March 1, 2024

DealBook: Rajat K. Gupta’s Insider Trading Case Goes to Jury

Rajat Gupta, former Goldman Sachs director, exits federal court in New York on Wednesday.Peter Foley/Bloomberg NewsRajat Gupta, former Goldman Sachs director, exits federal court in New York on Wednesday.

During closing arguments in the insider trading trial of Rajat K. Gupta on Wednesday, a prosecutor distilled a dizzying number of exhibits — phone records, board minutes, trading logs and e-mails — into a cogent narrative of the government’s case.

But a defense lawyer for Mr. Gupta said that the reams of documents and nearly two dozen witnesses were a desperate attempt by the government to bolster a thin case that lacked any “hard, real and direct” evidence of wrongdoing.

“If you put in a lot of paper, you give the illusion that you might have something more than you actually have — an illusion of making something out of nothing,” said Gary P. Naftalis, a lawyer for Mr. Gupta. “That is a gambit that can bamboozle people into thinking something was proven when it wasn’t,” Mr. Naftalis said.

On Thursday, a jury of eight women and four men at Federal District Court in Manhattan will begin deliberating the fate of Mr. Gupta, 63, who was once one of the world’s most respected businessmen.

As the retired head of the consulting firm McKinsey Company and a former director on the boards of Goldman Sachs and Procter Gamble, Mr. Gupta is the most prominent defendant in a long-running crackdown on insider trading that has led to criminal charges against about 60 hedge fund traders and corporate executives.

Mr. Gupta is accused of leaking boardroom secrets from Goldman and Procter Gamble to his friend and business associate Raj Rajaratnam on eight occasions from 2007 to 2009. Mr. Rajaratnam, a former head of the Galleon Group hedge fund, was convicted of insider trading by a jury last year and is serving an 11-year federal prison term in Massachusetts. While the trial of Mr. Rajaratnam was filled with drama, the testimony during the monthlong trial of Mr. Gupta grew tedious at times.

Numerous objections from both sides slowed the case down, as did lengthy sidebars out of jurors’ earshot when the two sides sparred over legal issues. For prosecutors and Mr. Gupta’s lawyers, closing arguments were their last chance to shape competing versions.

The defense on Wednesday, as it has throughout the trial, tried to distance Mr. Gupta from Mr. Rajaratnam. Mr. Naftalis argued that Mr. Gupta lacked any knowledge of the vast insider trading conspiracy that Mr. Rajaratnam orchestrated.

“There was a secret world of Raj Rajaratnam that was unknown to Rajat Gupta,” Mr. Naftalis said. “Our law does not make people criminals based on guilt by association.”

The government presented the jury with a different take.

“Two men with public sides of success,” said Reed Brodsky, a prosecutor, describing Mr. Gupta and Mr. Rajaratnam, a one-time hedge fund titan. “But hidden, concealed from the public, was a different side, a side that committed crimes.”

Mr. Gupta’s lawyers emphasized that the government’s case was based largely on circumstantial evidence like phone and trading records.

Unlike last year’s trial of Mr. Rajaratnam, this trial had no smoking-gun wiretaps of illegal insider trading.

“With all the power and majesty of the United States government, they found no real, hard, direct evidence,” Mr. Naftalis said. “They didn’t find any because it didn’t happen.

“As they say in that old commercial, where’s the beef in this case?”

Richard Tarlowe, a prosecutor, methodically took the jury through a series of charts that the government believes establishes Mr. Gupta’s guilt. The charts showed Mr. Gupta’s participation in Goldman and P.G. board meetings via telephone.

Shortly after those meetings, sometimes seconds after, Mr. Gupta called Mr. Rajaratnam, according to phone records. Trading logs then listed large trades in Goldman or P.G. by Mr. Rajaratnam.

Toward the end of his summation, after presenting yet another pattern of phone calls and questionable trades, Mr. Tarlowe said, “It’s not another coincidence, ladies and gentlemen.”

