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Former Rajaratnam Employee Was Almost A Juror On New Insider Case

Harry Bradford   |   May 18, 2011    9:09 AM ET

NEW YORK (Grant McCool) - In a trial of three New York securities traders on insider trading charges, several jurors told the judge on Tuesday they could consider the case separately and impartially from last week's conviction of high-profile Galleon Group hedge fund founder Raj Rajaratnam.

Some of the potential jurors, however, were excused for possible bias from sitting for the Manhattan federal court trial of a former Rajaratnam employee, Zvi Goffer, and two other men who have had no association with Galleon.

U.S. District Judge Richard Sullivan struck them from service on the panel after they said they could not set aside preconceived notions from reading about hedge fund tycoon Rajaratnam.

The two-day jury selection was completed on Tuesday. The panel of 12 and three alternates includes a medical doctor, an acting school administrator and a counselor to victims of crimes.

Sullivan said opening arguments would start on Wednesday with the government's presentation followed by remarks from a lawyer for each of the three defendants.

The Goffer trial comes after last Wednesday's jury verdict convicting Rajaratnam on all 14 counts of insider trading conspiracy and securities fraud with which he was charged.

The two trials are part of what the government describes as the biggest probe of insider trading at hedge funds on record.
Many of the potential jurors indicated under questioning that they could be impartial and fair to the three defendants, despite knowledge of the two month-long Rajaratnam trial.

One told the judge that even though he had read newspaper articles on the Rajaratnam verdict, "I think I can forget the slant that was published."

Another said: "I presume them to be innocent" referring to Zvi Goffer, 34, his brother Emanuel Goffer, 32 and David Kimelman, 40. Their trial is expected to last five weeks.

"These cases have the same conclusions," one of the potential jurors said during questioning by the judge with the defendants, their lawyers, prosecutors and reporters present. He was excused from serving on the jury.

"It's a slight question, guilt by association," said the man, who described his career working for the likes of Credit Suisse, Lehman Brothers and Morgan Stanley.

The three defendants sat quietly in chairs behind their lawyers during the questioning of potential jurors. At times they conferred with the lawyers or handed them scribbled notes.

Potential jurors were told on Monday that if selected to the panel, they would hear an FBI phone tap of Rajaratnam in conversation with Goffer. The government pinned its case against Rajaratnam on 46 phone taps played at trial.

The secretly recorded phone conversations are the hallmark of the broad Galleon case that ensnared 26 defendants, 21 of whom have pleaded guilty. It was the first time wiretaps had been used so extensively in a white-collar case.

Zvi Goffer worked at Galleon between January and August 2008. He then started his own trading firm, called Incremental Capital, with his brother and Kimelman joining him.

The government accuses them of making profitable trades based on inside information about corporate deals obtained from two lawyers who worked at law firm Ropes & Gray LLP.

The case is USA v Zvi Goffer et al, U.S. District Court for the Southern District of New York, No. 10-00056.

(Reporting by Grant McCool; Editing by Tim Dobbyn)

Copyright 2011 Thomson Reuters. Click for Restrictions.

The Victims of Insider Trading

Jeff Madrick   |   May 17, 2011    1:39 PM ET

Nothing surprises me more than when I read that trading on insider information is a victimless crime. In the wake of the conviction of hedge-fund giant Raj Rajaratnam, the claim has come up time and again. In fact, it is entirely untrue. The victims are all those who sold Raj a stock or other security at a lower price than they might have if they had the same information he had. In other words, the victims are pensioners, mutual fund investors, bank trusts holders, and on.

It's like what happened in the 1800s when some insiders knew the railroad had planned to build a track through a certain territory. They bought land from unsuspecting farmers, ranchers and maybe even the federal government on the cheap. That activity disgusts us. Same with stocks when the fund managers know about good earnings news to be reported the next day or a merger announcement to come.

What the details of the Rajaratnam scandal also shows is that he who pays the most money for inside information also makes the most money. Money begets money, the big get bigger. That's a pretty good example of what's happened over the past thirty years in American finance.

Now, when you can leverage that money up -- borrow to the hilt at low rates -- inside information really pays off. Many hedge-fund managers don't make money for the insights but for their sheer chutzpah. Meantime, market integrity is out the window.

Wall Street's always had some kind of advantage over the rest of us. The pros could often call someone up at a company to get an edge. But passing out outright inside information -- the kind that will move a stock price one way or the other substantially -- should clearly be illegal.

One of the more interesting facts about hedge funds is that, according to those who measure risk statistically by deriving 'betas' and 'alphas,' they do better on average than the amount of risk they take suggests they should. Mutual funds on average do not.

Some interpret this as proof of how astute the hedge funds are compared to other investors. The data could also be interpreted another way. That given their size and wealth, they have more information about company strategies and results, takeovers, and the trading patterns of the market. They may even be able to push prices their way and bail out before others catch on. Cornering markets can be against the law. How often does "mini-cornering" -- momentary attempts to buy enough supply to determine a quick price change -- go on? That's perhaps the main reason why they do better than the risk they take suggests they should.

