After Rajaratnam Conviction, US Far From Done in Insider Probe

Wednesday, 11 May 2011 03:05 PM

 

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The conviction of hedge fund founder Raj Rajaratnam is by far the government's biggest victory in its wide-ranging hedge fund insider-trading probe. It is unlikely to be the last.

The case against Rajaratnam, the founder of Galleon Group, was the central focus in what has been described by the government as the largest investigation into insider trading at hedge funds.

In addition to the conviction of Rajaratnam, which ended a two-month trial before U.S. District Judge Richard Holwell, the probe has resulted in 21 guilty pleas by Wall Street professionals, corporate insiders and lawyers.

Related insider trading probes since late 2009 have resulted in 13 additional guilty pleas, prosecutors said.

But some defendants are still fighting the charges.

On Monday, the trial of three former traders, two of them brothers, begins in the Manhattan courtroom of a different federal judge, Richard Sullivan.

Prosecutors allege that Zvi Goffer, Emanuel Goffer and Michael Kimelman made profitable trades based on inside information about mergers and acquisitions obtained from two lawyers who worked at law firm Ropes & Gray LLP.

As in its case against Rajaratnam, the government will rely on cooperating witnesses and evidence obtained from wiretaps.

Earlier this year, Sullivan denied a motion by defendants to suppress the wiretaps, which was considered a big win for the government.

"The wiretap is what always makes for the convictions," said Gail Shifman, a defense lawyer at Shifman Group. "That's why they go after wiretaps. It's very compelling evidence."

Wiretaps have also been used in the government's investigation into expert-network firms, which bring together consultants who work at public corporations with hedge funds seeking an investing edge.

In several cases, prosecutors allege that certain expert-network consultants and employees peddled inside information to their hedge-fund clients.

The investigation has yielded charges against more than a dozen individuals and several guilty pleas.

Among them: two former portfolio managers who once worked at SAC Capital Advisors LP, the $12 billion hedge fund firm founded by Steven A. Cohen.

One of those portfolio managers, Donald Longueuil, pleaded guilty on April 28 to trading on inside information leaked by a consultant at an expert-networking firm.

That expert, Winifred Jiau, who was a consultant for Primary Global, is scheduled to go to trial in June, which would be the first expert-network case to go to trial.

Prosecutors allege that Jiau obtained information about earnings from Nvidia Corp. and Marvell Technology Group Ltd. insiders and passed it on to hedge fund portfolio managers. The funds paid her more than $200,000 through Primary Global over a two-year period, according to the government.

Defense counsel have argued that any tips from those insiders did not involve a breach of fiduciary duty, an essential element for proving insider trading

But prosecutors said Jiau sought to pay her sources, once asking a hedge fund manager to "drop some of your extra sugar to me" because those sources "don't talk to me without sugar."

© 2014 Thomson/Reuters. All rights reserved.

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