Mr. Brodsky, discussing the circumstantial evidence in the case, said: “To believe the arguments of the defense team, you’d have to believe that Mr. Gupta is one of the unluckiest people in the world. He is not the victim of unlucky coincidences.”

Mr. Tarlowe spent a chunk of time talking about Sept. 23, 2008, when Mr. Gupta participated in a board call to approve a $5 billion investment in Goldman Sachs by Warren E. Buffett during the depths of the financial crisis.

The board discussion ended at 3:53 p.m. Seconds after it ended, Mr. Gupta called Mr. Rajaratnam, according to phone records. A minute later, Mr. Rajaratnam ordered his traders to buy shares of Goldman Sachs before the market closed at 4 p.m.

“In the last 10 minutes of the day, there was one call to Rajaratnam, and it was from Rajat Gupta,” Mr. Tarlowe said. “That evidence is devastating.”

To bolster the phone and trading records, Mr. Tarlowe played a wiretapped call of Mr. Rajaratnam boasting of the tip with another employee of Galleon. During the call, Mr. Rajaratnam told the employee that he had heard something good was going to happen to Goldman. The employee suggested three times that they hold off talking about the details until Mr. Rajaratnam got into the office.

“You know what that means,” Mr. Tarlowe said, nodding at the jurors.

Throughout his closing, Mr. Naftalis stressed that the government had the burden of proving its case beyond a reasonable doubt. If the government did not meet that high burden, Mr. Naftalis told the jury, “It’s your duty to say not guilty, or, as they say in Scotland, not proven.”

At the end of his summation, Mr. Naftalis again invoked Britain. Growing quiet, and in a voice barely audible to the gallery, he recalled going to one of the oldest courthouses in England, where written on the walls of the basement are the words “In this hallowed place of justice, the Crown never loses because when the liberty of an Englishman is preserved against false witness, the Crown wins.”

He then translated those words to the American legal system, urging the jury to find his client not guilty.

“The United States,” Mr. Naftalis said, “always wins when justice is done.”

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DealBook: At Gupta’s Insider Trial, a Star Goldman Witness and Charts

Lloyd Blankfein, chief executive of Goldman Sachs, arriving at federal court on Thursday with Gregory Palm, Goldman's general counsel, at left.Scott Eells/Bloomberg NewsLloyd Blankfein, chief executive of Goldman Sachs, arriving at federal court on Thursday with Gregory Palm, Goldman’s general counsel, at left.

8:13 p.m. | Updated

Lloyd C. Blankfein, the chief executive of Goldman Sachs, brought star power to the courtroom at the trial of Rajat K. Gupta on Thursday, his second day on the witness stand in the insider trading case.

But while Mr. Blankfein’s presence aroused the packed spectators’ gallery, the jury might have been more impressed with a series of “summary charts” — trading data, bar charts and phone records that crystallized the case that prosecutors have presented over the last three weeks.

The government has charged Mr. Gupta, a former director of Goldman and Procter Gamble, with leaking confidential information about those two companies to Raj Rajaratnam, the former head of the Galleon Group hedge fund. Judge Jed S. Rakoff is presiding over the trial at Federal District Court in Manhattan.

Mr. Rajaratnam was convicted by a jury about a year ago and is serving an 11-year prison term.

The government used James Barnacle Jr., an F.B.I. agent, to methodically walk the jury through the summary charts. The exhibits consisted of phone records documenting Mr. Gupta’s participation in Goldman and P. G. board calls previewing the companies’ earnings. Then, the jury saw charts of aberrational trading at Galleon in the two companies’ stocks in advance of the earnings announcements. Next, the jury was shown the news releases announcing those earnings, followed by spreadsheets listing Galleon’s supposed illegal gains on the trades.

For instance, evidence showed that on March 12, 2007, Mr. Gupta dialed in to Goldman’s board call from Galleon’s offices. About a half-hour after the call ended, Galleon’s traders loaded up on Goldman stock, buying 450,000 shares worth about $91 million.