This is seedy stuff and there is no simple way to prevent it adequately. If such practices are common, it makes good sense for investors who have the money to sign up with hedge funds and get a piece of their unfair advantage.

On the other hand, some hedge funds are totally honest. How can we tell which ones make it on smarts, good instincts and genuine preparation? Only if the government aggressively cleans up the act. Fear of prosecution is perhaps the only effective weapon.

Meantime, good money flows to funds, often unwittingly, who exploit and take advantage -- and that only distorts the efficient allocation of capital in America.

Cross-posted from New Deal 2.0.

Tell Me Why I Should Care About Ending Insider Trading

  |   May 13, 2011    1:24 PM ET

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The Unbearable Brown-ness of Raj Rajaratnam

Sandip Roy   |   May 13, 2011   12:51 AM ET

Move over spelling bee champions, Raj Rajaratnam is here.

Desis in North America are finally making news for something other than Pulitzers, spelling bees or plum positions in the White House. Hedge fund billionaire Raj Rajaratnam's trial, the biggest insider trading trial in years, ended with a guilty verdict for the Galleon funds founder on 14 counts of securities fraud and conspiracy. It's shaken up Wall Street not just because of the scale of trial but also because of its color.

Gary Weiss in The Daily Beast has cottoned on to the fact that the trial is not just shining a light on the murky dealings in the world of high finance. It's also a symbol of a changing Wall Street. "Wall Street is no longer a white man's preserve," he writes.

So far so good. But then the article goes on to talk about the "insularity" of Indians, Pakistanis, Bengalis and Sri Lankans. Rajaratnam's college buddy Anil Kumar, a former McKinsey executive pleaded guilty to getting $2 million from Rajaratnam for inside information. Rajiv Goel, Rengan Rajaratnam, Rajat Gupta are all desis involved in the scandal. (Even the prosecutor Preet Bharara is Indian-born!)

Weiss says outsiders can't help but note this "ethnic clubbiness" although he writes for South Asians "it's merely an extension of a style of business -- working a network of friends and acquaintances -- that's played out for centuries on the subcontinent, only applied, in this case, for allegedly criminal ends."

Hmmm. That sounds like exactly the way everyone does business. Presidents of the United States go back to their college buddies and early work days when they appoint staff members. When WASPs do it it's just called networking, not a strange exotic ethnic-specific hawala style of business. In a recent New York Times piece about Rajaratnam's friends it sounds like the newspaper just stumbled on some exotic hitherto unknown Amazon tribe: "Many of Mr. Rajaratnam's tipsters came from the South Asian immigrant community, a relatively small group of Indians, Pakistanis and Sri Lankans who over the past several decades have made their mark in finance and technology." Contrast that to Columbia University professor Arvind Panagariya's comments of firstpost.com:

"Call it the law of large numbers or probability. When there are so many South Asians on Wall Street some will inevitably get enmeshed in these incidents. There is embarrassment involved but why should every South Asian feel defensive?"

Weiss admits that Wall Street for its first 200 years remained a WASP preserve. The old boys club shut everyone else out but no one talks about its "ethnic clubbiness." White is always regarded as the absence of ethnicity.

In fact while Rajaratnam was tried for his alleged financial shenanigans by the courts, he should be congratulated on one count. Desis can be insular but not in the way Weiss imagines. In the U.S., the proliferation of Telegu Associations and Bengali Associations suggests that Indians abroad cling to caste and clan with even greater fervor than they did in India. The grand gathering of Bengalis every year in the Banga Sammelan is all about the glory of the Bengali language. But even amidst the dulcet tones of Rabindrasangeet the Bangladeshis complain they are being sidelined by the West Bengalis and the West Bengalis complain about how demanding the Bangladeshis are.

That Sri Lankan-born Rajaratnam spread his largesse among all his South Asian brothers is in itself noteworthy. He didn't just benefit the Sri Lankan Tamils. Perhaps the organizers of South Asian Association for Regional Cooperation should give him an award.

An earlier version of this blog first appeared on firstpost.com

Forget Raj: "Too Big to Fail" is Still "Too Big to Jail"

Richard (RJ) Eskow   |   May 13, 2011   12:40 AM ET

Some of the headlines about the conviction of hedge fund manager Raj Rajaratnam are misleading or just plain wrong. The Rajaratnam guilty verdict won't "change the way Wall Street does business" - not where it matters most. Too Big to Fail banks will continue to endanger the economy because they know they'll be rescued again. And they'll keep on breaking the law, knowing that even if they're caught they'll be protected from prosecution.

And yet, instead of being grateful, bankers like JPMorgan Chase CEO Jamie Dimon will continue to publicly sulk about their own perceived mistreatment. That can be annoying, since the U.S. taxpayer saved their corporations, their careers, and their wealth from the consequences of their own mismanagement.

