For Hedge Fund Baron, Trial Poses a Steep Risk
When Raj Rajaratnam was a hedge fund baron managing billions of dollars and being lionized as one of Wall Streets savviest investors, he was asked what made him so successful.
“It is pride, and I want to win,” said Mr. Rajaratnam, the co-founder of the Galleon Group hedge fund, according to the 2001 book “The New Investment Superstars,” by Lois Peltz. “I want to win every time. Taking calculated risks gets my adrenaline pumping.”
A decade later, Mr. Rajaratnam is taking the biggest calculated risk of his life. Beginning Tuesday, he will be seated at the defense table in a federal courtroom in Manhattan. In the biggest insider trading trial in a generation, Mr. Rajaratnam, 53, is fighting charges that he made $45 million trading on illegal stock tips.
If a jury convicts Mr. Rajaratnam, he faces up to 20 years in prison.
The trial promises to deliver gripping Law & Order-like drama, complete with confidential informants, wiretapped phone conversations and high-profile witnesses, including potential testimony from Lloyd C. Blankfein, chief executive of Goldman Sachs .
It will also shine a spotlight on the hedge fund industry, which over the past decade has emerged as one of the most powerful forces on Wall Street
The trial, expected to last six-to-eight weeks, will also display the unusual investigatory tactics the Justice Department has used in its pursuit of insider trading — techniques traditionally used in pursuing organized crime.
Employing these tools, the investigation has reached into the upper echelons of corporate America and high finance. Just last week, federal prosecutors named Rajat K. Gupta, a former director of Goldman and Procter & Gamble , as a co-conspirator in the case.
The odds are stacked heavily against Mr. Rajaratnam. The government wins about 90 percent of federal trials, according to Department of Justice data.
Federal prosecutors say they have overwhelming evidence of Mr. Rajaratnam’s illicit trading. They have told Judge Richard J. Holwell, who is overseeing the case, that they could play 173 secretly recorded telephone conversations between Mr. Rajaratnam and his associates, some of whom are his supposed co-conspirators.
The government says that Mr. Rajaratnam illegally traded in 35 different stocks. Nineteen traders in Mr. Rajaratnam’s orbit have already pleaded guilty to insider trading, several of whom are cooperating with the government and are expected to testify.
Legal experts say that even if there is a low probability of an acquittal, there is little motivation for Mr. Rajaratnam to plead guilty now, 17 months after federal agents arrested him in his Sutton Place apartment in Manhattan on securities fraud and conspiracy charges.
“The deals you get for pleading guilty usually come early in the process, so if he were to plead now versus a guilty verdict after a trial, the sentence he would get by pleading might not be very different from the sentence after the verdict,” said Mark Cohen, a partner at Cohen & Gresser and a former federal prosecutor.
Friends and former colleagues also say that the Sri Lankan-born Mr. Rajaratnam is a proud and dignified family man who maintains his innocence. A prominent philanthropist, especially to South Asian causes, Mr. Rajaratnam feels that not only his reputation rests on his vindication, but also that of the entire South Asian immigrant community and his Sri Lankan countrymen, friends say.
“If Raj pleaded, he would be admitting that he committed a crime and to admit guilt is not an option,” said a former Galleon employee who worked with Mr. Rajaratnam for a decade and would speak only on the condition of anonymity. “But if a jury finds him guilty, he can say he was wrongfully convicted.”
A centerpiece of Mr. Rajaratnam’s defense is the so-called mosaic theory of investing. Galleon practiced a method of picking stocks built by relentlessly pressing for pieces of information about companies to form a “mosaic” — a fuller picture intended to give it an edge on other investors.
Lawyers for Mr. Rajaratnam are expected to argue that their client did not know he was trading on confidential, market-moving tips from company executives and other informants who breached a duty to not reveal the information. Instead, they will assert that Mr. Rajaratnam, like a dogged investigative journalist, worked with disparate sources to collect as much data as he could about the companies in which he invested.
“Throughout his career Mr. Rajaratnam has worked tirelessly as permitted by the securities laws to build a mosaic of public information about the companies he follows,” John Dowd, his lead trial lawyer, has said. “His detailed, meticulous research into company fundamentals distinguished him as an exceptional analyst and portfolio manager.”
Mr. Rajaratnam came to the United States to study business at the University of Pennsylvania’s prestigious Wharton School. As a young stock picker at Needham & Company, he earned a reputation for possessing a vast network of sources in the technology industry.
In 1997, he co-founded Galleon, which at its peak managed about $7 billion and was one of the largest commission payers on Wall Street. On the trading floors of the world’s largest banks, he was known — like the one-named celebrities Bono and Madonna — as Raj, which he would proudly explain meant “king” in Hindi.
