Oct. 13 (Bloomberg) — Raj Rajaratnam, the Galleon Group LLC co-founder and hedge fund manager whom prosecutors called “the modern face of illegal insider trading,” was sentenced to 11 years in prison and a $10 million fine for conspiracy and securities fraud.
Rajaratnam, 54, is the central figure in what federal investigators called the largest hedge fund insider trader case in U.S. history. The Galleon probe, which leveraged the widespread use of FBI wiretaps for the first time in such an inquiry, led to convictions of more than two dozen people. Prosecutors said he made more than $72 million by using illegal tips to trade in stocks of companies including Goldman Sachs Group Inc., Intel Corp., Google Inc., ATI Technologies Inc. and Clearwire Corp.
U.S. District Judge Richard Holwell sentenced Rajaratnam today before a packed courtroom in lower Manhattan, saying his term was enhanced due to his leadership role in the scheme and obstruction of a related Securities and Exchange Commission probe. Holwell also noted that he received more than 200 letters on the fund manager’s behalf, and that Rajaratnam suffers from diabetes and needs a kidney transplant.
“This is a lighter sentence than anticipated,” said Anthony Sabino, a professor at St. John’s University School of Law in New York, pointing to the U.S. request for as many as 24 ½ years. He said the judge still sent a message with the 11- year term. “Holwell is clearly achieving a crucial goal here, that is, telling Wall Street that this kind of criminality will not be tolerated, and will be severely punished.”
The Galleon case helped trigger two other overlapping insider-trading investigations that relied heavily on wiretaps, a tool more commonly used to probe organized crime. In the past 18 months, U.S. Attorney Preet Bharara in Manhattan charged more than 50 people in the three schemes with insider-trading crimes.
A federal jury in Manhattan convicted Rajaratnam on May 11 of all 14 counts of securities fraud and conspiracy against him. During the two-month trial, the panel heard evidence that he engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies.
“Raj Rajaratnam’s criminal conduct was brazen, arrogant, harmful and pervasive,” Assistant U.S. Attorneys Jonathan Streeter, Reed Brodsky and Andrew Michaelson said in court papers. “He corrupted old friends. He corrupted subordinates. He corrupted entire markets. Day after day, month after month, year after year, Rajaratnam operated as a billion-dollar force of deception and corruption on Wall Street.”
Prosecutors asked for a prison term ranging from 19 years and seven months to 24 1/2 years, citing federal sentencing guidelines and the ‘historic nature of his crimes.”
The U.S. compared Rajaratnam to Enron Corp.’s Jeffrey Skilling, who helped bring down the massive energy trader, and WorldCom Inc.’s Bernard Ebbers, convicted in what prosecutors called “the worst of accounting frauds.”
The Galleon Group hedge fund manager was also put in the same category as Bernard Madoff, whose massive scam they said represented “the worst of Ponzi schemes.” Skilling was sentenced to 24 years in prison, Ebbers to 25 years and Madoff to 150 years.
Rajaratnam’s lawyers had asked for a sentence below the term sought by the government, one that was “fair, dispassionate and proportionate.” They said the federal guideline range overstated the seriousness of Rajaratnam’s crimes, and called the term sought by the U.S. “grotesquely severe.”
Claiming Rajaratnam’s actions made him only $7.4 million, they asked for 6 1/2 to 8 years, according to a person familiar with the defense case who declined to be identified because the matter isn’t public.
There is no parole under the federal prison system.
Rajaratnam claimed a flawed loss calculation was responsible for most of the government’s requested prison sentence. Federal sentencing guidelines, which are advisory, increase the recommended term for financial crimes based on the amount of money lost. Holwell held a hearing Oct. 4 to determine the loss resulting from Rajaratnam’s crimes.
“This court’s role is not to validate a prosecutorial public relations effort, nor is it to single out one man to serve as the whipping boy for Wall Street misdeeds,” Rajaratnam’s lawyers argued in court papers.