But in the end all this public posturing is just a form of territorial primate display, like mandrills showing their brightly-colored posteriors to zoo visitors. These bankers are reminding us that this country's economy and government are their territory and we're just trespassing on their mating grounds. To paraphrase an old Sam and Dave song, "It's their world, we're just living in it."

Any aggravation felt as a result of their actions can easily be overcome through a rigorous program of spiritual and emotional self-improvement - or so I'm told. Here's the real problem: If you combine the egocentric and self-absorbed vituperation from these CEOs with the fact that their institutions can continue to commit crimes without fear of prosecution, it means that Wall Street enjoys state of "undiplomatic immunity" that endangers the entire country.

Whether it's Dimon's whine du jour, Bank of America CEO Brian Moynihan's arrogant sarcasm, or Washington's love affair with the CEO of serial corporate lawbreaker GE, the arrest of a hedge fund manager or two is insignificant as long as Wall Street's real power brokers remain immune from investigation. The Rajaratnam conviction doesn't change the underlying reality:

Too Big to Fail is still Too Big to Jail.

Something Fishy

Rajaratnam sounds like a big fish. He ran a $7 billion hedge fund and was convicted of making $63 million from criminal behavior. But one bank alone, Dimon's JPMorgan Chase, has already given up three quarters of a billion dollars to settle charges after it systematically bribed government officials in Alabama. Dimon's Chase has set aside another $2.3 billion to settle additional lawsuits that are expected to arise from other illegal acts on its part.

Jack Palance's line to Billy Crystal in City Slickers was "I cr*p bigger than you." Dimon's JPMorgan Chase excretes legal settlements that are bigger than Raj Rajaratnam.

How big are the biggest banks in America? Bank of America has $2.27 trillion in assets. JPMorgan Chase has $2.2 trillion. Citigroup has $1.97 trillion. Wells Fargo has $1.2 trillion. Compared to them, Rajaratnam's hedge fund is just a rounding error.

Raj Rajaratnam isn't a big fish. He's a guppy.

Busting up the wrong gang

This conviction is "just the start," we're told. Other members of Rajaratnam's Galleon fund have been targeted, along with Silicon Valley executives and employees of other investment funds. And we're told that the SEC's investigation is broadening to address the idea of "expert networks" that link industry professionals (i.e., in technology) with hedge fund investors.

To be sure, "expert networks" are dubious at best and downright illegal at worst. Business Insider did a useful round-up of firms who advertise themselves with phrases like these: "a global knowledge broker connecting professionals seeking specialist knowledge with those possessing it" ..."connects the investment community and advisory firms with leading industry specialists around the globe in order to access key market information" ... "the premier provider of expert consultation, market intelligence, advisory services, investment, and events for the China market."

To the untrained eye, that sounds a lot like insider trading. And to the trained eye it sounds a lot like insider trading.

A very gray, very faint line divides "networking between the investment community and experts in the industry" and the illegal exchange of information between investors and experts. And it can be crossed in a heartbeat. In can be crossed in the course of a four or five-sentence answer that a "industry specialist" gives to a question from "a member of the investment community."

So it's worth investigating. But it's not the source of our economy's systematic danger ... or its systematic corruption. The Rajaratnam conviction may be "just the start" of something useful. But it's not going to fix our worst problems.

Big and Bad

We never learned our lesson from the 2008 crisis. Instead of ending Too Big to Fail, the government has encouraged it. It's been helping larger banks acquire small ones. There were 157 bank failures last year, and there are now roughly half as many banks in the U.S. as there were 20 years ago. And most industry experts agree that consolidation in the banking industry will continue.

What's much worse is the fact that the top banks are getting bigger, not smaller. The "Big Four" - Citigroup, JPMorgan Chase, Bank of America and Wells Fargo - had 32% of the market before the 2008 collapse. Afterwards they had 39%, and they continue to grow.

And these corporations are all serial outlaws. Each of them has been deeply implicated in widespread mortgage fraud that includes the forging of court documents, a crime for which the Attorneys General for fifty states are reportedly reducing a proposed slap on the wrist to a proposed gentle kiss on the back of the hand.

We've already described some of the crimes committed by Dimon's JPMorgan Chase. The number of criminal indictments that resulted? Zero. Another "Big Four" bank, Wells Fargo, systematically laundered drug money from the cartels that have murdered 35,000 people in Mexico. Number of criminal indictments? Zero. Citigroup violated SEC law regarding corporate disclosures, engaged in illegal rate activity toward credit card customers, and is under investigation for aiding and abetting a Ponzi scheme. Number of criminal indictments? Zero.

(A more detailed description of these banks and their rap sheets can be found here.)

Get Real

So forget all of those headlines that say Raj Rajaratnam's conviction will "change everything." The government is still targeting small fry and trying to convince the public it's getting the people who have ruined their lives. It's not. Justice won't be served, and we won't be protected from the next crisis, until executives from the major U.S. banks are seriously investigated for their roles in the criminal behavior that has already been admitted to and addressed with a wave of large financial settlements.

