Galleon’s Rajaratnam May Face Uphill Battle to Win His Appeal

Thursday, 12 May 2011 12:05 PM

 

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Galleon Group LLC’s Raj Rajaratnam, potentially facing almost two decades in prison, will have an “uphill struggle” in seeking to overturn his conviction in the biggest insider-trading trial since the 1980s, a former prosecutor said.

The hedge fund co-founder will appeal yesterday’s verdict to the U.S. Court of Appeals in Manhattan, according to his attorney, John Dowd. Dowd failed to persuade the judge last year that prosecutors had intentionally misled the court in their request to wiretap Rajaratnam’s calls.

“It’s an uphill struggle, there’s no question about it,” Stephen Miller, a former federal prosecutor, said. “It’s always hard, once you have a judge making credibility findings of any sort for the appellate court to review it, especially in a case of this magnitude.”

Rajaratnam, 53, was found guilty of five counts of conspiracy and nine counts of securities fraud on the jury’s 12th day of deliberations. The jurors returned the verdict after hearing evidence that Rajaratnam engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs Group Inc. He gained $63.8 million, prosecutors said.

Home Detention

Prosecutors said Rajaratnam faces a prison term of 15 1/2 years to 19 1/2 years when he is sentenced July 29. Rajaratnam remains under home detention and electronic monitoring at his Sutton Place residence in Manhattan pending sentencing. Assistant U.S. Attorney Jonathan Streeter argued unsuccessfully to have Rajaratnam, who is free on a $100 million bond, taken into custody after the verdict.

Galleon was among the 10 largest hedge funds in the world in the early years of the last decade. It managed $7 billion at its peak in 2008. Rajaratnam’s net worth of $1.3 billion made him the 559th richest person in the world, Forbes Magazine said in 2009.

The case was the first one focused exclusively on insider trading in which prosecutors wiretapped their targets’ telephone conversations, a tactic used in organized-crime investigations. Jurors heard more than 40 recordings of Rajaratnam, in some of which he can be heard gathering secrets from his sources.

‘Tip From My Guy’

“They’re gonna guide down,” Danielle Chiesi, an analyst at New Castle Funds LLC, told Rajaratnam on July 24, 2008, after she got an insider’s leak that Akamai Technologies Inc. would lower its forecast. “I just got a tip from my guy.”

Dowd said he would appeal the use of wiretaps, telling U.S. District Judge Richard Holwell that the matter was “very substantial.”

Holwell, after holding a week-long hearing in October, ruled that the wiretaps were admissible at trial. He concluded prosecutors “made a glaring omission” by failing to disclose to the judge who approved the government’s wiretap application that civil regulators had been probing Rajaratnam for years. At the same time, Holwell rejected a defense claim that prosecutors had intentionally deceived that judge.

That finding regarding the government’s credibility “cuts against success on appeal,” said Miller, the former prosecutor who is now a partner at the law firm Cozen O’Connor LLP. Appeals courts are more likely to reverse a judge’s decision based on a legal argument than a factual finding based on the judge’s conclusions, he said.

“You have a district court judge who made a finding and made a credibility determination,” Miller said, saying an appellate court doesn’t have that same luxury. “They know it and they tend to defer to the trial judge.”

Dowd and representatives of Manhattan U.S. Attorney Preet Bharara didn’t immediately return calls after regular business hours seeking comment on an appeal.

Intel, Goldman Sachs

Rajaratnam used inside information to trade ahead of public announcements about earnings, forecasts, mergers and spinoffs involving more than a dozen companies, according to the evidence at the trial. Among them were Santa Clara, California-based Intel Corp., New York-based Goldman Sachs, Google Inc., ATI Technologies Inc., Akamai and Hilton Hotels Corp.

Prosecutors said Rajaratnam’s sources included Rajat Gupta, who until last year was a director at Goldman Sachs, and Kamal Ahmed, a Morgan Stanley investment banker who prosecutors said passed tips through Smith. Both deny wrongdoing, and neither has been criminally charged.

Rajaratnam’s case was the most prominent amid a widespread U.S. crackdown on insider trading. Bharara, who is directing the nationwide probe, said his office has charged 47 people with insider-trading crimes during the past 18 months, and that Rajaratnam is the 35th person to be convicted.

Jurors ‘Shaken Up’

Phillip Wedo, who sat as an alternate on the jury and wasn’t involved in deliberations, said he didn’t want to talk about the case because he thought it would compromise his loyalty to other jurors.

