for confidential information.
Rengan Rajaratnam called the consultant "a little dirty" and boasted that he "finally spilled his beans" by sharing secrets about a corporate client.
[Source: The New York Times, USA, 13Oct11]
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