It's time to get real about Wall Street crime, before it brings down the economy again. And it's time to end Too Big to Fail.

If Raj Rajaratnam's conviction fails to convince the public that the government's cracking down on bad bankers, they'll need another target for the public's wrath. Who knows? Maybe they'll arrest Martha Stewart again. Or they can get serious, and investigate the people whose crimes have done so much damage and may very well do more in the years to come.

As Martha might say, that would be a good thing.

____________________________________________________________

Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.

He can be reached at "rjeskow@ourfuture.org."

Website: Eskow and Associates

WATCH: Rajaratnam's Lawyer Flips Off CNBC

Maxwell Strachan   |   May 12, 2011    8:56 AM ET

That turned ugly fast.

On Wednesday, Galleon Group hedge fund manager Raj Rajaratnam was found guilty on all 14 counts of securities fraud and conspiracy, in what has been one of the most closely-watched insider trading trials of recent years.

Later in the day, Rajaratnam's lawyer, John Dowd, needed only one finger to express his frustration. "Get the f--- out of here," Dowd said after being approached for comment by a network cameraman. Dowd then lifted his middle finger to the camera and said, "that's what I've got for CNBC."

Dowd's flipping of the bird is only the most recent outrageous moment to have transpired over the course of the Rajaratnam trial. In March, jurors listened to a recording Rajaratnam's brother, Rengan, calling to say, "Oh dude, we're f-----," the WSJ then reported. Rengan's concern stemmed from reports of alleged insider trading by the Wall Street Journal.

Watch the CNBC video here:

EVELYN M. RUSLI   |   May 12, 2011    8:19 AM ET

With the government securing a conviction against Raj Rajaratnam of the Galleon Group on Wednesday, federal prosecutors will shift their focus to expert networks -- the intricate web of money managers, corporate executives and consultants at the center of another wave of insider trading cases.
Over the last few years, the Justice Department has built dozens of insider trading cases.

Rajaratnam Conviction Serves As Powerful Warning Shot On Wall Street

Lila Shapiro   |   May 11, 2011    4:47 PM ET

NEW YORK -- The conviction of billionaire hedge fund manger Raj Rajaratnam on all 14 counts in a sprawling, unprecedented insider trading case will serve as a powerful warning shot to Wall Street, legal and financial experts say.

The case against Rajaratnam, formerly the head of the Galleon Group, centered on an extensive network of tips he received over the course of at least six years, giving his hedge fund unauthorized insight into pending mergers and acquisitions, upcoming quarterly earnings at other companies and other transactions. The government estimated that Rajaratnam's firm, once one of Wall Street's biggest hedge funds, netted more than $63 million in gains and avoided losses over the time period.

Experts said that Rajaratnam's offense was so egregious that his conviction doesn't represent a shift in how the law defines insider trading, but rather, the government's willingness and ability to go after and convict such offenses.

"This was the least gray case I've ever seen. There was overwhelming evidence," said John C. Coffee, Law Professor at Columbia University and director of its Center on Corporate Governance. Rajaratnam plans to appeal the case because evidence was obtained through wire-taps and not, Coffee points out, because of the content of the charges themselves.

"The definition of insider trading is not really involved with this case," he said. "It is a case about whether or not the evidence was lawfully obtained."

The billion dollar question for investors and analysts is whether the conviction will cause hedge funds -- particularly those that use expert networks to help determine investing decisions -- to fundamentally reassess the way they operate?

"For well-counseled hedge funds, that reassessment began many many months ago," said Joseph A. Grundfest, a Professor of Law and Business at Standford University who previously served as a commissioner of the Securities and Exchange Commission.

Grundfest said hedge funds he does business with began increasing transparency and scrutinizing the use of expert networks when Rajaratnam was arrested and charged with more than a dozen counts of securities fraud and conspiracy to commit securities in October, 2009. At that time, the U.S. Attorney’s Office called the case “the largest hedge fund insider trading case in history.”

The case also marked the first time that wiretaps were used as part of a major insider trading investigation. More than 40 recordings collected over the years figured heavily into the case against Rajaratnam, including a tape showing that he had received information about an expected quarterly loss at Goldman Sachs from Goldman board member Rajat Gupta.

Some of the most significant testimony in the trial came from Anil Kumar, a former McKinsey & Co. consultant who pleaded guilty to conspiracy and securities fraud and later agreed to cooperate with the government in the case. According to the Wall Street Journal: Mr. Kumar's four days of testimony provided the cornerstone of the government's case, including damaging testimony from the consultant that he was paid $500,000 a year by Mr. Rajaratnam through an offshore account to an account in his housekeeper's name in exchange for insider tips. One such tip, involving the acquisition of ATI Technologies Inc. by Advanced Micro Devices Inc. in 2006, generated Galleon profits of nearly $23 million.

