Fall of the Hammer  Rajaratnam convicted
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Fall of the Hammer Rajaratnam convicted

Bar & Bench

Hedge fund billionaire and founder of the Galleon Group, Raj Rajaratnam,  who has been at the centre of the biggest insider trading case in the history of US was found guilty in a verdict on May 11, 2011. Rajaratnam was found guilty on all 14 counts – five relating to conspiracy and the balance concerning securities fraud.

Hedge fund billionaire and founder of the Galleon Group, Raj Rajaratnam (pictured),  who has been at the centre of the biggest insider trading case in the history of US was found guilty in a verdict on May 11, 2011. Rajaratnam was found guilty on all 14 counts – five relating to conspiracy and the balance concerning securities fraud.

The jury’s decision was based on phone tap evidence, used for the first time in white collar crime and the trial testimony of friends-turned-government witnesses. The list of friends who turned witnesses included former partner of McKinsey & Co Anil Kumar, former executive of Intel treasury group Rajiv Goel and a former Galleon employee, Adam Smith.

All this confirmed the prosecution case that Rajaratnam ran a net of highly-placed insiders between 2003 and 2009, who commanded the ability to sneak valuable corporate secrets. At the end, a federal jury based on the incriminating evidence found Rajaratnam guilty of trading on illegal tips from corporate executives, bankers, consultants, traders, and directors of public companies, including Goldman Sachs, Hilton, Google and Intel.

The Galleon chief was accused of amassing wealth over $63.8 million as illegal earnings from trade based secrets. Prosecution contended that trading was illegally carried out on at least 15 stocks, many of them technology companies such as chipmakers Advanced Micro Devices Inc, and ATI Technologies Inc and search engine Google Inc.

Surprisingly, the curtain raiser has been the number of financial and corporate figures involved in the crime matrix, who successfully provided access to insider information of the financial world.

This conviction has warranted the government’s forceful use of wiretapping, method which seems will be used quite often to prosecute Wall Street figures. More than 40 recordings collected over the past few years played a pivotal role against Rajaratnam, including a tape showing that Rajaratnam had received information about an expected quarterly loss at Goldman Sachs, from Goldman board member Rajat Gupta.

Rajaratnam could now face as much as 19 and a half years in prison under federal sentencing guidelines which is scheduled to be announced later this month.

Rajaratnam will appeal the use of the secret recordings, a method which was historically deployed in organized crime, not white-collar probes. The case was the first Wall Street insider trading trial to draw such wide public attention since the mid-1980s scandal involving speculator Ivan Boesky and junk bond financier Michael Milken.

This is of course a huge victory for federal prosecutors, and NY attorney Preet Bharara who commenced this investigation and crusade against white collar crime.

Preet Bharara after the jury decision told the media, “Rajaratnam, once a high-flying billionaire and hedge fund manager, is now a convicted felon, 14 times over. 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. The message today is clear — there are rules and there are laws, and they apply to everyone.”

Rajaratnam has now been released until his July 29 sentencing by presiding U.S. District Judge Richard Holwell. He is free under a $100 million bail package that will now include an electronic monitoring device and house arrest in his Manhattan apartment.

Rajaratnam’s lawyer, Akin Gump’s star litigator John Dowd, told media, “We’re gonna take an appeal for this conviction. We’ll see you in the 2nd circuit” a reference to the appeals court in New York.

The trial lasted almost two months and the verdict was read on the 12th day of deliberations by jurors, trading charges, which in the past have been difficult to prove because they rely on circumstantial evidence.

This verdict is also likely to impact Ex-Managing Partner of McKinsey Rajat Gupta, who is facing civil charges in a related case. The Securities and Exchange Commission (SEC) has accused Rajat Gupta of passing insider information that helped Rajaratnam to illegally profit from Warren Buffett’s $5 billion investment in Goldman Sachs at the peak of the 2008 recession.

According to Asif Ismail, the Editor in Chief of Global India Newswire, the best shot that Gupta has at this point is to settle the case with SEC. It is not uncommon for the SEC to obtain settlement in insider trading investigations. The manner in which prosecution has secured the conviction of Rajaratnam, there is little doubt that Rajat Gupta would be left unharmed. Instead, Rajaratnam’s verdict has strengthened the SEC’s case against Gupta. If he settles the case, Gupta may end up paying a heavy fine, which can even be an eight-figure sum. If not, he will be mounting a vigorous defence.

Gupta’s civil trial before an administrative judge is scheduled to start on August 22.

Bar & Bench spoke to Cyril Shroff, Managing Partner Amarchand & Mangaldas and Ipsita Dutta, Principal Associate at Amarchand on the verdict and some insight into Indian insider trading regulations

Bar & Bench: What do you have to say about the verdict in the case against Rajaratnam and its impact?

Cyril Shroff: Definitely a milestone. From a legal perspective, certainly reflective of the trend that regulatory focus is now shifting to professional, sophisticated forms of insider trading and information cartels which may span across industries and market players for common benefit. The key victory here is that of finesse in enforcement, ranging right from evidence collection and submission right down to issuing notices.

Ipsita Dutta: In an offence like this, nailing down on intent and unequivocally establishing the chain of events leading up to the trade is critical and SEC has managed to achieve that.

Bar & Bench: In reference to this, can you please give us some insight into Insider Trading Regulations and the conviction rate in India?

Cyril Shroff: Our existing laws are pretty robust and if the same situation played out in India, the existing laws would have the teeth to nail down on tipper/tippee liability. However, Indian jurisprudence is yet to create distinctions based on the remoteness of the tippee and draw distinctions between primary and secondary recipients of information and the intention behind usage of such information for engaging in trades. SEBI has always been a very vigilant regulator, with conviction rates which are comparable with any other regulator in the world, especially on matters concerning market integrity. Having said that the need of the hour is clearly to grant SEBI with broader surveillance powers.

Ipsita Dutta: However, the ability of SEBI to tap phone records of market intermediaries is a double edged sword and is something that will need to be considered carefully.

This verdict should give a sigh of relief to the investors and honest hedge fund managers. It is a big step towards restoring investors’ confidence in the financial market. This verdict will reinforce the sense on Wall Street that the regulator can crack down on illegal insider trading. The government’s move of tapping Wall Street’s phone call has played the key role in nailing Wall Street offenders. 

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