Flanked by his lawyers, Raj Rajaratnam stepped into an elevator on the 17th floor of the Manhattan federal court. A crew of reporters got into an elevator across the corridor. In a cinematic sequence, Rajaratnam and the journalists stared straight at each other. Just before the elevators doors on both sides closed in unison, he smiled.
Rajaratnam, 53, founder of the Galleon Group hedge fund and main accused in the largest hedge fund insider trading case in US history, had spent another day waiting for the jury to decide his fate. Having sat through seven weeks of evidence, 12 jury members entered their second week of deliberations on 2 May. They had 14 counts of securities fraud and conspiracy charges to consider behind closed doors. Only muffled murmurs and sounds of laughter would occasionally escape. Outside, New York City enjoyed its first days of a late spring.
Rajaratnam looked thinner since the trial started in March. He was often at the salad bar during lunch at the courthouse cafeteria. Since the start of the trial, the defendant had stoically sat in court listening to his own conversations caught on wiretaps. The prosecution said the recordings were evidence of “material and non-public” information being exchanged between him and his accomplices on Wall Street. During closing arguments at the end of April, US Assistant Attorney Reed Brodsky told the jury that the one-time billionaire was driven by “money, power and conquest” to make millions by trading on insider tips.
Rajat Gupta, a former Goldman Sachs board member, has been accused of passing on secret information about the firm to Rajaratnam. The prosecution played a 29 July 2008 call in which Rajaratnam asked Gupta whether Goldman Sachs was considering acquiring a commercial bank. “Yeah, there was this big discussion at the board meeting,” he replied.
Rajaratnam, who came to the court every day, never looked flustered even as evidence gradually stacked up against him. His lawyers had to counter secretly recorded phone conversations and witnesses who were ready to spill the beans.
The US government had accused Rajaratnam of making $63.8 million from insider tips on the performance and plans of Google Inc, Hilton Hotels Corp, Akamai Technologies and several other firms. The prosecutors said that Rajaratnam knew about plans like the acquisition of chip-maker ATI Technologies by its rival Advanced Micro Devices (AMD), in 2008, and that of PeopleSupport by the Essar Group. “The defendant knew tomorrow’s news today, and that meant big money,” Brodsky told the jury on 20 April.
The government appeared to have a slam dunk case. But going by the time the jury is taking, it seems they have much to ponder. Rajaratnam’s lawyers argued that the content of the alleged tips was already part of a “mosaic” of public information available in analyst reports and the financial press. They said their client used sophisticated research for his trading decisions that enriched Galleon investors. “If it’s public, you must acquit,” said John Dowd, the lead defence lawyer, in his closing arguments on 21 April. Dowd also alleged that the government’s witnesses, who had pleaded guilty, were lying to get shorter sentences.
Brian Quinn, a law professor at Boston College, says that if the jury buys the “mosaic theory”, it would make the situation “very complicated” for the government. However, many experts and observers consider the secretly recorded conversations just too damning. “The evidence is overwhelming and sufficient to convict,” says John Coffee, a law professor at Columbia University, “You can quibble about individual episodes, but the cumulative impact of the evidence has not been effectively countered by the defence.”
AN INDIAN NETWORK
For long-distance observers in India, the focus of the scandal was Gupta’s alleged role. The 62-year-old former chief of McKinsey—who recently resigned as chairman of the Indian School of Business in Hyderabad—was not indicted in the criminal trial, but faces civil charges from the US Securities and Exchange Commission. Among other things, he has been accused of telling Rajaratnam ahead of time about a $5 billion investment in Goldman Sachs by Warren Buffett’s Berkshire Hathaway, and also about the firm’s poor earnings in 2008. “You trade based upon the real fly on the wall, Mr Gupta, the person who is in the Goldman board room, who knows what Goldman is really going to do,” Brodsky told the jury on 20 April.
Other aspects of the trial may perhaps have made bigger news in India had the country not been agog with its own wiretaps-led scam: 2G spectrum. “There are enough controversies in India for the local media to track the Galleon story on a full-time basis,” says Shishir Jose Vayttaden, a corporate lawyer with the Delhi-based law firm Luthra & Luthra.