“I think they’re a little bit shaken up,” Wedo said. “I don’t think it was an easy decision for them.”

John Coffee, a Columbia University law professor, said the government’s use of wiretap evidence against Rajaratnam makes the risks of sharing illegal stock tips clear to traders.

“This is the first major case in a generation.” Coffee said. “And quite frankly, professionals learn what is legal and illegal based not on the law but on who goes to prison for what.”

‘Rampant’ Illegal Trading

The trial came as Bharara promised to crack down on “rampant” illegal trading on Wall Street.

“Rajaratnam, once a high-flying billionaire and hedge fund manager, is now a convicted felon, 14 times over,” Bharara said in a statement after the verdict. “Rajaratnam was among the best and the brightest — one of the most educated, successful and privileged professionals in the country. Yet, like so many others recently, he let greed and corruption cause his undoing.”

Before his arrest on Oct. 16, 2009, Rajaratnam had claimed that Galleon analysts had an advantage over rivals because most were trained as engineers and all focused their energies exclusively on research. At the trial, his lawyers said his trades were based on Galleon research.

“They don’t get blindsided by the marketing hype,” Rajaratnam said of his analysts in “The New Investment Superstars: 13 Great Investors and Their Strategies for Superior Returns,” by Lois Peltz.

‘Getting the Number’

Adam Smith, a former Galleon trader, testified at the trial that the New York-based hedge fund gained its advantage through other means. Rajaratnam emphasized “getting the number” — or learning revenue figures before they became public — from insiders at Intel, Intersil Corp. and other publicly traded companies, he said.

“Research is sort of doing your homework ahead of time,” Smith testified after pleading guilty to insider trading and agreeing to cooperate with prosecutors. “Getting the number is more like cheating on the test.”

Born in Sri Lanka’s capital, Colombo, Rajaratnam was educated there at St. Thomas’ Preparatory School before leaving for England, where he studied engineering at the University of Sussex. He came to the U.S. to get his master’s of business administration, graduating from the University of Pennsylvania’s Wharton School in 1983.

Two of his Wharton classmates — Anil Kumar, who became a partner at McKinsey & Co., and Rajiv Goel, who was a managing director at Intel — testified against him at the trial, telling jurors how their relationships began at the school and how they turned to crime. Both have pleaded guilty.

Blankfein’s Testimony

Also testifying for the prosecution was Goldman Sachs Chief Executive Officer Lloyd Blankfein, who said Gupta violated the company’s confidentiality policies by allegedly telling Rajaratnam about its earnings and strategic plans. Rajaratnam didn’t take the stand in his own defense.

Rajaratnam’s first job after graduation was at Chase Manhattan Bank, where he was a lending officer in the group that made loans to high-tech companies. In 1985, he joined Needham & Co., a New York-based investment bank that specialized in technology and healthcare companies.

He started as an analyst covering the electronics industry and rose through the ranks, becoming head of research in 1987, chief operating officer in 1989 and president in 1991. A year later, at 34, Rajaratnam started a fund, Needham Emerging Growth Partners LP, according to Galleon’s marketing documents.

Rajaratnam and Needham colleagues Krishen Sud, Gary Rosenbach and Ari Arjavalingam formed Galleon Group in January 1997. By the end of that year, they were managing $830 million, much of it from technology company executives Rajaratnam had gotten to know throughout his career, according to “The New Investment Superstars.”

Goffer’s Trial

Among others charged are executives affiliated with Primary Global Research LLC, a Mountain View, California-based networking firm that links investors with industry experts who work for public companies. A related case against former Galleon trader Zvi Goffer is scheduled for trial next week.

Goffer, who has pleaded not guilty, is accused by prosecutors of leading one of three insider-trading rings targeted in the Galleon-related cases. Prosecutors filed a superseding indictment in April in which Goffer and his codefendants are accused of trading on stock tips that came from lawyers at Ropes & Gray in New York and from another former trader.

Rajaratnam “joins the pantheon of Ivan Boesky and Gordon Gekko,” said Peter Henning, a professor at Wayne State University Law School in Detroit, citing the real-life stock trader who was jailed after pleading guilty to conspiracy in 1987 and the fictional “Wall Street” film character who came to symbolize the financial scandals of the 1980s. “It is a defining case,” Henning, a former federal prosecutor, said.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

© Copyright 2014 Bloomberg News. All rights reserved.

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