The strength of the conviction on all counts serves, Grundfest says, as a game-changer and a powerful bargaining tool for the government in all future cases of insider trading. "Now, the U.S. attorney will be able to sit down with the defendant and say [two] word[s]: Raj Rajaratnam. And that changes the complexion of the conversation. The government has now demonstrated that in situations that it has wiretaps and cooperating witnesses, they can convict."

Not everyone is convinced of the verdict's power on Wall Street. Charles Ferguson, director of the Academy Award-winning Inside Job, said that the focus on Rajaratnam's trial is misguided. “The total amounts of money and the consequences in insider trading are trivial," says Ferguson, according to The New York Times, "compared to the damage caused by the behavior that caused the financial crisis[.]”

But many argue that the deterrence factor of a criminal conviction -- Rajaratnam faces a minimum of 15-1/2 years -- is symbolically huge.

"The one thing we do know is that finance professionals are uniquely susceptible to general deterrents," said Coffee. "The street criminal may have very little alternative -- it's either sell drugs or stay poor -- but the person running a hedge fund sees the high risks involved that this case dramatically communicates. Looking at this case, he learns that expert networks that continue for a while have a good chance of getting revealed."

Rajaratnam is only one of 26 people charged in the Galleon case so far, and a second trial of three former securities traders, including a former Galleon hedge employee, is scheduled to start next week. Coffee expects that we will see more convictions in the coming months. As for whether there are hedge fund managers feeling anxious about the morning's news, Coffee put it simply:

"This is good news for honest expert network firms, bad news for those that were crossing the line. Good news for hedge funds not seeking insider information, bad news for those that were," Coffee said. "Professionals learn what is lawful based on who goes to prison and for what. This is a vivid message that you can go to prison for insider trading even if you are a sophicsticated business professional."

After the financial crisis, Bernie Madoff, years of slow economic growth and high unemployment, this is a message that will be likely welcomed by many, both on Wall Street and off.

"We've just been bombarded with a whole series of ponzi schemes, meltdowns and people making an enormous amount of money," said David Larcker, professor of accounting at the Stanford Graduate School of Business and author of Corporate Governance Matters. "The government is saying here 'look, let's pull it back to the middle here and show the population that we are serious about this -- that you can't just do anything you want.'"

Hedge Fund Manager Raj Rajaratnam Found Guilty On 14 Counts Of Insider Trading

Maxwell Strachan   |   May 11, 2011   10:47 AM ET

In what has been a heavily-watched insider trading case, Galleon Group hedge fund manager Raj Rajaratnam has been found guilty on all 14 counts of securities fraud and conspiracy, according to multiple reports. The announcement was made in a lower Manhattan federal court.

(Update: Analysts react to the Rajaratnam verdict below.)

For now, Rajaratnam, who ran one of the world's largest hedge funds, will be free on bail, but will be fitted with an electronic monitoring device. Reuters has more on the Rajaratnam verdict:

Rajaratnam, a one-time billionaire, will remain free on bail until sentencing on July 29, U.S. District Judge Richard Holwell ruled after the jury delivered its verdict.

Rajaratnam was expressionless during the verdict reading by a courtroom deputy.

He could face 15-1/2 to 19-1/2 years in a federal prison under sentencing guidelines, prosecutors said.

The Manhattan federal jury announced its unanimous verdict on the 12th day of deliberations in what many legal experts said was a strong prosecution case using FBI phone taps and testimony of three former friends and associates of Rajaratnam.

The jury convicted Rajaratnam of nine counts of securities fraud and five counts of conspiracy for what prosecutors describe as the money manager's central role in the most sweeping probe of insider trading at hedge funds on record.

During the two-month trial, prosecutors hammered at their argument that Rajaratnam cheated to gain an unfair advantage in the stock market from 2003 to March 2009, reaping an illicit $63.8 million.

Defense lawyers had stuck consistently to their main theme that Rajaratnam's trades were guided by a trove of research and public information, not secrets leaked by highly-placed corporate insiders.

Sri Lankan-born Rajaratnam, 53, was ordered to be fitted with an electronic monitoring device while out on bail.
Prosecutors had asked the judge to jail Rajaratnam pending sentencing, but the judge rejected that request.

The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.

The Wall Street Jorunal has a nice round-up of some of the key moments that may have swayed the jury. For example, Rajaratnam apparently told a colleague: "I heard yesterday from somebody who's on the board of Goldman Sachs that they are going to lose $2 per share. The Street has them making $2.50." Because this information came from a key bank employee and was sufficiently outside of the consensus view, the WSJ reports, prosecutors deemed it "material" information.

In 2009, Forbes estimated Rajaratnam's net worth at $1.3 billion, ranking him 559 on the magazine's list of the world's richest people.

Update: Below are analyst reactions to the Rajaratnam verdict:

Yahoo! economics editor Daniel Gross dismisses somewhat the significance of the trial, calling it "a sideshow to the larger financial scandals" of recent years. "Its impact on the economy pales in comparison to the Lehman Brothers debacle," Gross writes. "The sums of money and institutional failures involved were much less dramatic than in the Bernard Madoff affair."