Yet, the number of Indian names that featured in the Galleon trial is staggering. Manju Das, the housekeeper for Anil Kumar, a key government witness in the trial, may never quite understand her ‘role’ in the entire episode. The maid from Bengal came to live with the Kumar family in California in 1999. According to the prosecution, her name was planted on a Galleon account in which money received by her boss for providing insider tips was invested. Kumar, 52, a former McKinsey director, pleaded guilty to passing confidential information to Rajaratnam in exchange for $500,000 a year between 2003 and 2009. Both men met when they were graduate students at The Wharton School of University of Pennsylvania, some 30 year ago.
Another Indian-American, Rajiv Goel, 52, a former Intel executive, also pleaded guilty to providing insider tips. He was also Rajaratnam’s classmate at Wharton. “Raj and I were very good friends,” Goel testified in March. “He was a good man to me. I was a good pal, a good person to him, so I gave him the information.”
As his friends testified against him for several days, Rajaratnam watched silently. Reporters caught glimpses of brief eye contact between them, but their expressions never betrayed any emotion. Kumar and Goel could receive reduced jail sentences in exchange for their cooperation. But they may never be able to work in the US market again. Gupta, who has not been criminally charged, still has a chance to get out of his current predicament, albeit with some scars. “It will be interesting to see how Gupta handles the SEC charges… if he loses, he could be banned from the securities market here,” says Ross B Intelisano, a partner in Rich & Intelisano, LLP, a New York-based law firm that specialises in securities fraud. Even if Gupta is let off, he adds, he might have it tough finding a job with a public firm in the US.
To American observers, the trial has been a window to the lives of immigrants who made it to the top of Wall Street. And what they see is unedifying. Americans facing financial hardships could feel especially embittered by immigrants twisting the rules to rise to the top. “There is resentment,” observes Eugene O’Donnell, a professor at the John Jay College of Criminal Justice and a former police officer.
Given the public anger at America’s Great Recession, some feel, it is hard to guarantee a jury totally free of bias against Wall Street powerbrokers. Other experts, however, point out that the Rajaratnam scam didn’t roil people as much as Bernard Madoff, the Wall Street legend who was sent to jail in 2009 for running a $50 billion Ponzi scheme. “Rajaratnam does not face the same level of public anger,” says Professor Quinn. Even the immigrant factor may have been more pronounced if the case was being tried in a city not as mixed as New York, a fact reflected in the diversity of the jury. Suspicions of prejudice on part of the government were also diluted by the role of Indian-origin Preet Bharara, the top US attorney in Manhattan, who is the force behind the crackdown.
Ethnic solidarity is not uncommon for co-conspirators in such cases, says Professor Coffee, pointing out that the famous Ivan Boesky insider trading case in the 1980s had many Jewish defendants. “Some commentators foolishly opined that the government was anti-Semitic,” he says.
FEAR OF BUGS
As the Indian Judiciary grapples with phone-tapped evidence in general and the Radia Tapes in particular in the context of the 2G spectrum case, it’s interesting to see how the US stance on recorded voices has evolved. After all, Rajaratnam’s was America’s first case of insider trading that allowed the use of wiretaps, and the stir this created is yet to peter out. Shortly after Galleon’s founder was arrested in October 2009, Bharara described the case as “a wake-up call” for Wall Street. “These people were privy to inside information,” Bharara said, “but they didn’t know one secret, that we were listening.”
The wiretaps on which the government’s case relied—Rajaratnam’s phone conversations from March 2008 onwards—had been allowed by US District Judge Richard Holwell despite Dowd’s bid to get them thrown out. The use of wiretaps is now expected to increase in the US. In another win for the government, US District Judge Richard Sullivan allowed the government to present wiretaps in a separate insider trading case, involving Craig Drimal, a former Galleon Group hedge fund trader (he pleaded guilty along with 20 others arrested).“If it is used against criminals, then why not against people with white collars and ties?” asks Gerald J McMahon, a prominent criminal lawyer in New York.
It has sent shudders down Wall Street. According to Intelisano, hedge fund managers have “hired private investigators to do [bug] sweeps in their offices”. This, despite the fact that bugging is expensive and a high burden of proof needs be presented for a judge to allow it. In the Rajaratnam trial, McMahon says that federal prosecutors pushed the limits of law because the US government had already expended large resources on the case.
