Courtroom showdown in sweeping US trading probe

Saturday, 5 March 2011 00:43 -     - {{hitsCtrl.values.hits}}

  • Galleo’s Rajaratnam faces barrage of tapes, witnesses
  • Seasoned defence team may spring trial surprises
  •  Battle over allegations of tips, $45 million in profits
  • Biggest insider trading probe of hedge funds -government

NEW YORK (Reuters) — A sweeping insider trading case that shook the hedge fund world is finally set for trial, with onetime billionaire Raj Rajaratnam fighting to stay out of prison in a courtroom drama over corporate secrets, tapped telephones and friends-turned-government witnesses.

Jury selection in the case against the Galleon Group founder in New York starts on Tuesday. The trial, expected to last up to two months, comes as U.S. authorities push on with other probes into stock trading in the $1.9 trillion hedge fund industry based on leaked company earnings and deals.

Rajaratnam is accused of making $45 million in illicit profits through tips from former friends and associates at the highest levels of Corporate America.

Once named the richest person born in Sri Lanka, the 53-year-old U.S. citizen has vowed to clear his name at trial. Galleon managed $7 billion at its peak.

"All signs are pointing to a battle royal," said Chicago securities attorney Andrew Stoltmann, who is not involved in the case. "Just by being a hedge fund manager he is a gambler by trade. The mentality is a little bit different than what we see with other defendants."

Rajaratnam, arrested in October 2009 and free on bail, faces up to 25 years in prison if convicted of conspiracy and securities fraud in Manhattan federal court.

The government's wide scale use of phone taps sets it apart from past insider trading cases, which are notoriously difficult to prove. In announcing the case, prosecutors called it the biggest ever probe of insider trading at hedge funds, sending a warning to money managers that the government might be covertly listening to them.

The prosecutions are reminiscent of the blockbuster insider trading cases of the 1980s, when speculator Ivan Boesky pleaded guilty and cooperated with authorities. That led to criminal charges against Drexel Burnham Lambert, which was destroyed in the scandal, and Michael Milken, its former junk bond chief.

While Rajaratnam lost a key ruling that will allow jurors to hear audiotapes of his telephone conversations secretly recorded by the FBI, his lawyers argue the tapes prove nothing. The tapes could be an issue for appeal if he is found guilty because there is “at least some lack of clarity in the statute about whether it authorised wiretaps here” (for insider trading), said Manhattan Institute think tank legal policy director James Copland.

Part of defense trial strategy is to tell the jury that the government has significantly expanded the bounds of what insider trading means, court papers show.

Rajaratnam’s representatives have said repeatedly that “he intends to establish his innocence at trial before a jury of his fellow citizens.”

The prosecution team must convince the jury that their evidence proves Rajaratnam knew that between 2003 and March 2009, he was trading on confidential information given to him by people who had a fiduciary duty not to disclose it.

“Just because there is a wiretap it does not mean this evidence is going to be absolutely conclusive” for the jury, said New York attorney Nathaniel Burney of Burney Law Firm LLC in New York, who is not involved in the case. “There is a lot of room for skillful advocacy. The tapes could be misinterpreted or misunderstood.”

The allegations extend far beyond Rajaratnam. Besides him, 25 former traders, executives and lawyers have been charged with being part of two overlapping insider trading networks. Nineteen have pleaded guilty, and some of those defendants are expected to testify against him at the trial.

A graduate of the prestigious Wharton business school at the University of Pennsylvania, Rajaratnam had a deep network of acquaintances including people at Goldman Sachs Group, Intel Corp and McKinsey & Co.

Prosecutors said it was some of those contacts who spilled secrets that helped him gain an unfair edge over other traders, gleaning stock tips that helped Galleon prosper.

Rajaratnam’s friend, former Goldman board member Rajat Gupta, will be subpoenaed as a trial witness, Rajaratnam’s lawyers said in court papers. Gupta has been accused by securities regulators of disclosing Goldman secrets to Rajaratnam, a contention he denies. [ID:nN01159728]

The trial is the biggest in the financial industry since two former Bear Stearns fund managers were accused of misleading investors over mortgage-linked securities as the housing market collapsed in 2007. The two were acquitted.

An acquittal of Rajaratnam would be another embarrassment for the government, which has given the case high priority.

Rajaratnam will go to trial in the same courthouse in lower Manhattan where Bernard Madoff pleaded guilty two years ago to a multibillion-dollar swindle. It was also where celebrity homemaker Martha Stewart stood trial in 2004 in another stock tipping case.

The government has released excerpts of the tapes and could present as many as 173 intercepted mobile phone audio recordings to the jury. The full extent of the evidence from the calls and text messages is not known, so there may yet be surprises at trial.

Another unknown is whether or not Rajaratnam will testify in his own defence.

“If the defence is ‘I didn't know the information given to me was material nonpublic information’ the only way that story comes into the trial is through him,” said Evan Stewart, a partner at law firm Zuckerman Spaeder who is not involved in the case.

Jim McCarthy, a spokesman for the defence, declined to comment on the possibility of Rajaratnam taking the witness stand.

McCarthy also declined comment on whether or not the government ever offered Rajaratnam a plea deal. Ellen Davis, a spokeswoman for the Manhattan U.S. Attorney declined comment.

Jury selection could take several days. A panel of 12 jurors plus several alternates will be chosen from a pool of 300 New Yorkers. Opening arguments will follow.

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

Rajaratnam trial jury jeopardised by SEC: defence

Reuters — Lawyers for Galleon hedge fund founder Raj Rajaratnam accused U.S. market regulators of polluting the jury pool for his insider trading trial by filing charges, a week before jury selection, against a friend who is also a former Goldman Sachs Group Inc director.

The criminal trial of the Sri Lankan-born Rajaratnam, 53, is scheduled to start on 8 March in Manhattan federal court, part of what U.S. prosecutors call the biggest probe of insider trading at hedge funds.

The long-running case took a new turn two days ago when the U.S. Securities and Exchange Commission charged former Goldman director Rajat Gupta with providing inside information to Rajaratnam.The SEC said this included making a hurried phone call to Rajaratnam just minutes before the public learned of a $5 billion investment in Goldman by Warren Buffett’s Berkshire Hathaway Inc. at the height of the financial crisis in September 2008.


Gupta’s lawyer called the charges baseless. Rajaratnam has pleaded not guilty to charges including securities fraud and conspiracy in the criminal case.

“The overwhelming publicity from this action by the SEC has seriously jeopardised Rajaratnam’s ability to seat an impartial and unbiased jury,” defence lawyers from Akin Gump Strauss Hauer & Feld LLP said in a motion to U.S. District Judge Richard Holwell, who oversees Rajaratnam’s criminal case.

“There was no need to file these charges just one week before jury selection,” the lawyers said.

According to the defence’s court papers, the office of Manhattan U.S. Attorney Preet Bharara, which is prosecuting the criminal case, asked the SEC “to refrain from commencing an action but we have not seen any official correspondence to that effect.”

SEC spokesman John Nester declined to comment. Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment.

Rajaratnam’s lawyers also asked the judge to allow additional questioning of potential jurors and to give them more instructions.

A panel of 12 jurors and several alternates will be selected from a pool of 300 New Yorkers.