April 17, 2024

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DealBook: In Galleon Case, Prison Term Is Seen as Test

Prosecutors want Raj Rajaratnam, who was convicted of securities fraud and conspiracy, to be sentenced to as much as 24 years.Peter Foley/Bloomberg NewsProsecutors want Raj Rajaratnam, who was convicted of securities fraud and conspiracy, to be sentenced to as much as 24 years.

Federal prosecutors want to send the convicted hedge fund chief Raj Rajaratnam to prison for as long as 24 years, which would be the longest insider trading sentence in history.

How a judge rules next week on Mr. Rajaratnam’s punishment is being seen in legal circles as a litmus test of whether the crime of insider trading justifies such a long prison term.

In May, a jury convicted Mr. Rajaratnam, the head of the hedge fund the Galleon Group, of 14 counts of securities fraud and conspiracy. Prosecutors, calling him “the modern face of illegal insider trading,” placed him at the center of a vast insider trading ring, accusing him of using a global network of tipsters to gain about $64 million from illegal stock trading.

The question is whether such a sentence — longer than the average federal prison term for murder — is appropriate.

“Given the magnitude of the crimes, it’s hard to feel any pity for him,” said Harlan J. Protass, a defense lawyer who teaches a sentencing class at the Benjamin N. Cardozo School of Law. “Still, there is a real question whether such a lengthy sentence is warranted for an insider trading offender.”

The Galleon Trial
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Sentences for white-collar criminals used to be relatively lenient, legal experts say. Corporate offenders were seen as nonviolent criminals, and judges would often impose probation terms or send them away for short stints to low-security prison camps nicknamed “Club Fed.”

This began to change in the late 1980s. The insider trading scandals and savings and loan crisis of that era resulted in increased sentences for corporate defendants. Michael Milken, who pleaded guilty to securities law violations, was sentenced to 10 years in prison. Charles Keating, the head of Lincoln Savings and Loan, was sentenced to 12 1/2 years. Both served far less time than their original sentences.

Around that time, in 1987, a government commission also issued federal sentencing guidelines that linked prison terms to the amount of loss in fraud cases. In 2001, an overhaul of those guidelines further increased sentences based on the dollar amounts involved in the crime, and specifically tied insider trading sentences to the amount of money illegally gained.

“Since the inception of the sentencing guidelines, we have seen a consistent and dramatic upward ratchet,” said James E. Felman, a lawyer in Tampa and co-chairman of the American Bar Association’s sentencing committee.

Today, prison terms measured in decades are common for white-collar criminals. In 2005, Bernard J. Ebbers, the former chief executive of WorldCom, was sentenced to 25 years in prison for a huge accounting fraud. Earlier this year, Lee B. Farkas, a former mortgage company executive, received a 30-year term for his role in a fraud that the government says caused $2.9 billion in losses. On Monday, a federal judge in Miami sentenced Marianella Valera, a former mental health company executive, to 35 years in prison for her role in a $205 million fraud at American Therapeutic; a 50-year sentence was earlier imposed on her co-defendant, Lawrence Duran.

For Mr. Rajaratnam, the government has requested a sentence from 19 years and seven months to 24 years and five months, based on federal sentencing guidelines. The government said he did not deserve leniency because he was a “fundamentally deceptive and dishonest person” who had lied under oath in a deposition and had tried to cover up his crimes.

If Judge Richard J. Holwell of the Federal District Court in Manhattan issues such a sentence on Sept. 27, it will be the longest prison term ever for an insider trading crime. A recent study by Bloomberg News of 43 defendants sentenced in federal court in Manhattan for insider trading in the last eight years found that the longest sentence was 10 years, to a Credit Suisse banker convicted in 2008 of leading a $7.8 million scheme.

Mr. Rajaratnam’s lawyers call the proposed sentence “grotesquely severe” and argue that “the advisory guidelines severely overstate the seriousness of the instant offenses, and would expose Mr. Rajaratnam to a sentence grossly out of proportion to the sentences imposed on other insider trading defendants.”

They point out that the sentence is not only disproportionate to the sentences imposed in other insider trading cases, but also greater than the average federal sentence for murder (23 years), kidnapping (14 years) or sexual abuse (nine years), according to the United States Sentencing Commission.

His lawyers also criticize prosecutors for comparing Mr. Rajaratnam’s crimes to the accounting fraud committed by Mr. Ebbers of WorldCom and the Ponzi scheme run by Bernard L. Madoff. Those crimes “ruined the lives and livelihoods of scores of victims,” while Mr. Rajaratnam’s insider trading offenses victimized no one, his lawyers said.