The next day, Goldman announced a better-than-expected quarter, surprising Wall Street analysts by posting earnings that were 32 percent above estimates. Galleon made about $2 million on the trade.

On cross-examination of Mr. Barnacle, David S. Frankel, a lawyer for Mr. Gupta, highlighted two different money-losing Goldman and P. G. trades that Galleon made after Mr. Gupta is said to have tipped off the firm. Mr. Frankel pointed out that the F.B.I. had not prepared charts highlighting when Galleon lost money, insinuating that the government’s evidence was misleading.

“So you made charts for trading profits but not for losses, correct?” Mr. Frankel asked.

“No, I did not,” Mr. Barnacle said.

Mr. Blankfein followed Mr. Barnacle on the witness stand. He had started his testimony on Monday, but had a two-day hiatus because the trial went dark on Tuesday and on Wednesday the judge granted Mr. Blankfein permission to attend his daughter’s high school graduation.

The government’s direct examination of Mr. Blankfein largely consisted of his testifying about the secrecy surrounding the various board discussions that Mr. Gupta reportedly leaked to Mr. Rajaratnam.

The March 12, 2007, meeting, for example, was confidential, Mr. Blankfein said, because it was “potentially market-moving with respect to our stock.”

During Mr. Blankfein’s cross-examination, Gary P. Naftalis, a lawyer for Mr. Gupta, homed in on September 2008. That month, Mr. Gupta planned to resign from the Goldman board because he was going to take a job at the private equity firm Kohlberg Kravis Roberts Company, presenting potential conflicts. Goldman had prepared a news release on Mr. Gupta’s departure that praised his work on the board. The bank even gave him cuff links as a token of its gratitude for his service, Mr. Blankfein acknowledged.

But given the Lehman Brothers bankruptcy and the global financial crisis that ensued that month, Mr. Blankfein persuaded Mr. Gupta to stay on as a director, he testified, to avoid any perception of instability. Mr. Naftalis used the questioning to suggest to the jury that Mr. Gupta was a valued member of the board.

Mr. Blankfein, dressed in a gray suit and navy tie, appeared at ease on the witness stand, grinning and smirking his way through the testimony. Known for his rapier wit, Mr. Blankfein happily engaged in banter with Mr. Naftalis.

Early in his cross-examination, Mr. Naftalis reviewed Mr. Blankfein’s résumé for the jury, taking him through his brief, earlier career as a lawyer and his ascension at Goldman. Mr. Naftalis noted that Mr. Blankfein became chief executive of Goldman in 2006.

“You became the No. 1 person at Goldman Sachs,” Mr. Naftalis said.

Mr. Blankfein corrected him.

“Chairman and chief executive is my official title,” Mr. Blankfein said. He then broke into a smile. “No. 1’s not an official title.”

Judge Rakoff expressed further frustration with the trial’s slow pace.

He had originally wanted Mr. Blankfein’s testimony to finish on Thursday and the government to rest its case. But Mr. Blankfein was still testifying when the trial broke for the day, meaning that Goldman’s No. 1 will be back in court on Friday, his third day on the witness stand.

This post has been revised to reflect the following correction:

Correction: June 7, 2012

An earlier version of this article referred incorrectly to some of the evidence presented at the trial on Thursday. The evidence showed that Rajat K. Gupta listened to a Goldman Sachs board call from the offices of the Galleon Group hedge fund. It did not suggest that Mr. Gupta allowed Raj Rajaratnam, the former head of Galleon to listen to a conference call among Goldman board members in March 2007.

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DealBook: U.S. Is Seeking Maximum Prison Term in Galleon Case

A prosecutor said Raj Rajaratnam's prison sentence should send a “message to hedge funds and money managers that insider trading will not be tolerated.”Rick Maiman/Bloomberg NewsA prosecutor said Raj Rajaratnam’s prison sentence should send a “message to hedge funds and money managers that insider trading will not be tolerated.”

Federal prosecutors recommended on Tuesday that Raj Rajaratnam, the hedge fund manager convicted of running a huge insider trading scheme, be sentenced to as many as 24 and a half years in prison.

