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.
“This is a message to say, ‘The markets are clean in the United States,’” Currier said. “Where there are infractions they will be prosecuted.”
U.S. Attorney Preet Bharara said in a statement that his office would “continue to pursue and prosecute those who believe they are both above the law and too smart to get caught.”
“Rajaratnam was among the best and the brightest — one of the most educated, successful and privileged professionals in the country,” Bharara said. “Yet, like so many others recently, he let greed and corruption cause his undoing. The message today is clear — there are rules and there are laws, and they apply to everyone, no matter who you are or how much money you have.”
Rajaratnam didn’t testify during the trial. The former trader, who shut down Galleon after his arrest, is set to be sentenced July 29 and remains free on bail until then. Under federal sentencing guidelines, which judges aren’t required to follow, he would face a prison term of 15 to 20 years.
Others caught in the government dragnet have opted to cut deals with prosecutors rather than risk a jury’s guilty verdict. Since Rajaratnam’s October 2009 arrest, 21 people connected to him have pleaded guilty, including some who subsequently testified against Rajaratnam.
While many believe the use of wiretaps will lead to more indictments, others pointed out that it’s an expensive and time-consuming process that would likely be reserved for major cases.
“It’s not a game changer for the government in terms of prosecutorial decision and whether they will bring future cases, said former prosecutor Doug Jensen, an attorney at Park & Jensen.
The Securities and Exchange Commission, meanwhile, has filed a civil complaint against Gupta, a former head of consulting giant McKinsey & Co. and a board member at Goldman Sachs and Procter & Gamble Co.
The SEC alleges that Gupta used his corporate board positions to feed insider information to Rajaratnam.
Appearing as a witness for the prosecution at Rajaratnam’s trial, Goldman Sachs Chief Executive Lloyd Blankfein listened to a phone call between Rajaratnam and Gupta in court and testified that Gupta had violated Goldman’s confidentiality policies.
Gupta has denied wrongdoing.