Business

Largest insider trading case ever: Rajaratnam gets 11 years

By Kevin Bloom 14 October 2011

Not since Rudolph Giuliani brought down Michael Milken and Ivan Boesky has the world seen an insider trading scandal this big. But 22 years later, with hedge fund tycoons among the most powerful players in global finance, the scale of this type of fraud has only gotten exponentially larger. Who is Raj Rajaratnam and what did he do? By KEVIN BLOOM.

In mid-October 2009, Raj Rajaratnam, a Sri Lankan who’d started out as a technology analyst and had risen to manage his own New York-based hedge fund, was arrested in his plush Manhattan duplex. He and five others were accused by the United States Justice Department and the Securities and Exchange Commission of relying on a network of corporate insiders to make tens of millions in profits between the years 2006 and 2009. Bail for Rajaratnam was set at $100 million, a sum that he happily paid because, at the time, he was the richest Sri Lankan-born individual in the world – according to Forbes magazine, he was also then the 236th wealthiest person in America, with an estimated net worth of $1.5 billion.

But bail would turn out to be the least of Rajaratnam’s problems. Shamed by their failure to detect the $68 billion Ponzi scheme of Bernard L Madoff, federal prosecutors were calling this the biggest insider trading ring involving a hedge fund in US history. Since 2007, over the same period that the financial crisis had shaken investor confidence in the honesty of the markets, they’d been methodically following leads and gathering evidence of vast illegal syndicates. They used wire taps and body wires, offering leniency to those they caught in exchange for further information, until eventually one of the prosecutors made the following statement to the press: “Given the scope of the allegations to date, we are not talking simply about the occasional corrupt individual; we’re talking about something verging on a corrupt business model.”

Before his trial was due to start earlier this year, the Washington Post ran an in-depth investigative piece in which it claimed that many of the individuals involved in these activities were clustered around Rajaratnam and his Galleon Group fund. “The alleged tipsters betrayed some prominent firms by selling their secrets,” the report stated. “Leakers who pleaded guilty or were convicted included lawyers at Ropes & Gray, a prestigious corporate law firm; a senior executive at IBM; a partner at Ernst & Young and a director at the big management consulting firm McKinsey & Co.”

On 11 May 2011, Rajaratnam was found guilty on all 14 counts of conspiracy and securities fraud. Among the dozens of companies regarding which he was convicted of trading on inside information were Goldman Sachs, Google, Intel, eBay, AMD and Clearwire. After his conviction, the United States attorney for Manhattan noted that in the previous 18 months, his office had charged 47 people with insider trading, and that Rajaratnam was the 35th. Still, it was the scope of Rajaratnam’s dealings and the brazenness of his methods that grabbed the headlines. The New York Times, for one, printed this statement made over the phone, as secretly recorded by federal authorities: “‘I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,’ Mr. Rajaratnam said to one of his employees in advance of the bank’s earnings announcement.”

The maximum sentence that Rajaratnam stood to face was 25 years, with prosecutors saying they would seek as much as 19 and a half. In the event, on Thursday 13 October 2011, Judge Richard J. Holwell sentenced the 54-year-old to 11 years in prison and a $10 million fine. Although this is the longest prison sentence ever handed down for insider trading, prosecutors were disappointed. According to the New York Times, Holwell “cited a number of mitigating factors that he said caused him to hand down a term that was substantially lower than the nonbinding federal guidelines. He said Rajaratnam’s “good works figure into the equation”, citing his financial help for victims of the tsunami in Sri Lanka, the earthquakes in Pakistan and the September 11 attacks.

Rajaratnam, who initially pleaded not guilty and has over the last two years steadfastly maintained his innocence, intends to take the matter on appeal. His lawyers will apparently focus their strategy on the judge’s decision to admit the recorded calls as evidence, arguing “Congress has not authorised the use of wiretap surveillance for insider trading cases”. Legal experts told the Times that they doubt the appeal will succeed.

And just about everybody watching, excluding perhaps the inside traders out there, will be hoping it doesn’t. As Joseph Schumpeter put it today in The Economist: “Mr Rajaratnam’s demise is a boon for the regulators’ campaign to root out market abuse and prove the markets are welcoming of ordinary investors. At one point Galleon was one of the largest hedge funds in the world. But now it is an example of Wall Street’s misguided hubris and greed. Mr Rajaratnam’s crimes, the judge said, ‘reflect the virus in our business culture that needs to be eradicated’.” DM



Read more:

  • “Federal investigators expose vast web of insider trading,” in the Washington Post;
  • “Galleon’s Rajaratnam Found Guilty,” in the NYTimes;
  • “Rajaratnam Is Sentenced to 11 Years,” in the NYTimes;
  • “Away with you,” in The Economist.

Photo: REUTERS

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