Prosecutor: NYC hedge fund relied on inside tips

Even with the economy in a free fall in the summer of 2008, federal prosecutors say, Raj Rajaratnam managed to give new meaning to turning a quick profit.

Even with the economy in a free fall in the summer of 2008, federal prosecutors say, Raj Rajaratnam managed to give new meaning to turning a quick profit.

The high-flying hedge fund manager made $1 million with a massive trade that took all of seven minutes. The prosecutors allege he had to cheat to do it.

The transaction was a glaring example of how Rajaratnam "exploited a corrupt group of people to get access to secret corporate information and then traded on it," Assistant U.S. Attorney Jonathan Streeter said in opening statements Wednesday at the only trial to result from what the government calls the biggest hedge fund insider-trading probe ever.

Rajaratnam, who founded the now-defunct Galleon Group LLC family of hedge funds in 1997, remained still as Streeter described the insider-trading case in stark terms, repeatedly pointing at the defendant.

"Greed and corruption. That's what this case is all about," Streeter told the federal jury in Manhattan, where the trial was to continue Thursday.

Defense lawyer John Dowd, given his turn, said, "The evidence will show the government has it wrong. And the government has it wrong because it believed the word of unbelievable people."

He said Rajaratnam spent $300 million annually at Galleon on research and called it the best in the business to the benefit of pension funds, wealthy individuals and hardworking citizens.

For jurors, Dowd countered the image Streeter tried to project of a hard-driving, greedy, win-at-all-costs Wall Street dynamo by saying: "When you invest in mutual funds, you're relying on somebody like Raj to manage your money."

The trial comes more than a year after prosecutors announced they had raised the stakes to root out corruption on Wall Street by using wiretaps for the first time on a wide scale to eavesdrop on private conversations of those trading inside information at public companies and at hedge funds. Too often, they said, those calls revealed insider information being passed around casually.

The prosecution of Rajaratnam, first announced with his October 2008 arrest, has been accompanied by the arrests of more than two dozen other people — 19 have pleaded guilty, and many are cooperating. It has led to a second probe of research specialists in the financial industry, nine of whom have been arrested in a crackdown on those who disguise inside information as legitimate research.

Rajaratnam, 53, has pleaded not guilty to securities fraud and conspiracy to commit securities fraud. He has been free on $100 million bail. Prosecutors tried to have him jailed without bail before trial, saying he may have made more than $50 million illegally.

Among Rajaratnam's cadre of tipsters, prosecutors say, was Rajat Gupta, a close friend and a former Goldman Sachs board member. On Wednesday, Streeter described Gupta completing a phone call at 3:53 p.m. on Sept. 23, 2008, when he voted with the board to accept a blockbuster offer from Warren Buffet to pump $5 billion into the struggling investment bank.

Records show that two minutes later the director telephoned Rajaratnam, the prosecutor said. Three minutes after that, the hedge fund manager called in an order for $43 million in Goldman stock.

It was only two minutes before the market closed at 4 p.m. — "right under the wire," Streeter said.

The order was so large, brokers could only complete $27 million in trades for Rajaratnam. But the next day, after news of the deal was made public, his stake in Goldman rose enough to make Rajaratnam a cool $1 million.

In another phone call that day with employees, Rajaratnam described the trade as a "big drama," the government said, revealing, "I got a call saying something good is going to happen to Goldman."

Gupta has not been charged criminally but has been charged civilly by the Securities and Exchange Commission. His lawyer has said he did nothing wrong.

Streeter said Rajaratnam also got secrets from several of his former classmates at the University of Pennsylvania's Wharton School.

Rajaratnam paid one of them, Anil Kumar, a former senior partner and director at McKinsey & Co., on a quarterly basis from 2003 to 2006 for inside information, putting the money in the overseas account of Kumar's housekeeper until Kumar's information made him more than $20 million for one tip in 2006, the prosecutor said. Rajaratnam paid Kumar a $1 million bonus for that tip, he said.

Streeter said Kumar, who pleaded guilty last year to securities fraud charges, will testify.

Dowd said Galleon records prove that Kumar was paid consulting fees for overseas information and that he was hiding what Rajaratnam paid him from the Internal Revenue Service.

"Kumar was the one with something to hide," Dowd said.

Rajaratnam also got secret information from another Wharton classmate, Rajiv Goel, who was director of strategic investments at Intel Capital, the investment arm of microprocessor maker Intel Corp. until he was arrested in the Galleon probe in October 2009, Streeter said. Goel pleaded guilty to conspiracy and securities fraud charges in February 2010.

Streeter said the recordings from an FBI wiretap of one of Rajaratnam's phones and other evidence such as phone and trading records will show he led a campaign to cover his tracks, even advising a co-defendant on how to make trades based on inside information seem legitimate.

Dowd was dismissive of much of the wiretap evidence, saying it did not contain any conversations in which inside information was passed. He was particularly critical of government portrayals of conversations between his client and Rajaratnam's one-time co-defendant, Danielle Chiesi, who claimed during a January guilty plea that she had given inside information to Rajaratnam.

He said the calls contain "a lot of self-promotion and gibberish" but no inside information.

"Just a lot of drama," he added.

That, Dowd said, reflected the passive and friendly nature of Rajaratnam, the richest Sri Lankan-born person in the world and a man listed by Forbes in 2009 as the world's 559th wealthiest billionaire, with a net worth of $1.3 billion.

Rajaratnam, Dowd has said, is no longer a billionaire.

Dowd did make Rajaratnam sound legendary in financial circles, saying he became the foremost expert on semiconductor companies just when the industry was starting to take off because of the computer revolution, soon after Rajaratnam had become a U.S. citizen in 1983, the year he graduated at the top of his class at Wharton.

"Raj listens," he said. "When he's along with people, he tries to make them feel important."

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