That term is the maximum established for his crime under nonbinding sentencing guidelines, and prosecutors said it was warranted because Mr. Rajaratnam’s “criminal conduct was brazen, arrogant, harmful and pervasive.”

“Such a sentence is necessary to punish Mr. Rajaratnam for his extensive criminal activities, and to send a clear and unambiguous message to hedge funds and money managers that insider trading will not be tolerated,” the government said in a memo sent to Judge Richard J. Holwell, who is scheduled to sentence Mr. Rajaratnam, the former head of the Galleon Group, on Sept. 27.

In May, a jury found Mr. Rajaratnam, 54, guilty of perpetrating a seven-year conspiracy of trading on confidential information about publicly traded companies including Intel and Goldman Sachs. His vast network of informants, some of whom testified against him during his seven-week trial, included investment bankers, management consultants and corporate directors.

Mr. Rajaratnam’s lawyers on Tuesday asked Judge Holwell in a filing for a prison term “substantially below” what the guidelines recommend, but they did not specify the length of the requested sentence. They complained that Mr. Rajaratnam had been unfairly portrayed “as the poster child for every wrongful act that has ever been associated with Wall Street.”

The sentencing of Mr. Rajaratnam will be closely watched in legal circles. If Judge Holwell agrees with the government and sentences Mr. Rajaratnam to 20 or more years in prison, it will be one of the longest prison terms ever for an insider-trading crime. A recent study by Bloomberg News found that of 43 defendants sentenced in federal court in Manhattan for insider trading in the last eight years, the longest sentence was for 10 years, given to a Credit Suisse banker convicted in 2008 for leading a $7.8 million scheme.

Yet Preet S. Bharara, the United States attorney in Manhattan, has made the prosecution of Mr. Rajaratnam — who at his peak was among the world’s most powerful hedge fund managers — the center of his office’s crackdown of insider trading on Wall Street.

Federal authorities used extraordinary tactics, including wiretapping traders’ phones, to build their case against Mr. Rajaratnam and his accomplices.

John M. Dowd, a lawyer for Mr. Rajaratnam, acknowledged in the defense memo that his client was convicted of “serious crimes,” but that “the Raj Rajaratnam who emerges from the evidence before the court — including the hundreds of letters submitted on his behalf — bears scant resemblance to the greedy criminal kingpin the government attempts to portray.”

Mr. Dowd said: “With the sole, and significant, exception of his criminal conviction in this case, the evidence shows that Mr. Rajaratnam lived a life that was not just blameless, but exemplary.” The memo highlighted Mr. Rajaratnam’s more than $45 million in philanthropic gifts, including ones made to the Harlem Children’s Zone.

Echoing a common argument made by lawyers of defendants in insider trading cases, Mr. Dowd said Mr. Rajaratnam’s crimes did not harm anybody. He compared Mr. Rajaratnam’s behavior to that of the top executives at Enron and WorldCom, arguing that his client was “not in the same league” as defendants in those cases because they betrayed their own shareholders and employees, while Mr. Rajaratnam’s crimes had no “single identifiable victim.”

Yet the government’s sentencing memo paints Mr. Rajaratnam as a pernicious figure: “He corrupted old friends. He corrupted subordinates. He corrupted entire markets. Day after day, month after month, year after year, Mr. Rajaratnam operated a billion-dollar force of deception and corruption on Wall Street.”

The defense memo used Mr. Rajaratnam’s health problems in asking for a lenient sentence. A lengthy imprisonment would “seriously threaten his well-being” and would effectively be “a death sentence.” The pleading did not detail Mr. Rajaratnam’s maladies, but described them as “a unique constellation of ailments ravaging his body.” Mr. Rajaratnam had emergency foot surgery during his trial.

Mr. Rajaratnam’s lawyers also argued that their client deserved a lighter sentence because he was “already keenly aware that the consequences of insider trading can include the destruction of one’s business and reputation, exposure to scorn and public obloquy and the complete loss of personal dignity and privacy to government surveillance and the media’s microscope.”