Mr. Rajaratnam was arrested on Oct. 16, 2009. Five others accused of being part of the insider trading conspiracy were also arrested that day. All five have since pleaded guilty.
None of those five has Mr. Rajaratnam’s prodigious wealth, another factor driving Mr. Rajaratnam’s gamble, say legal experts. What prevents most of their clients from taking cases to a jury, white-collar defense lawyers say, is the immense cost of a trial.
In 2009, Mr. Rajaratnam had a net worth of $1.5 billion, according to Forbes magazine. He has spared no expense in mounting his defense, with a team of lawyers from Akin Gump Strauss Hauer & Feld working around the clock since his arrest.
His legal bills have already surpassed $20 million, said a person with direct knowledge of the case who requested anonymity, and will escalate substantially during the trial.
In Mr. Dowd, 69, Mr. Rajaratnam has a lawyer with experience trying high-profile cases. A former prosecutor with a curmudgeonly countenance and a hint of a Boston accent, he is perhaps best known for his work for Major League Baseball in issuing the “Dowd Report.” That report set forth a case showing that Pete Rose had bet on games as manager of the Cincinnati Reds.
He also represented John McCain, the Senator from Arizona, in a scandal involving campaign contributions from Charles Keating, the convicted savings-and-loan executive. Mr. McCain was cleared of any wrongdoing but was criticized for “poor judgment.”
Mr. Dowd is facing off against a team of federal prosecutors led by Preet Bharara, the United States attorney in Manhattan who has led the widespread crackdown on insider trading. Since Mr. Bharara became New York’s top federal prosecutor in August 2009, his office has charged 46 people with insider trading; 29 of them have pleaded guilty.
The Indian-born Mr. Bharara, 42, who grew up in New Jersey, has been outspoken on the pervasiveness of insider trading.
“Unfortunately, from what I can see, from my vantage point as the United States attorney here, illegal insider trading is rampant,” he said in a speech last October. The next month, after a judge imprisoned a defendant who admitted to insider trading, Mr. Bharara said the sentence should “remind those who might contemplate similar crimes that we will ultimately find you, prosecute you and convict you.”
The harsh rhetoric is reminiscent of the insider trading scandal of the 1980s when Rudolph W. Giuliani, then the United States attorney, prosecuted Wall Street executives for insider trading crimes, including Ivan F. Boesky and Michael R. Milken, two of the most powerful financiers of that era.
Mr. Bharara’s focus on insider trading has surprised many people on Wall Street. They had expected his office to instead bring criminal charges against top executives at the large banks that were at the center of the financial crisis. But legal experts say those cases, which would have been built on e-mails that did not provide clear evidence of wrongdoing, would be very difficult to prove.
The Justice Department’s insider trading investigation, though, has been helped by its aggressive use of tapping phones and pursuing confidential informants.
Federal prosecutors are expected to play recorded conversations of Mr. Rajaratnam swapping confidential information with fellow hedge fund traders and corporate sources, according to court documents. They were discussing as many as 35 stocks, including Advanced Micro Devices, Intel and Hilton Worldwide. The conversations led Mr. Rajaratnam to trade in those companies stocks based on the supposed illegal tips funneled to him.
Legal experts say that the biggest blow to Mr. Rajaratnam’s defense came last November, when Judge Holwell denied his request to prohibit the government from using wiretapped conversations at trial. The government asked a federal judge in March 2008 to approve an application to tap Mr. Rajaratnam’s phones after a nearly two-year investigation had stalled.
The government received approval to record Mr. Rajaratnam’s telephone conversations, which it did over a nine-month stretch in 2008. More than 2,400 conversations were recorded with scores of friends and associates, according to court filings.
Mr. Rajaratnam would likely appeal a conviction, as they did before the trial, on the grounds that the use of wiretaps was unconstitutional, say several lawyers following the case.
Should a jury convict Mr. Rajaratnam, another avenue for appeal could be that the swarm of publicity surrounding the trial tainted the jury. The media storm reached a fevered pitch last week when the Securities and Exchange Commission filed a civil action against Mr. Gupta, the former Goldman and P.& G. director who for many years headed McKinsey & Company, the management consulting firm. The S.E.C. accused him of sharing secret information about Goldman and P.& G. with Mr. Rajaratnam.
A lawyer for Mr. Gupta has called the government’s charges against his client “baseless.” Several Goldman and P.& G. executives are on the government’s witness list, including Mr. Blankfein, Goldman’s C.E.O.
Mr. Dowd pleaded with the S.E.C. to wait until Mr. Rajaratnam’s trial ended to file its action against Mr. Gupta, according to a court filing. He blamed the United States attorney’s office for failing to persuade the S.E.C. to hold off, saying it was “a deliberate attempt to pollute this jury pool and deny Mr. Rajaratnam his right to an impartial jury.”