What makes Rajaratnam's case significant, he says, is that it signifies the increasing prominence of South Asians in U.S. pop culture.

Charles Ferguson, director of the Academy Award-winning Inside Job, agrees that the focus on Rajaratnam's trial is misguided. "The total amounts of money and the consequences in insider trading are trivial," says Ferguson, according to The New York Times, "compared to the damage caused by the behavior that caused the financial crisis[.]"

Not everyone agrees. Anthony Michael Sabino, a professor at St. John's University, said in a statement that this could be a turning point in the larger fight against white collar crime. "For more than 30 years, the government has had a spotty history in insider trading cases, reflecting the difficulty of gathering evidence, explaining the machinations of high finance to a jury, and reconciling sometimes conflicting legal theories," the statement reads, according to the Washington Post.

"It is a defining case," says Wayne State University law professor Peter Henning, who went on to say Rajaratnam "joins the pantheon of [convicted stock trader] Ivan Boesky and [fictional Wall Street character] Gordon Gekko," according to Bloomberg.

The trial could also be a boon for the well-meaning trader. "The honest hedge fund managers should breathe a sigh of relief," San Diego State professor of finance Dan Seiver says, according to Reuters. "This will make the competition fairer... That's why we need these laws and cases to level the playing field."

The conviction hasn't seemed to rattle Wall Street thus far. "There is no market reaction," says Joe Saluzzi, co-manager of trading at Themis Trading, according to Reuters. "(But) it's the talk of the Street, no doubt about it."

Below read the release from the United States Attorney's office (via Business Insider):

Rajaratnam Raj Verdict


By TOM HAYS and LARRY NEUMEISTER   |   April 20, 2011    1:41 PM ET

NEW YORK -- Extensive wiretap evidence in the biggest hedge fund insider trading case in history proves a Wall Street heavyweight routinely used a cadre of "corporate spies" to get secrets and earn tens of millions of dollars in illicit revenue, a prosecutor said in his closing argument Wednesday.

When the jury listened to FBI recordings of Raj Rajaratnam, "You heard the defendant commit his crimes time and time again in his own words," Assistant U.S. Attorney Reed Brodsky told the panel. "The tapes were devastating evidence of the defendant's crimes, in real time."

An Outsider's Look at Insider Trading

Dan Solin   |   April 19, 2011   10:40 PM ET

I am fascinated by all trading (since little of it makes sense to me), but insider trading really intrigues me. Some recent cases are worthy of special attention.

In one, a hedge fund manager in FrontPoint Partners is alleged to have sold a huge block of shares in a biotech company after he got a tip that one of the company's drugs was in trouble. The sale allegedly avoided $30 million in losses. According to an article in the Wall Street Journal, FrontPoint, which was previously owned by Morgan Stanley, agreed to a settlement with the SEC involving payment of $33 million. Criminal charges are pending against the fund manager.

The fund manager, who earned a medical degree from Yale, allegedly paid cash to a French doctor who gave him the inside tip. On one occasion, he allegedly slipped $10,000 in cash in an envelope to the doctor while they were both at a bar in Milan. The French doctor has admitted his complicity in this scheme. I have to give credit to his lawyer, David Zornow, who noted that: "Dr. Benhamou's conduct in this instance must fairly be considered in the overall context of his extraordinary contributions to his patients and to medical science." How those contributions should factor into his illegal conduct is beyond me, but I thought the effort to conflate the two was very creative.

The founder of the Galleon Group, Raj Rajaratnam, is currently on trial for insider trading, as part of a broad crackdown by the U.S. Attorney Office. By some accounts, 47 people affiliated with hedge funds in the last 18 months have been charged with insider trading.

Here's what fascinates me. These are not rinky dink outfits. Galleon Group managed over $3 billion in assets. It had significant resources which -- you would think -- would permit it to do all the research necessary to uncover mispriced stocks and secure outsized returns for its wealthy investors.

Clearly, these giants of Wall Street know something they aren't telling their clients: It's really hard to be a successful stock picker. In fact, I am unaware of any research validating this skill and reams of data showing that stocks are fairly priced, incorporating all available information instantaneously. As successful insider trading indicates, it's tomorrow's news that affects stock prices. When FrontPoint got tipped off about non-public information, it was able to profit. Essentially, it learned about tomorrow's news before that news was public.

Insider trading validates index based investing. The hedge fund managers who engage in this activity understand they are unlikely to "beat the markets," without violating the law.

As noted author and market theorist William Bernstein said: " It turns out for all practical purposes there is no such thing as stock picking skill." Confronted with that reality, some managers have resorted to illegal conduct. There is a much better alternative. It will permit you to outperform 95% of all professionally managed money. Invest in a globally diversified portfolio of low management fee stock and bond index funds in an asset allocation suitable for you. Keep your cash out of envelopes. Keep yourself out of prison.