The government in its memo expressed no sympathy for Mr. Rajaratnam, who it said reaped at least $64 million in illegal profits from insider trading, a number that his lawyers dispute. “He is arguably the most egregious violator of the laws against insider trading ever to be caught,” the government said. “He is the modern face of illegal insider trading.”

Prosecution’s Sentencing Memorandum

Defense’s Sentencing Memorandum

Exhibits With Rajaratnam Defense Memorandum

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DealBook: Judge Allows Gupta’s Lawsuit Against S.E.C. to Proceed

Judge Jed. S. Rakoff, a federal judge in Manhattan.Justin Maxon/The New York TimesJudge Jed S. Rakoff

“A funny thing happened on the way to this forum.”

So opened the latest ruling from the ever-lively Judge Jed. S. Rakoff, a federal judge in Manhattan.

Judge Rakoff said on Monday that Rajat K. Gupta, the former Goldman Sachs and Procter Gamble director, can proceed with a lawsuit that accuses the Securities and Exchange Commission of violating his constitutional rights.

In March, the S.E.C. filed an unusual civil administrative proceeding against Mr. Gupta that accused him of leaking secret board discussions to Raj Rajaratnam, the head of the Galleon Group hedge fund, who was convicted of insider-trading crimes in May.

Mr. Gupta’s lawyers fired back at the S.E.C., filing a lawsuit asking to move the case to federal court. The complaint said that the S.E.C.’s administrative action denied Mr. Gupta the right to a jury trial and treated him differently than the more than two dozen other Galleon-related defendants who were all sued in federal court. (The administrative proceeding is being heard before an S.E.C. administrative law judge in Washington.)

Rajat K. Gupta, the former Goldman Sachs and Procter  Gamble director accused of leaking confidential information about those companies.Seokyong Lee/Bloomberg NewsRajat K. Gupta, the former Goldman Sachs and Procter Gamble director accused of leaking confidential information about those companies.

Judge Rakoff sympathized with the argument by Mr. Gupta that the S.E.C. potentially violated his constitutional rights under the Equal Protection Clause.

“We have the unusual case where there is already a well-developed public record of Gupta being treated substantially disparately from 28 essentially identical defendants, with not even a hint from the S.E.C., even in their instant papers, as to why this should be so,” Judge Rakoff said.

Judge Rakoff takes the S.E.C. to task throughout the opinion. He calls the agency’s decision to file the administrative proceeding against Mr. Gupta a “seeming exercise in forum-shopping.” He also says that the complaint suggests that the S.E.C. took a “cavalier approach” in approving the administrative proceeding.

“We are reviewing the decision and will proceed in a manner that maintains the commission’s authority to best serve the interests of investors and the integrity of the markets,” an S.E.C. spokesman said.

Judge Rakoff also noted that the S.E.C. had delayed Mr. Gupta’s hearing, which was originally scheduled for July 18, for six months. This will give him “ample opportunity” to decide whether the S.E.C. violated Mr. Gupta’s constitutional rights, the judge said.

The lengthy postponement in the proceeding raises questions about the fate of Mr. Gupta, the most prominent business executive ensnared by the government’s insider-trading crackdown. The United States attorney’s office in Manhattan, which has been investigating Mr. Gupta’s role in the case for at least three years, named Mr. Gupta a co-conspirator of Mr. Rajaratnam’s but has not charged him criminally.

Gary P. Naftalis, a lawyer for Mr. Gupta, has called the S.E.C.’s case “totally baseless.”

Monday’s decision is the latest in a series of rulings in which Judge Rakoff has criticized the S.E.C.’s actions. In March, Judge Rakoff chafed at the agency’s practice of allowing defendants to settle cases “without or admitting or denying wrongdoing,” describing the practice as treating the court as a “rubber stamp.” And last year, in approving a deal between the S.E.C. and Bank of America over its acquisition of Merrill Lynch, he called the settlement as “half-baked justice.”

