Would-be Wall Street criminals pondering insider trading schemes to illegally line their pockets should probably hang up their phones and have all their calls held.
Legal experts said Galleon Group hedge fund co-founder Raj Rajaratnam, convicted Wednesday on 14 felony counts related to insider trading charges, was brought down largely by his own words.
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A jury heard those words via hours of conversations between Rajaratnam, his employees and people with whom the billionaire hedge fund manager did business, conversations that were secretly taped by federal prosecutors using wiretaps to eavesdrop.
Wiretaps have been used in the past to bring down mob bosses, drug kingpins and murderers, but this the first time the secret monitoring devices were used in an insider trading case.
“I think wiretaps are a game changer. I can promise you a chill has gone down the collective back of Wall Streeters today,” said Andrew Stoltmann, a Chicago-based securities attorney.
“I think prosecutors are salivating at the opportunity to use these in future Wall Street cases and we’re going to see them utilized much more going forward,” Stoltmann added.
Rajaratnam, 53, was arrested in October 2009 and accused of raking in $63.8 million in illegal profits between 2003 and March 2009 using a network of industry experts and company executives who funneled him inside information.
In some of the 50 tapes played for the jury Rajaratnam seemed to encourage his employees to engage in sketchy practices if it meant producing profits for Galleon.
Some of the employees heard speaking with Rajaratnam also testified against him during Rajartanam’s seven-week trial in federal court in Manhattan, and their testimony evidently confirmed for jurors what they thought they were hearing on the tapes.
“Hearing a defendant’s voice recorded in a moment where he thinks no one is listening is very revealing and it ultimately is very convincing,” said former federal prosecutor Jonathan New, now a defense attorney at Baker Hostetler in Manhattan.
Those conversations caught on tape, combined with the testimony of those heard talking to Rajaratnam, provided enough context for the jurors to convict the billionaire hedge fund manager, said New.
“I think the context is everything. Wiretaps as opposed to e-mails allow you to hear the tone of the person’s voice. You know whether that person is joking or being sarcastic or being serious,” he said.
Rajaratnam’s case is part of the largest crackdown on hedge-fund insider trading in U.S. history. Prosecutors relied both on the wiretaps of Rajaratnam’s phone calls and testimony from his former associates. More than two dozen others were charged in the Galleon scheme and 21 have pleaded guilty so far.
Rajaratnam's defense attorneys argued that their client traded solely on the basis of his own research and information easily obtainable in the public domain.
The jury found otherwise and convicted him on five counts of conspiracy and nine counts of securities fraud. He now faces as long as 20 years in prison. His lawyer said he will appeal.
John Coffee, a law professor at Columbia University and expert in white collar criminal cases, said Rajaratnam’s appeal could well be based on whether the government adhered to the “extremely rigorous” requirements for obtaining wiretaps.
Two important elements of those requirements are that no reasonable alternative existed to the use of wiretaps, and that the government was minimally invasive in its use of the devices.
But Coffee said Rajaratnam’s case may be “exactly the case” the government would like to have challenged on appeal based on the use of wiretaps because the evidence against Rajaratnam “seems so overwhelming.”
Rajaratnam may also consider some sort of deal to testify against Rajat Gupta, the former director of Procter & Gamble (NYSE:PG) and Goldman Sachs (NYSE:GS), who was also charged in the Galleon case, accused of passing inside information to Rajaratnam.
“The government would also like Gupta,” said Coffee.
According to Coffee, Gupta “breached the highest duty of all” in allegedly passing inside information as a company director, and the government would have him if "Mr. Rajaratnam starts looking at 20 years in prison.”
“Everyone cooperated against Rajaratnam. Why should he be the only standup guy?” said Coffee.
New, the Manhattan defense attorney, said Preet Bharara, the federal prosecutor in Manhattan, is clearly sending a message to Wall Street that he wants it to clean up its act.
“I think there is a bigger picture here, that’s why everyone is paying attention to the case,” he said.
Bharara is putting Wall Street on notice that prosecutors have every intention of stepping up their use of aggressive law enforcement measures -- namely wiretaps -- to root out criminal activity.
New said the increased focus by prosecutors could stem from a loss of investor and public confidence in Wall Street in the wake of the recent financial crisis in which bankers were widely criticized for taking risks at the expense of ‘mom and pop’ investors.
The message is clear, said New: “We’re still here, we’re not asleep at the wheel and if you break the law we’re going to catch you.”