Insider trading does not cause “the kinds of measurable losses to identifiable victims that conventional fraud causes,” Mr. Rajaratnam’s lawyers wrote in a court filing.

The government has countered that insider trading is not a victimless crime.

“Rajaratnam betrayed Galleon’s investors, its employees, the counterparties to its trades, and the capital markets system upon which he built his wealth and success,” federal prosecutors said.

The government also urged Judge Holwell to impose a long sentence on Mr. Rajaratnam “to send a strong and clear message that the time for illegal insider trading to end is now.”

But defense lawyers also dispute prosecutors’ argument that a long sentence is necessary for deterrence purposes. If anything, they say, it is the government’s newly aggressive law enforcement tactics, like wiretapping the phones of stock traders, that will deter insider trading.

In the coming months, a number of Mr. Rajaratnam’s accomplices also face sentencing. And on Wednesday, Judge Jed S. Rakoff of Federal District Court in Manhattan will sentence Winifred Jiau, a technology industry consultant who, in a trial this summer unrelated to Mr. Rajaratnam’s, was convicted of passing illegal stock tips.

Judges are not bound by the sentencing guidelines. In 2006, Judge Rakoff sentenced Richard Adelson, a former health care company executive facing an 85-year sentence under the guidelines, to three and a half years in prison for participating in an accounting fraud that he wrote was “originally concocted by others.”

Judge Rakoff wrote that the proposed sentence exposed the “utter travesty of justice that sometimes results from the guidelines’ fetish with abstract arithmetic.”

Unlike Judge Rakoff, who is considered a maverick jurist, Judge Holwell is known for more conventional rulings. In at least two recent cases, Judge Holwell has departed slightly from the suggested sentencing guidelines and imposed shorter sentences than the ones recommended by the government.

In July, Judge Holwell sentenced Danielle Chiesi, a co-conspirator of Mr. Rajaratnam, to two and a half years in prison, which was less than the minimum three-year sentence requested by the government. Yet Ms. Chiesi pleaded guilty, whereas Mr. Rajaratnam fought the government’s charges and took his case to trial, a possible negative factor at sentencing.

Stuart P. Slotnick, a lawyer at Buchanan Ingersoll Rooney in New York, predicts that Judge Holwell will impose a prison term of 12 to 15 years, which, while less than the government’s request, would still be a record insider trading sentence. That sentence, Mr. Slotnick said, in part reflects attitudes since the financial crisis.

“There is a ‘Wall Street is bad’ mentality that permeates the culture,” he said. “It’s now in the social ether that financial crimes of whatever kind cause widespread damage and hurt everybody.”

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DealBook: Rajaratnam Jurors Hear More Tapes

Seated behind the defense table, Raj Rajaratnam leaned back in his chair and flipped through a spreadsheet detailing the government’s wiretaps against him.

It was the second time during deliberations Monday that jurors had asked to rehear secretly recorded tapes of Mr. Rajaratnam, a new record of sorts. Since they began deliberating the fate of the Galleon Group co-founder two weeks ago, jurors have not asked to listen to tapes more than once a day, if they’ve asked at all.

Mr. Rajaratnam, who is accused of gaining more than $60 million using inside information, seemed at ease as he paged through the document, titled Government Wiretaps, which laid out the callers, content and date of each of the calls at the center of the government’s case against him.

A cheat sheet was hardly needed. All of but one of the dozen calls requested were between Mr. Rajaratnam and Rajiv Goel, a former executive at Intel who pleaded guilty to leaking inside information and testified against his friend at trial.

Jurors seem to be focusing on Mr. Goel and his alleged leaks related to Clearwire, a joint venture that Intel was planning to invest in with a number of other companies. At trial, Mr. Goel testified that he leaked information about the deal to Mr. Rajaratnam before its public announcement.

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.

In the calls, Mr. Goel discussed the timing of the investment with Mr. Rajaratnam, in addition to his own personal needs, including a job and a GPS system for a trip to Europe the men were planning with their families. Mr. Goel tells Mr. Rajaratnam about the potential board members in the new venture that Intel is investing in, a fact Mr. Rajaratnam is unimpressed with. In another call, Mr. Rajaratnam says he has just made bought shares in PeopleSupport on Mr. Goel’s behalf, trades the government claims were made based on inside information.

