Guilty: Wiretaps sink Rajaratnam in insider trading case

In the end, it was the secretly taped phone calls that did Raj Rajaratnam in.

The Galleon Group hedge fund chief was found guilty on Wednesday of nine counts of securities fraud and five counts of conspiracy. He could serve more than 20 years in prison for the crimes.

In what the U.S. Securities and Exchange Commission (SEC) has called a “ massive insider trading scheme” that netted up to $25 million in illict profits, Sri Lankan-born Rajaratnam was found to have colluded with high-powered friends and business associates at major companies and investment banks to gain material, non-public information that he used to his benefit when trading on the stock market.

The high-profile case led to charges against 25 defendants. Twenty-one pled guilty, including former executives of IBM, Intel, and Bear Stearns.

In a statement, Manhattan U.S. Attorney Preet Bharara, who prosecuted the case, said that Rajaratnam, who is “among the best and brightest” let “greed and corruption cause his undoing.”

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“The message today is clear-there are rules and there are laws, and they apply to everyone, no matter who you are and how much money you have,” Bharara added.

Rajaratnam will appeal the case.

Taped calls Rajaratnam’s downfall

Rajaratnam was arrested in October 2009 for insider trading, and he pleaded not guilty. At trial, his attorney argued that Rajaratnam relied only on public information to make investments, advancing a theory that Galleon gathered a “mosaic” of readily available information through expert networks and from the public domain, such as newspaper articles, to research its investment decisions.

But this theory proved no match for the nine months of secretly taped phone calls-which the U.S. government produced at trial as evidence-between Rajaratnam and his colluders, many of whom are Indian-American.

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“Rajaratnam was convinced by a combination of wiretaps and testimony by those who were taped, with people in the tapes explaining what the conversations meant,” John C. Coffee, Jr., a securities law professor at Columbia Law School told Firstpost. “That convinced the jury totally.”

Coffee added that it is “unusual” to get a conviction on all 14 counts in a complex securities fraud case, but the jury was “convinced by the evidence in each of those episodes, and that’s as resounding of a victory as the government could hope for.”

Examples of the deals that were captured on tape:

• In 2008, Goldman Sachs board member Rajat Gupta called Rajaratnam after a meeting to tell the hedge fund chief that Warren Buffet was going to invest $5 billion in the firm. Rajaratnam bought stock following the call.

• Intel’s Rajiv Goel gave earnings numbers ahead of the official release date, and Rajaratnam bought or sold shares based on the information.

[caption id=“attachment_8387” align=“alignleft” width=“380” caption=“The jury convicted Rajaratnam of nine counts of securities fraud and five counts of conspiracy. AFP Photo”]  [/caption]

The tapes were clearly compelling evidence, and during its six-day deliberations, the jury asked to hear more recordings.

Rajaratnam ripple effects?

The Rajaratnam case has been closely watched because it is the largest insider trading case that the U.S. government has prosecuted to date, and it is part of an ongoing focus on these crimes. The SEC has charged 47 individuals charged with insider trading crimes in the last 18 months alone, and a related case against former Galleon trader Zvi Goffer is scheduled to go to trial next week.

Some legal observers say it is also a “test case” for new legal approaches to curbing the crime. And in a trend that has become more prominent in the last decade, the SEC and the U.S. Department of Justice are using wiretaps and other forms of traditional law enforcement investigation and evidence-gathering techniques to prosecute white collar crimes.

Based on the strength of the wiretap evidence, some have predicted Rajaratnam’s guilty verdict weeks ago, with some self-described cynical commentators arguing that his conviction will not have a much impact on Wall Street.

Richard Roth, founder of the The Roth Law Firm, for example, told CNBC host Scott Cohn in late April:

I think that Raj is going down, but Wall Street will not change its ways. It has not changed its ways since [convicted inside traders] Ivan Boesky, since [Michael] Milken. … the bottom line is that Wall Street will not change Wall Street. Raj will not change Wall Street.

But Coffee, the Columbia Law professor begs to differ. “White collar criminals are extremely susceptible to evidence of increased enforcement,” he said. “These deterrents work much better in the case of white collar criminals, who are capable of evaluating the respective costs and benefits of their actions.”

“A new generation of traders are learning a very visible lesson today,” he added. “At the end of the day, the public at large and white collar professionals learn what is criminal not from the laws on the books but from who goes to prison and for what, and this [case] is an important lesson in that regard.”