Rajaratnam, who didn’t take the stand at trial in his own defense, was convicted of five counts of conspiracy and nine counts of securities fraud. He still faces a lawsuit against both him and Galleon by the U.S. Securities Exchange Commission.
The far-flung Galleon scandal may have derailed or damaged the careers of executives who weren’t involved in the trading.
Prosecutors said Rajaratnam’s sources of information included Rajat Gupta, who until last year was a director at Goldman Sachs Group Inc., and Kamal Ahmed, a Morgan Stanley investment banker who prosecutors said passed tips through a Galleon trader. Both deny wrongdoing, and neither has been charged with a crime in the case.
Witnesses testifying for the prosecution included Goldman Sachs Chief Executive Officer Lloyd Blankfein, who said Gupta violated the company’s confidentiality policies by allegedly telling Rajaratnam about its earnings and strategic plans.
Robert Moffat, a former International Business Machines Corp. executive, was sentenced to six months in prison for leaking tips to Rajaratnam co-defendant and New Castle Funds LLC analyst Danielle Chiesi. Moffat said he had an “intimate relationship” with Chiesi and said she had “played him” to get inside information.
Hector Ruiz, the former chairman of Advanced Micro Devices Inc., also gave inside information to Chiesi, according to prosecutors. Ruiz hasn’t been charged with a crime.
Galleon was once among the 10 largest hedge funds, managing $7 billion at its peak in 2008. Rajaratnam’s net worth of $1.3 billion made him the 559th richest person in the world, Forbes Magazine said in 2009.
Before his arrest on Oct. 16, 2009, Rajaratnam claimed that Galleon analysts had an advantage over rivals because most were trained as engineers and all focused exclusively on research.
“They don’t get blindsided by the marketing hype,” Rajaratnam said of his analysts in the book “The New Investment Superstars: 13 Great Investors and Their Strategies for Superior Returns,” by Lois Peltz. At trial, Rajaratnam’s lawyers claimed his trades were based on Galleon research.
Adam Smith, a former Galleon trader, testified that Galleon’s edge came from illegal tips from company insiders. Rajaratnam emphasized “getting the number” — or learning revenue figures before they became public — from insiders at Intel, Intersil Corp. and other publicly traded companies, Smith said.
“Research is sort of doing your homework ahead of time,” Smith, who pleaded guilty to insider trading and agreed to cooperate with prosecutors, told jurors. “Getting the number is more like cheating on the test.”
Jurors at Rajaratnam’s trial heard more than 40 recordings of the Galleon co-founder, made by the Federal Bureau of Investigation, where he chatted and joked with sources while getting information about sales projections and mergers.
“They’re gonna guide down,” Chiesi told Rajaratnam on July 24, 2008, after she got an insider’s leak that Akamai Technologies Inc. would reduce its forecast. “I just got a tip from my guy.”
Defense lawyer John Dowd said he would appeal the use of wiretaps, telling the judge the matter was “very substantial.”
Rajaratnam’s lawyers argued that wiretaps shouldn’t be used at the trial because the U.S. failed to disclose key facts about the investigation. Holwell granted prosecutors the right to use about 2,400 recorded conversations between Rajaratnam and more than 130 friends, business associates and alleged accomplices.
Born in Sri Lanka’s capital, Colombo, Rajaratnam was educated there at St. Thomas’ Preparatory School before leaving for England, where he studied engineering at the University of Sussex. He came to the U.S. to get his master’s of business administration, graduating from the University of Pennsylvania’s Wharton School in 1983.
Two of his Wharton classmates — Anil Kumar, who became a partner at McKinsey & Co., and Rajiv Goel, who was a managing director at Intel — testified against him at the trial, saying Rajaratnam corrupted their friendships as he sought them out as sources of secret information. Both have pleaded guilty.
