Raj Rajaratnam, the billionaire investor who once ran one of the world’s largest hedge funds, was found guilty of fraud and conspiracy on Wednesday by a federal jury in Manhattan. He is the most prominent figure convicted in the government’s crackdown on insider trading on Wall Street.
Mr. Rajaratnam, who was convicted on all 14 counts, could face as much as 19 and a half years in prison under federal sentencing guidelines, prosecutors said on Wednesday.
Mr. Rajaratnam is expected to appeal.
The government built its case against Mr. Rajaratnam with powerful wiretap evidence. Over a nine-month stretch in 2008, federal agents secretly recorded Mr. Rajaratnam’s telephone conversations. They listened in as Mr. Rajaratnam brazenly – and matter-of-factly – swapped inside stock tips with corporate insiders and fellow traders.
“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.
“One thing we know, this is very confidential, someone is going to put in a term sheet for Spansion,” he told a colleague, referring to a proposed acquisition of a technology company.
“So yesterday they agreed on, at least they’ve shaken hands,” a tipster told Mr. Rajaratnam about an upcoming deal involving another publicly traded business. “So I think, uh, you can now just buy.”
For years, Mr. Rajaratnam was lionized as one of Wall Street’s savviest investors. At its peak, his Galleon Group hedge fund managed more than $7 billion in assets. Investment banks including Goldman Sachs and Morgan Stanley counted Galleon, which paid out roughly $300 million in trading commissions annually to brokerage firms, as one of their largest trading clients.
In the early morning hours of Oct. 16, 2009, federal agents arrested Mr. Rajaratnam at his Sutton Place apartment on Manhattan’s East Side. The government placed him at the center of a vast insider trading conspiracy, accusing him of using a corrupt network of tipsters to earn tens of millions of dollars in illegal trading profits in stocks including Google and Hilton Worldwide.
The case has led to insider trading charges against 25 defendants – 21 of whom have pleaded guilty – including former executives at I.B.M., Intel and Bear Stearns.
Mr. Rajaratnam fought the charges against him, insisting that he had done nothing wrong. His lead lawyer, John C. Dowd, said that his client’s success as a money manager came from “shoe-leather research, diligence and hard work.”
He based his defense on the so-called mosaic theory of investing. Galleon was famous for its dogged digging for information about publicly traded companies that would form a “mosaic” –- a complete picture of a company’s prospects that gave it an investment edge over other investors.
Mr. Rajaratnam’s lawyers argued that all of his supposed illegal trading was grounded in publicly available newspaper articles, analyst reports and company news releases. For instance, the defense presented evidence showing that before Advanced Micro Devices acquired ATI Technologies – a deal that prosecutors said Mr. Rajaratnam had received an illegal tip about – 51 news articles and 6 analyst reports speculated on the likelihood of a merger between the two companies.
Prosecutors dismantled Mr. Rajaratnam’s defense by acknowledging that Galleon performed legitimate research. But at the same time, they argued, the firm routinely violated securities laws. In the words of a former Galleon portfolio manager who testified during the trial, the firm did its homework — but also cheated on the test.
“The defendant knew the rules, but he did not care,” said a prosecutor, Reed Brodsky, in his summation. “Cheating became part of his business model.”
Mr. Rajaratnam’s arrest halted a remarkable Wall Street success story. A native of Sri Lanka, Mr. Rajaratnam came to the United States in 1981 to study business at the prestigious Wharton School at the University of Pennsylvania. He joined Needham & Company, a small investment bank, and carved out a reputation as an expert in technology companies.
His ascent coincided with both the tech boom of the 1990s and the emergence of hedge funds – a once obscure pocket of the investment world – into a powerful force on Wall Street. When he formed his own hedge fund, Galleon Group, in 1997, his services were in hot demand. Mr. Rajaratnam posted superior investment returns, attracting blue chip investors like New Jersey’s state pension fund and UBS, the giant Swiss bank.
Galleon brought Mr. Rajartnam great wealth. Forbes magazine pegged his net worth at $1.3 billion. He owns a second home in the wealthy suburb of Greenwich, Conn., and a condominium at the Setai Hotel in Miami Beach. During the trial, Mr. Rajaratnam’s former friends told the jury about lavish vacations including, for his 50th birthday, chartering a private jet to fly dozens of family and friends for a safari in Kenya.
Fiercely competitive, Mr. Rajaratnam could be heard during the trial on wiretaps speaking in sports and military metaphors. He compared himself to fighting Muhammad Ali in the boxing ring and said during the financial crisis, “I’m feeling the pain, but they can’t kill me. I’m a warrior.”
It was that competitiveness that caused Mr. Rajaratnam, despite his facing a blizzard of incriminating evidence, to fight the charges against him, according to two former Galleon employees who requested anonymity.
“Raj hated to lose and loved a good fight,” one former colleague said. “He’s a big sports fan, and I think in some ways he viewed this trial as a contest.”
Another said that Mr. Rajaratnam took great pride in his accomplishments and refused to admit to any wrongdoing.
“This way, Raj can say he was wrongfully accused,” he said.
The origins of Mr. Rajaratnam’s case stretch back more than a decade, but a turning point came in 2006 during an investigation of a hedge fund run by Rengan Rajaratnam, Mr. Rajaratnam’s younger brother and a former Galleon employee. While reviewing e-mails and instant messages, Andrew Michaelson, now a member of the team that prosecuted Raj Rajaratnam, discovered incriminating communications between the brothers.
Rengan Rajaratnam, who has not been criminally charged, emerged – through several wiretapped conversations – as a colorful figure during the trial. On a call in August 2008, Rengan told his brother about his efforts to press his friend, a McKinsey consultant, for confidential information.
Rengan Rajaratnam called the consultant “a little dirty” and boasted that he “finally spilled his beans” by sharing secrets about a corporate client.
In another call later that day, the brothers laughed about recruiting him into their scheme.
“Scumbag,” Rengan Rajaratnam said, referring to his friend. “Everybody is a scumbag.”