That's my outsider's look at insider trading.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Rajaratnam's Unlikely Defender

Harry Bradford   |   April 12, 2011    1:52 PM ET

NEW YORK (Grant McCool) - Hedge fund manager Raj Rajaratnam hopes a "Superman" will be able to help him win over the jury at his insider trading trial.

The judge ruled on Tuesday that American social activist and educator Geoffrey Canada, who appeared in the award-winning 2010 documentary film "Waiting for 'Superman'" can attest to Rajaratnam's character.

His Harlem Children's Zone in New York has benefited from the Galleon Group founder's philanthropy and board service. Canada, along with other nationally-known figures such as Microsoft founder Bill Gates, appeared in the film that won a best documentary award at the 2010 Sundance Film Festival.

"I will allow the character witness because the government itself has raised the issue of alleged greed by the defendant," U.S. District Judge Richard Holwell said before the jury came into the courtroom on the second day of the defense's case.

In what federal prosecutors have described as the biggest probe of insider trading at hedge funds, Rajaratnam is charged with conspiracy and securities fraud in a case in which 19 out of 26 defendants have pleaded guilty.

Prosecutors contend Sri Lankan-born Rajaratnam made an illicit $63.8 million. If convicted, the 53-year-old hedge fund manager could be sentenced to up to 20 years in prison.

The defense began presenting its side of the case on Monday. Before that, the jury heard five weeks of government evidence, including FBI phone taps and three friends-turned-prosecution witnesses, as prosecutors tried to show that between 2003 and March 2009 Rajaratnam gained an unfair trading advantage from highly-placed corporate insiders.

Rajaratnam's chief defense lawyer, John Dowd, had asked the judge on Monday if he could call Canada because prosecutor Jonathan Streeter told jurors at the trial's March 9 opening that the case was about "greed and corruption." Dowd said jurors should also hear about Rajaratnam's philanthropy.

Canada is expected to testify this week. The defense has not decided whether to call Rajaratnam to testify. The Manhattan federal court jury could hear closing statements by Friday.

Meanwhile, the jury heard more on Tuesday from former Galleon chief operating officer Rick Schutte, the third witness called by the defense since it began its side of the case.

A defense lawyer, Michael Starr, talked Schutte through dozens of emails, stock research reports and documents, some marked "Galleon confidential."

Starr asked Schutte to explain to the jury such terms as "a core long position" and "trading around a position."

Through Schutte, defense lawyers are portraying Galleon as a tightly-run firm in which Rajaratnam demanded discipline, challenged analysis and studied research and public data to make trading decisions.

Before Schutte began his testimony on Monday, the defense called two witnesses to try to discredit the earlier testimony for the government of a former Galleon portfolio manager, Adam Smith. He has pleaded guilty to criminal charges in the case.

The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.

(Reporting by Grant McCool, editing by Dave Zimmerman)


Copyright 2011 Thomson Reuters. Click for Restrictions.

Lawyer, Trader Charged With Sharing Merger Secrets For 17 Years

Maxwell Strachan   |   April 7, 2011    8:25 AM ET

NEW YORK/NEWARK, New Jersey (Jonathan Stempel and Andrew Longstreth) - A lawyer and a trader were accused by federal prosecutors of running a 17-year conspiracy to trade on corporate merger secrets stolen from three of the nation's most powerful law firms, in one of the largest U.S. insider trading cases on record.

Prosecutors accused Matthew H. Kluger and Garrett D. Bauer of reaping more than $32.2 million from trades on tips about upcoming mergers and acquisitions that Kluger learned as a lawyer at Wilson Sonsini Goodrich & Rosati PC, the pre-eminent firm representing Silicon Valley technology companies.

The complaint details a conspiracy that had its origins in Atlantic City, New Jersey, and ended with attempts by the defendants to cover their tracks, including a discussion about cleaning money in a washing machine to rid it of fingerprints.

Kluger also regularly leaked information he learned when he worked previously at two other law firms, Cravath Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP, prosecutors said. Wednesday's charges do not cover any trades that may have been made at that time. For a graphic on top M&A law firms, clickr.reuters.com/tap88r

The charges come amid a broad government crackdown on insider trading. This includes the criminal trial of Galleon Group hedge fund founder Raj Rajaratnam and last month's charges that a U.S. Food and Drug Administration chemist traded on insider information about drug approvals.

Questions are also surfacing about David Sokol, a former top deputy to Warren Buffett who quit Berkshire Hathaway Inc last week amid questions over his trading in stock of a company Berkshire later agreed to buy.

LAUNDERING MONEY IN A WASHING MACHINE

Federal prosecutors said Kluger passed tips to an unnamed co-conspirator about mergers, such as Oracle Corp's takeover of Sun Microsystems Inc, Adobe Systems Inc's purchase of Omniture Inc, Hewlett-Packard Co's takeover of 3Com Corp and Intel Corp's purchase of McAfee Inc.

