May 19, 2024

DealBook: Prosecution Rests Its Case in Galleon Trial

Raj Rajaratnam, right, with his lawyer, John Dowd, arriving at federal court this week.Louis Lanzano/Bloomberg NewsRaj Rajaratnam, right, with his lawyer John Dowd, arriving at federal court.

Raj Rajaratnam has his work cut out for him.

After five weeks and 18 witnesses, the government rested its case on Wednesday against Mr. Rajaratnam, the hedge fund billionaire, setting the stage for the defense to begin its bid to keep their client out of prison.

Jurors have listened to 45 secretly recorded telephone conversations between Mr. Rajaratnam and his supposed accomplices and colleagues.

Many of them included damning evidence of what appears to be insider trading at the Galleon Group, the hedge fund run by Mr. Rajaratnam.

“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 an employee on one tape. “The Street has them making $2.50.”

Jurors have also listened to Mr. Rajaratnam coaching colleagues on how to create what he called an “e-mail trail” to make it appear that Galleon purchased stock based on legitimate reasons rather than illegal tips. They have seen records of a sham Swiss bank account and a stealth investment in Galleon made in the name of a tipster’s housekeeper.

The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

Mr. Rajaratnam, 53, is the most prominent defendant in the government’s widespread investigation into insider trading at hedge funds. He is charged with earning $54 million on illegal stock trades and, if convicted, faces up to 25 years in prison.

The government rested its case on Wednesday after James C. Barnacle Jr., an F.B.I. agent, walked jurors through Galleon’s trading records and internal communications. Judge Richard J. Holwell excused the jurors for the balance of the week, with the defense set to begin calling witnesses on Monday.

Lawyers for Mr. Rajaratnam say their case is expected to last at least a week. Mr. Rajaratnam is not expected to testify, a tactic that does not surprise criminal defense lawyers following the case, who say that the defendant’s testimony in this case is fraught with peril.

“As a general proposition, defense lawyers do not like their clients to take the stand,” said Robert A. Mintz, a lawyer at McCarter English. “In a case like this, with all of the wiretap evidence, there would be a tremendous opportunity for the government to cross-examine him on all of the recorded phone calls and present their case to the jury for a second time.”

Mr. Rajaratnam’s legal team has already mounted a defense through its cross-examination of the government’s witnesses. Its strategy is clear: it will seek to persuade the jury that the confidential information swapped between Mr. Rajaratnam and his supposed accomplices on the wiretapped calls was widely known.

“The evidence will show that Raj only traded stocks based on public information, expert research and analysis conducted by Galleon,” said John Dowd, a lawyer for Mr. Rajaratnam, in his opening statement.

“We’ll show you the newspaper articles and the published analyst reports where the information had already been made public.”

The defense has inundated the jury with Wall Street research and media reports meant to show that Mr. Rajaratnam traded not on illicit tips, but on public information. If a jury determined that the information passed to Mr. Rajaratnam was immaterial, it would not be considered insider trading under the federal securities laws.

The prosecution’s case was built around three main witnesses, the latest of which was Adam Smith, a former Galleon portfolio manager. Mr. Smith, along with the other main witnesses, has baggage. He has pleaded guilty and cut a deal with prosecutors in the hope of securing a reduced sentence. Mr. Rajaratnam’s lawyers have attacked the government’s witnesses as felons who are lying about criminal activity.

A more daunting challenge for the defense will be trying to debunk evidence that Mr. Rajaratnam traded in Goldman stock after Rajat K. Gupta, a director of the bank, provided him with details of confidential board meetings. Among the supposed tips was news, at the peak of the financial crisis, that Warren E. Buffett would be investing $5 billion in Goldman.

The defense plans to counter such evidence through testimony from experts who will argue that Mr. Rajaratnam practiced the so-called mosaic theory of stock trading. In other words, his trades were based on a pastiche of Wall Street research and public data, not inside information.

Mr. Rajaratnam’s lawyers want to put on the stand Gregg A. Jarrell, a finance professor at the University of Rochester, who maintains that Mr. Rajaratnam’s trading was based on the “mix of information available in the marketplace and within Galleon.”

For instance, Mr. Jarrell has concluded that the public expected Goldman to raise additional capital, so news of Mr. Buffett’s planned investment was not material to the bank’s stock price.

Prosecutors have objected to Professor Jarrell’s appearance, arguing that he “should be precluded from opining about the basis upon which Mr. Rajaratnam made trading decisions.” Judge Holwell is to hold a hearing on Friday about the scope of Mr. Jarrell’s testimony.

Though jurors will probably not judge Mr. Rajaratnam on the witness stand, they have been able to observe him in the courtroom each day.

Mr. Rajaratnam, a Sri Lankan native, intently watches the proceedings with an amiable expression on his face, occasionally jotting a note on a legal pad or whispering to one of his lawyers.

Mr. Rajaratnam’s positioning in the courtroom is highly unusual. He is not seated at the defense table.

Instead, lawyers and paralegals from Akin Gump Strauss Hauer Feld fill the long, rectangular table. Mr. Rajaratnam sits in a chair about 10 feet behind it, flanked by more Akin Gump lawyers and partly obstructed from the jury box.

A spokesman for the defense said that the seating arrangements were most convenient for Mr. Rajaratnam’s legal team because it needed the table for computers and organizing exhibits.

But in a survey of 10 trial lawyers not involved in the case, not one had ever seen a criminal defendant not sit at the defense table.

Most lawyers say they believe the high-priced defense team has carefully considered Mr. Rajaratnam’s positioning. One lawyer, who spoke on the condition of anonymity because he is tangentially involved in the trial, questioned the move. “The jury could think the lawyers are trying to hide him,” he said.

Mark C. Zauderer, a lawyer at Flemming Zulack Williamson Zauderer, said the defense could be trying to send the jury a subtle message.

“Raj was a big-picture guy with no actual knowledge that anybody was mining inside information,” Mr. Zauderer said. “His position away from counsel table, where defendants always sit, is obviously designed to suggest, albeit subliminally, his a role as a remote actor in the events at the center of the trial.”

In another anomaly, Mr. Rajaratnam’s wife has not attended the trial.

Defendants’ spouses typically attend legal proceedings in an attempt to humanize the defendant and elicit possible sympathy from the jury, say white-collar criminal defense lawyers. But there is also the risk that jurors can be sensitive to attempts to play on their heart strings.

A spokesman for the defense declined to comment on the absence of Ms. Rajaratnam, who lives with her husband and three children in Sutton Place, a luxury address just five miles north of the Federal District Court in Manhattan.

While the testimony of the witnesses, along with the opening and closing arguments, are paramount for a jury, lawyers say that trials are ultimately a morality play not only about the evidence, but also about the prism through which jurors are asked to view that evidence.

“Even with all the law and evidence, a jury trial is still theater,” Mr. Zauderer said. “All that counts is the reviews of the jurors.”

Azam Ahmed contributed reporting.

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