Mr. Gupta’s case is the latest major proceeding that Judge Rakoff has welcomed into his courtroom in recent weeks. Earlier this month he agreed to hear the billion-dollar action brought against the owners of the New York Mets baseball team by the trustee seeking to recover money for victims of Bernard L. Madoff’s fraud. That lawsuit was originally brought in bankruptcy court, but Judge Rakoff took control of the case.

Rakoff’s Ruling in Favor of Gupta

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DealBook: Another Guilty Plea to Insider Trading Is Disclosed

8:10 p.m. | Updated

An ex-portfolio manager at Diamondback Capital Management pleaded guilty to insider trading late last year and was cooperating with the government in its widespread crackdown on insider trading at hedge funds, according to documents unsealed by the Justice Department on Wednesday.

Prosecutors said the manager, Anthony Scolaro, made thousands of dollars by trading on a tip passed to him about the 2007 takeover of Axcan Pharma by TPG Capital. The case is related to an earlier government investigation of the Galleon Group hedge fund, whose co-founder, Raj Rajaratnam, was convicted of insider trading this month.

The plea was released at a difficult time for Diamondback, which along with two other prominent hedge funds was raided by federal authorities in November as part of a widening investigation. A source familiar with Diamondback says the firm does not believe the raid and Mr. Scolaro’s guilty plea are connected.

The raids delivered a blow to Diamondback, which lost about $1.3 billion in redemptions or roughly 20 percent in assets, through March of this year, as skittish investors withdrew their money from the firm. While Diamondback has so far survived, the other raided firms, Level Global Investors and Loch Capital Management, shut down in the aftermath.

None of the raided hedge funds have been charged with any wrongdoing. A representative for Diamondback declined to comment. Mr. Scolaro’s lawyer did not respond to requests for comment.

Prosecutors said Mr. Scolaro received his tip from Franz Tudor, a former trader at the broker dealer Schottenfeld Group, who had also pleaded guilty. Of the 27 people charged in relation to the Galleon case, Mr. Scolaro is the 23rd to plead guilty.

Among those still fighting the charges is Zvi Goffer, another former Schottenfeld trader and the founder of the hedge fund Incremental Capital. Mr. Goffer is currently on trial in Lower Manhattan, accused of making the same trade as Mr. Scolaro.

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DealBook: Next Up, a Crackdown on Outside-Expert Firms

Manosha Karunatilaka pleaded guilty to insider trading, admitting that he leaked details about his company’s sales to clients of an expert network firm.Peter Foley/Bloomberg NewsManosha Karunatilaka admitted that he leaked details about his company to clients of an expert network firm.

With the government securing a conviction against Raj Rajaratnam of the Galleon Group on Wednesday, federal prosecutors will shift their focus to expert networks — the intricate web of money managers, corporate executives and consultants at the center of another wave of insider trading cases.

Over the last few years, the Justice Department has built dozens of insider trading cases. The government’s effort has sent shivers through the hedge fund industry, the influential investors that have figured prominently in an investigation into Wall Street.

Prosecutions have developed mainly along two tracks. One group of cases aimed at Mr. Rajaratnam, the founder of Galleon, and the cadre of corporate insiders and investment traders from whom he solicited confidential information. The other group has involved expert network firms, the Wall Street matchmakers who connect large investors with outside experts.

In several indictments involving expert networks, authorities claim that hedge fund managers paid outside consultants handsome fees for providing nonpublic information. The government has also charged executives at the expert network firms, the ones who brokered the connections, with knowingly facilitating the exchange of illegal stock tips.

Prosecutors say the money managers often sought impending information on large technology companies, like Apple and Dell, whose stocks can turn quickly on tidbits about financial performance and forthcoming products. On Wednesday, a former account manager at the Taiwan Semiconductor Manufacturing Company, Manosha Karunatilaka, pleaded guilty to insider trading, admitting that he leaked details about the company’s sales and shipping orders to clients of Primary Global Research, an expert network firm.