The one tape that did not include Mr. Goel happened between Mr. Rajaratnam and his brother, Rengan. But the subject of that call, too, was the Clearwire investment. In the call, Rengan Rajaratnam is upset about a news article detailing the terms of the investment ahead of the public announcement from the company.

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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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DealBook: Morgan Stanley Is Expected to Be a Focus at Galleon Trial

Goldman Sachs had the starring role last week in the insider trading trial of Raj Rajaratnam when its chief executive, Lloyd C. Blankfein, testified about a former Goldman director who had possibly leaked confidential information to Mr. Rajaratnam.

Next up, Morgan Stanley.

Adam Smith, a former portfolio manager at the Galleon Group, the hedge fund Mr. Rajaratnam ran, is expected to take the witness stand as soon as Monday and tell the jury that he obtained illegal tips about merger deals from a Morgan Stanley investment banker. Then, Mr. Smith is expected to say, he and Mr. Rajaratnam earned substantial profits by trading on the information.

Mr. Smith pleaded guilty in January to insider trading and is cooperating with the government. He will be the first former Galleon employee to testify in the trial in Federal District Court in Manhattan, which begins its fourth week on Monday. His testimony is expected to illuminate the culture inside Galleon, which was one of the world’s largest and most powerful hedge funds before Mr. Rajaratnam’s arrest in October 2009.

Galleon, which focused on technology stocks, practiced the so-called mosaic theory of stock investing, which relies on analysts to ferret out data about companies by aggressively pressing sources for information to build a mosaic about those companies and gain an investment edge.

Mr. Smith, in effect, has admitted that pieces of his mosaics came from illegal stock tips.

A graduate of Harvard College and Harvard Business School, Mr. Smith, 38, was an investment banker in Morgan Stanley’s Silicon Valley office before joining Galleon in 2003. Galleon was a perfect fit for Mr. Smith, who specialized in the technology industry and preferred the fast-moving trading culture of a hedge fund to the slower-paced world of investment banking.

A popular figure on the trading floor with a keen sense of humor, Mr. Smith thrived at Galleon, which at its height managed $7 billion. Mr. Rajaratnam took to Mr. Smith early on and gave him his own pool of money to manage, according to two people who had been close to him and would speak only on the condition of anonymity. At his peak, Mr. Smith controlled about $250 million.

In his best years, he earned several million dollars annually. He was among the firm’s hardest workers, taking frequent trips to Asia to visit sources and production facilities.

Mr. Smith has also admitted to obtaining the confidential financial results of two technology companies — Intersil and Nvidia — from employees at those companies and then trading on the information in advance of their quarterly earnings announcement.

His relationship with a former Morgan Stanley colleague, Kamal Ahmed, is expected to be a focus of his testimony. Mr. Ahmed is a Morgan Stanley managing director who is said to have provided Mr. Smith with information about pending deals, including Integrated Device Technology’s acquisition of Integrated Circuit Systems in 2005 and Advanced Micro Devices’ purchase of ATI Technologies the next year.

Earlier in the trial, the government played a secretly recorded telephone call from 2008 in which Mr. Smith tells Mr. Rajaratnam about a potential sale involving Vishay Intertechnology. Mr. Smith says, “Listen, ah, I talked to Kamal last night” and explains that Morgan Stanley had tried to win the assignment to sell Vishay but that another bank “got the mandate.” He then says that he is going to buy some Vishay stock.

On the call, Mr. Rajaratnam asks Mr. Smith how the market is treating him and Mr. Smith responds: “Like a baby treats a diaper.”

Morgan Stanley has placed Mr. Ahmed on administrative leave. Doug Tween, a lawyer for Mr. Ahmed, said his client was cooperating and “we remain confident that he did nothing illegal or improper.”

Mr. Rajaratnam’s lawyers are expected to portray Mr. Smith as untrustworthy and to argue that he is testifying in return for a lenient prison sentence.

Just weeks before the trial began, prosecutors also tried to use Mr. Smith to gather information on Ian Horowitz, Mr. Rajaratnam’s personal trader at Galleon. On Jan. 14, after he began cooperating with the government, Mr. Smith made three secretly recorded calls to Mr. Horowitz in which he tried to elicit evidence of insider trading from him.

At the end of the third call, Mr. Horowitz, who has not been charged with any wrongdoing, said to Mr. Smith: “The questions you are asking me are like you are tapping me on the phone trying to get me to say some things.”

“Are you serious?” said Mr. Smith, denying that he was recording their call. “Dude, come on.”

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