Published April 19, 2011
Closing arguments begin Wednesday in the insider trading trial of Raj Rajaratnam, the Galleon hedge fund owner at the center of the government’s largest crackdown of insider trading in U.S. history.
The defense rested its case Monday after only a little more than a week of testimony -- and without putting the 53-year-old Sri Lankan billionaire on the stand. There had been some speculation he would testify in his own defense but it was a gamble many legal experts predicted his lawyers would not make.
Rajaratnam is charged with 14 counts of conspiracy and securities fraud. If convicted, he faces up to 25 years in prison.
The government claims Rajaratnam made $63.8 million illicitly between 2003 and March 2009. He was arrested and charged in October 2009 and is the central figure in the government’s multiyear investigation of insider trading. Nineteen out of 26 people charged in the case have pleaded guilty to conspiracy or securities fraud.
Federal prosecutors spent five weeks trying to paint Rajaratnam as the embodiment of Wall Street greed. In their case against him, the government called 18 witnesses and introduced more than 700 exhibits including 45 taped phone conversations. In one, jurors heard Rajaratnam coaching Krish Panu, a Galleon managing director, on how to create a phony email trail to make it look like stock purchases were based on legitimate research and not illegal tips.
“I’ll send you an e-mail and say, ‘Have you guys thought about Spansion?’” Rajaratnam told Panu.
“Have a corporate record,” Panu replied.
“Yeah, we just have an e-mail trail,” Rajaratnam said.
The trial is one of the most closely watched ones on Wall Street.
If Rajaratnam is found not guilty it could weaken the prohibition on insider trading, making it much harder for federal authorities to crack down on illegal trades. To win a conviction, the government must convince the 12-member jury that Rajaratnam received company secrets from someone who had a fiduciary duty not to disclose them and that he knew it was wrong.
The prosecution’s case against Rajaratnam centered around three key witnesses: former McKinsey & Co consultancy partner Anil Kumar, former Intel Corp (INTC) executive Rajiv Goel and former Galleon portfolio manager Adam Smith.
Kumar, a cooperating witness for the prosecution, pleaded guilty to criminal charges. He was paid $2 million to provide tips on McKinsey clients to Rajaratnam, he said. Kumar has also agreed to pay $2.8 million to settle a civil lawsuit.
Goel, a former managing director of strategic investments for Intel’s treasury group and a business school friend of Rajaratnam, also pleaded guilty to securities fraud. Prosecutors say Rajaratnam made transactions at Goel’s brokerage account at Charles Schwab based on illegal tips about publicly traded companies.
Smith, one of the strongest cooperating witnesses for the government, was the first Galleon employee to testify against his boss. He said Rajaratnam received a tip about the 2006 acquisition by Advanced Micro Devices Inc (AMD) of ATI Technologies Inc. He also said the hedge-fund head and others at Galleon sought tips from a former Intel Corp. employee, a Morgan Stanley investment banker and others. Smith has pleaded guilty to fraud charges.
The prosecution also called executives of companies whose stocks were mentioned in the wiretaps, most notably Goldman Sachs (GS) CEO Lloyd Blankfein. Blankfein told the court on March 23 that Rajat Gupta, a former Goldman board member, violated the firm’s confidentiality policies by disclosing information to Rajaratnam about the bank’s first-ever quarterly loss in 2008 as well as a $5 billion investment in the bank by Warren Buffett.
The defense began its case April 11. They maintain Rajaratnam’s trades were based on a collection of research, analysts and public information -- not leaked corporate tips.
Their first witness was Richard Schutte, the former president and chief of research at Galleon. Schutte testified employees based trades on disciplined research and hard work. He said analysts’ weekly reports were due at 5 p.m. every Friday and that the staff was told to study them over the weekend and be prepared to discuss them in detail Monday.
“Raj read them because he was the most prepared of any of us come Monday morning at that meeting,” Schutte testified, adding anyone who arrived late to the meeting was fined $25.
Galleon employees had two or three screens to monitor news, public filings, reports and other information relevant to their companies. Rajaratnam used six screens to monitor information, Schutte said.
On April 13, the defense called character witness Geoffrey Canada to testify about the gentler and generous side of Rajaratnam. Canada, an education advocate featured in the documentary “Waiting for Superman,” a film about the struggles of the public school system, called Rajaratnam a “dear friend.” He told jurors on that the billionaire had been a generous benefactor for his Harlem non-profit organization that promotes higher education for needy children.
Business professor Gregg Jarrell was one of the last witnesses for the defense. He repeatedly told the jury that Rajaratnam’s pattern of stock trading was consistent with public information circulating in the market and that insider tips were irrelevant. Jarrell, a University of Rochester Simon Business School professor, showed the jury a PowerPoint presentation that streamlined more than 100,000 news and analysts reports and millions of trades. The presentation goes through each stock Rajaratnam is accused of trading illegally, with Jarrell using publicly available information to make cases for those trades.