The co-conspirator would then tip Bauer, 43, who would make trades for all three based on the tips, according to the complaint filed with the federal court in Newark, New Jersey.

Kluger left Wilson Sonsini around March 11, prosecutors said.

The complaint relies on many recorded telephone calls. In one call, on March 28, Bauer was said to have discussed how to dispose of $175,000 of cash with his fingerprints that he had given the co-conspirator.

"Somebody did say: 'Why don't you just run it through a dish-, a washing machine?" the co-conspirator said.

"Well, I, I don't know," Bauer responded. "I mean, I've seen that in the movies, but I don't know. Who said that? Someone said that to you?

"Yeah, my cousin did," the co-conspirator said, laughing, "He goes: 'Run it through a washing machine.'"

More than $109 million was invested in the purported scheme, prosecutors said. Kluger is a resident of Oakton, Virginia, while Bauer lives in New York, they added.

"According to the complaint, the defendants exploited Kluger's access to sensitive, confidential information to make trading profits a sure thing," said U.S. Attorney Paul Fishman in New Jersey. "This kind of cheating corrodes confidence in our markets and swindles those who play by the rules."

The U.S. Securities and Exchange Commission filed civil charges against Kluger and Bauer.

At a hearing in Alexandria, Virginia, U.S. Magistrate Judge Theresa Buchanan ordered Kluger detained until another hearing set for Friday. Kluger surrendered his passport and asked the judge to consider appointing a lawyer for him.

U.S. Magistrate Judge Mark Falk ordered Bauer detained at a hearing in Newark. A prosecutor told the judge Bauer has more than $50 million in bank accounts and was "a very significant flight risk." Another hearing is set for April 18.

William Davis, a lawyer for Bauer, said after the hearing his client was "not pleased."

17 CRIMINAL COUNTS

Prosecutors said Bauer worked mainly at three proprietary trading firms in the period covered by the complaint, most recently at Lighthouse Financial Group and previously at JAG Trading LLC in Bloomfield Hills, Michigan.

The criminal complaint also contends Bauer spent $7.5 million of illicit proceeds in 2009 on a condominium on Manhattan's Upper East Side and a home in Boca Raton, Florida.

"I'm shocked to hear everything that's gone on," said Craig Bauer, who added he is Garrett Bauer's brother, in a telephone interview.

Craig Bauer is managing member of JAG, according to that firm's website.

Kluger and Garrett Bauer were charged in a 17-count criminal complaint, including 11 counts of insider trading, four counts of obstruction of justice, conspiracy to commit insider trading and conspiracy to commit money laundering.

Each of the insider trading counts carries a maximum penalty of 20 years in prison plus a $5 million fine.

The case is one of the largest in U.S. history based on the amount of illegal profit, a sum that may grow if investigators probe further, including into earlier trades, said a person familiar with the case and not authorized to talk publicly.

"We all have very, very careful procedures," said Garrett Moran, chief operating officer of the private equity group at Blackstone Group LP, at the Reuters Global Mergers and Acquisitions Summit. "You just don't do a trade unless you ask your compliance department in advance."

The case follows dozens of other U.S. insider trading prosecutions since October 2009 when Rajaratnam was arrested.

Rajaratnam, a one-time hedge fund billionaire, is on trial in Wall Street's biggest insider trading case in two decades.

Asked why the latest case is in New Jersey, Fishman said many companies do business there.

"This district is where Wall Street is wired," he added.

"MR. G"

Investigators said the defendants hatched their plan at an Atlantic City meeting in which Bauer agreed to use gambling as a cover story to explain cash withdrawals he was making to funnel illegal profits to Kluger.

The complaint also said that, after the FBI searched the co-conspirator's home on March 8, Kluger and Bauer -- sometimes called "Mr. G" -- became nervous and began destroying cellphones, computer records and other evidence.

"As long as Mr. G keeps his mouth shut and I keep mine and you keep yours, I don't think they're gonna find enough of anything," the government quoted Kluger as saying on a March 17, 2011, cellphone call with the co-conspirator.

"By the way, I got rid of my computer," Kluger was quoted as then saying. "I got rid of my iPhone where I had looked up some stock quotes. Those are gone. I mean history. Gone."

Wilson Sonsini spokeswoman Courtney Dorman said the firm is cooperating with the federal investigation and was "shocked" to learn of the allegations against Kluger.

Skadden said it is also cooperating and has strict policies to protect clients' confidential information. A Cravath spokeswoman had no immediate comment.

The case is U.S. v. Bauer et al, U.S. District Court, District of New Jersey, No. 11-mag-03536.

(Additional reporting by Dena Aubin, Paritosh Bansal, Nadia Damouni and Matthew Goldstein in New York, and Jeremy Pelofsky in Alexandria, Virginia; editing by Dave Zimmerman, Tim Dobbyn and Andre Grenon)

Copyright 2011 Thomson Reuters. Click for Restrictions.

The Whirligig of Time Fails to Bring Its Revenges

  |   April 5, 2011    4:43 PM ET

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