Rajaratnam’s first job after graduation was at Chase Manhattan Bank, where he was a lending officer in the group that made loans to high-tech companies. In 1985, he joined Needham & Co., a New York-based investment bank that specialized in technology and health-care companies.
He started as an analyst covering the electronics industry and rose through the ranks, becoming head of research in 1987, chief operating officer in 1989 and president in 1991. A year later, at 34, Rajaratnam started a fund, Needham Emerging Growth Partners LP, according to Galleon’s marketing documents.
Rajaratnam and Needham colleagues Krishen Sud, Gary Rosenbach and Ari Arjavalingam formed Galleon Group in January 1997. By the end of that year, they were managing $830 million, much of it from technology company executives Rajaratnam had gotten to know throughout his career, according to “The New Investment Superstars.”
Bharara’s office has charged more than two dozen people in cases related to Galleon. In June, Zvi Goffer, a former Galleon trader, his brother Emanuel, and Michael Kimelman were convicted of conspiracy and securities fraud. The three men started Incremental Capital LLC after Zvi Goffer was fired by Galleon in 2008.
Trial testimony showed the three used tips on pending acquisitions from two lawyers, then working at the Boston-based law firm Ropes & Gray LLP, to profit on trades in 3Com Corp., Axcan Pharma Inc., Kronos Inc. and Hilton Hotels Corp.
Zvi Goffer was referred to by some of his associates as “Octopussy,” according to prosecutors. The James Bond movie allusion sprung from Goffer’s many tentacles reaching for confidential corporate information, prosecutors said.
At least 15 other people were convicted in Manhattan in a third round of insider-trading cases brought by Bharara’s office since November. They involved so-called expert-networking firms, which match industry experts with fund managers.
Trial testimony showed that some employees at public companies, while moonlighting for firms such as Mountain View, California-base Primary Global Research LLC, passed nonpublic information to fund managers for fees.
Zvi Goffer was sentenced to 10 years in prison by U.S. District Judge Richard Sullivan. Chiesi was sentenced by Holwell to 30 months in prison. Craig Drimal, a former Galleon trader, was sentenced by Sullivan to 66 months. Jason Goldfarb, who was part of Zvi Goffer’s ring, was sentenced to three years in prison by Sullivan.
IBM Executive Sentenced
Moffat was sentenced to six months in prison by U.S. District Judge Deborah Batts. Mark Kurland, a fund manager at New Castle Funds and Chiesi’s boss, was sentenced to 27 months by U.S. District Judge Victor Marrero.
A former Primary Global consultant, Winifred Jiau, was sentenced in September to four years in prison for passing earnings and other information about Nvidia Corp. and Marvell Technology Group Ltd. to hedge fund managers. Two of those fund managers, Noah Freeman, a former SAC Capital Advisors LP portfolio manager, and Samir Barai, founder of New York-based Barai Capital Management LP, previously pleaded guilty in the case.
Freeman said he made from $5 million to $10 million by trading on Jiau’s Nvidia information.
Donald Longueuil, another former SAC Capital Advisors portfolio manager, was sentenced in July to 2 1/2 years in prison for his role in the scheme.
Longueuil admitted that after reading a newspaper article about the probe of Primary Global, he went to his office and took pliers to two drives on his computer, destroying them. Prosecutors said he walked 20 blocks and dumped the parts in four different garbage trucks.
“Chopped it up, chopped up everything,” Longueuil wrote in a text message to Freeman, according to the complaint filed by the U.S. in February.
The case is U.S. v. Rajaratnam, 09-01184, U.S. District Court for the Southern District of New York (Manhattan).
–With assistance Chris Dolmetsch and Cullen Wheatley in Manhattan federal court. Editors: Stephen Farr, Michael Hytha
To contact the reporters on this story: Patricia Hurtado in Manhattan federal court at firstname.lastname@example.org; Bob Van Voris in Manhattan federal court at email@example.com; David Glovin in Manhattan federal court at firstname.lastname@example.org.
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