Phone calls with insiders. Discussions about corporate deals, earnings results or big investments. Then, the celebrations and thanks.
Slowly beating the same drum, prosecutors built their case over the past month that Galleon hedge fund founder Raj Rajaratnam gathered corporate secrets from highly placed sources to make tens of millions in illegal insider trading.
Prosecutors have played FBI telephone taps to a New York jury in which the money manager is heard discussing purportedly secret company information with an associate, then presented records of him trading on it. Rajaratnam was also heard on at least two calls apparently celebrating success with the person on the call or thanking them.
Legal experts say a smooth presentation weaving in dozens of FBI phone taps, thousands of pages of records, testimony from three cooperating witnesses and several business executives presents a huge challenge when the defense brings its side of the case starting on April 11.
“At a minimum, Raj Rajaratnam's attorneys and the defendant himself are nervous at this point,” said Chicago securities lawyer Andrew Stoltmann, who is not involved in the trial in Manhattan federal court.
He and other lawyers said Rajaratnam, facing as long as 20 years in prison if convicted, could take a risk and testify to explain his so-called “mosaic theory” defense - that he made his trading decisions after piecing together analysis and research and other publicly available information. Few criminal defendants get on the witness stand because they could face potentially devastating cross-examination by prosecutors.
Asked whether Rajaratnam would testify, his chief lawyer, John Dowd, said: “I would never tell you that in a million years.”
The prosecution rested its case on Wednesday and defense lawyers moved to dismiss the conspiracy and securities fraud charges.
Lawyer Terence Lynam told U.S. District Judge Richard Holwell the jury “is being asked to make too many leaps” and speculate on certain evidence. The judge reserved ruling.
In what prosecutors have described as the biggest probe of insider trading at hedge funds, Rajaratnam, 53, is accused of violating insider trading laws between 2003 and March 2009.
The 14-count indictment said he made $45 million on those trades, but FBI agent James Barnacle testified on Wednesday the total profit and losses avoided was $63.8 million.
To win a conviction, the government's evidence must convince the jury that Rajaratnam received company secrets from someone who had a fiduciary duty not to disclose them and Rajaratnam knew it was wrong.
“The government made a pretty good job of gradually making the case stronger and stronger,” said Linda Fentiman, a professor at Pace University Law School in White Plains, New York. “You could argue about any individual conversation and say this isn't really trading material inside information, but if you put them all together, it makes it a strong case.”
Some lawyers said one theme or fact brought out in cross-examination of any of the 17 government witnesses since March 9 could stick out for the jurors and make the difference between Rajaratnam going to prison or being acquitted.
“I'll credit the defense, they have maintained a consistent theme of this idea that there may have been inside information, but it was also part of a mosaic that informed their full picture of potential transactions,” said Stephen Miller of Cozen O'Connor law firm in Philadelphia.
Three of Sri Lankan-born Rajaratnam's former friends and business associates spent days testifying against him. They included former McKinsey & Co consultancy partner Anil Kumar, former Intel Corp executive Rajiv Goel and former Galleon portfolio manager Adam Smith. All have pleaded guilty and Kumar and Goel admitted violating fiduciary duties.
Prosecutor Jonathan Streeter said in opening arguments that Rajaratnam was driven by “greed and corruption” to construct a complex web of informants. Two other prosecutors, Reed Brodsky and Andrew Michaelson, also questioned witnesses.
The government called high-placed officials from various companies whose stocks were cited, most notably Goldman Sachs chief executive Lloyd Blankfein. They dryly explained that employees are not allowed to share information with outsiders on earnings, mergers or any activity that could move the stock price.
U.S. securities regulators have accused former Goldman director Rajat Gupta of tipping Rajaratnam about the Wall Street bank's first ever quarterly loss in 2008 and a $5 billion investment. Gupta has not been criminally charged.
“It's easy to focus on the more sensational aspects here, but it is important not to lose sight of the 'small' witnesses,” said Jonathan New, a partner at law firm Baker Hostetler in New York, who is not involved in the case.
“The phone taps were effective because they pulled back the curtain on what was going on behind the scenes.”
The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184. - Reuters