This is one of the most talked about aspects of the trial even in India, where the stockmarket regulator Sebi is being urged to pursue insider trading cases with greater vigour. “I have not come across any instance where Sebi has procured wiretaps,” says Luthra & Luthra’s Vayattaden, adding though that Sebi’s surveillance techniques and quality of evidence have improved over the years.
Yet, phone taps remain controversial in India, with the Tata Group’s Ratan Tata having filed a petition at the Supreme Court of India that the Radia Tapes—recorded by the Income Tax Department—violate his right to privacy.
The US government is also faced with similar protests. In fact, while allowing the wiretapping evidence in the Drimal case, Judge Sullivan scolded the government for recording portions of private conversation. ‘The court is deeply troubled by this unnecessary, and apparently voyeuristic, intrusion into the Drimals’ private life,’ the judge wrote in his April ruling. He added, however, that the government’s isolated failures did not warrant total suppression of the recordings.
Under the rule of ‘minimization’, a federal agent is supposed to stop listening if bugged speakers talk about private matters and then check again to see if the conversation has returned to criminal matters. This is tricky. O’Donnell notes that it’s easier to understand a conversation about a drug deal than grasp the import of an insider trading conversation quickly, especially if people talk in code.
That’s not all that raises concerns. For all the attention the Rajaratnam case has got, whether it will deter insider trading is in doubt. “It will not, for the same reason that prison does not deter criminals,” says Arturo Bris, a professor of finance at IMD University in Switzerland. “Especially in current times, with institutional investors and hedge funds monopolising trading, we will see more cases of insider trading, not less.”
Others suggest that the sting of the trial may last for a while and then gradually dissipate. “Insider trading will never be eliminated, but the means of exchanging information will become more sophisticated, and the means to detect it will become more expensive,” says Laura Beny, a law professor at the University of Michigan.
THE CREDIT ROLL
‘Snoozethon’ is how one journalist described Dowd’s delivery of his closing remarks in Rajaratnam’s defence to the jury. In contrast, the prosecution fought hard. They stood before the jury and sealed their final arguments with a great deal of gesturing and pointing towards Rajaratnam. Dowd, a six-foot-five former military lawyer, merely stood on one side of the jury and read from a binder. In response, jury members sat upright while the prosecution presented its case, and then slowly slumped into their chairs when Dowd wrapped up the defence case in a low drone. “Some lawyers with the best reputation can be really bad in court,” says O’Donnell, adding that the prosecution had a knack of detail that the defence couldn’t match. “They connect the dots very skilfully… they really make the evidence sing for the jury.”
The trial was like an action-packed legal drama, though, for the most part, what with all the phone conversations and dramatic testimonies. Kumar, for instance, testified that he received $1 million from Rajaratnam for the tip about chipmaker AMD’s acquiring ATI. “I almost fell off my chair,” Kumar told the jury, recalling his reaction to the offer.
Of all the government witnesses, Kumar appeared to be Dowd’s least favourite. The lawyer described the former McKinsey director as a liar of the “worst” kind and once asked him whether he was envious of his rich friends. “I have a lot poor friends and I feel very privileged,” Kumar replied.
In the middle of the courtroom sat Rajaratnam—looking cool, at least on the surface. Goldman Sachs’ CEO Lloyd Blankfein, called as a government witness, famously shook hands with the accused after giving a damaging testimony against him. While some found this gesture classy, others said it was reminiscent of an old boys’ network on Wall Street that ran the show.
There has also been a great deal of speculation about why Rajaratnam denied wrongdoing, given the damning phone conversations and the fact that so many others had pleaded guilty. But then again, it seems not to be the open-and-shut case it was once thought. Lawyers who have been following the case suggest that Rajaratnam’s chance of getting a good deal from a plea bargain was slim, and so his best option was to try and convince even one jury member of his innocence.
If so, Dowd’s gruff manner, especially during the final phase of arguments, didn’t help. When the opposition has the upper hand, the personality of a lawyer and his ability to engage the jury with a cogent argument goes a long way. “If you want to get a jury to acquit a guy, then you have to give him a reason to want to do it,” says McMahon.
The wiretaps packed the prosecution’s punch, everyone agrees. The tough-looking defence lawyer failed to roll with the punch, let alone gather himself and jab right back. And thus ended the final scene of a high-profile trial that had played out like a movie. With its credit roll hogged by bugs.