“The cases send a good signal that firms need to remain vigilant,” said Carlo V. di Florio, the Securities and Exchange Commission’s director of compliance.

The insider trading investigation has had a chilling effect on the expert network industry, which is struggling to maintain its Wall Street client base. Scared of being ensnared by scandal, large financial firms are reducing their use of expert networks and reviewing their internal policies regarding outside consultants. In the last year, revenue at these firms dropped 20 to 30 percent, according to Integrity Research, which tracks the industry.

“Managers are studying those complaints carefully and saying, ‘O.K., what can we do to make sure that we’re not doing anything like this?’” said Marc E. Elovitz, a lawyer at Schulte Roth Zabel, which represents some of the country’s largest asset management firms. “With the increased attention to it, there’s been some more selectivity in the use of these services.”

The expert network industry developed after the S.E.C. enacted the Regulation Fair Disclosure rule in 2000. The rule, which bans public companies from disclosing “material nonpublic information to certain individuals or entities,” makes it illegal for corporate executives to share information only with certain parties. Lacking that exclusive pipeline, some big investors began relying on expert networks to supplement traditional sources of research.

Now, Wall Street is distancing itself from the industry. The hedge funds Balyasny Asset Management, Millenium Partners and Och-Ziff Capital Management have suspended their use of such consultants, according to people close to the firms who were not authorized to speak publicly on the matter.

Other firms are adjusting their rules. Credit Suisse has restricted the use of expert networks to certain departments. Morgan Stanley is hammering out a firmwide policy that will effectively limit their use, according to one person with knowledge of the situation who was not authorized to speak publicly.

Some hedge funds are barring the use of consultants who work at publicly traded companies, while others are encouraging compliance officials to randomly monitor phone conversations.

Federal authorities have tried to quell the anxiety by drawing a distinction between the legitimate players and the bad actors. In March, Preet S. Bharara, the United States attorney in Manhattan, said that there was “nothing inherently wrong or bad about hedge funds or expert networking firms or aggressive market research, for that matter.”

Such statements have provided little reassurance. Many financial firms that are still using expert networks have moved their business to the largest outfits with the most established compliance practices

“If this little industry is to survive, it’s going to have to glow with virtue, which means a lot of self-regulation,” said Robert Weisberg, a professor of criminal law at Stanford.

But comprehensive systems to vet consultants, train employees and maintain sprawling databases requires significant capital and human resources. The Gerson Lehrman Group, the industry’s largest player with a roughly 60 percent share, employs a full-time compliance staff of about 20 people.

Compliance is a heavy burden for the smaller players. There are only about 40 expert network firms in the United States, according to Integrity Research, and only a handful have annual revenue in excess of $40 million. Given the costs associated with compliance, Professor Weisberg predicts that many smaller firms will have to team up with their larger brethren or shut down.

Mr. di Florio said the S.E.C. was paying greater attention to compliance by expert networks. “Firms recognize that regulators, like the S.E.C., have their radar up on these insider-trading practices, and we’re looking to see that they have effective regulatory compliance and risk management programs in place,” Mr. di Florio said.

Several states, using powers under the Dodd-Frank law to police hedge funds, are starting to outline new rules to govern the industry.

Earlier this month, William F. Galvin, the chief financial regulator in Massachusetts, proposed regulations to force investment advisers to obtain certification from expert network consultants that they will not provide any confidential information.

“I hope this leads to more sensitivity in the industry that they cannot simply purchase insider information,” said Mr. Galvin said. “We are going to be as aggressive as we can.”

Azam Ahmed contributed reporting.

Correction: An earlier version of this post incorrectly spelled the name of law firm Schulte Roth Zabel.

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DealBook: Galleon Conviction Likely to Embolden Prosecutors

Raj Rajaratnam leaves federal court after his conviction. He is scheduled to be sentenced on July 29.Andrew Gombert/European Pressphoto AgencyRaj Rajaratnam leaves federal court after his conviction. He is scheduled to be sentenced on July 29.

Raj Rajaratnam, the billionaire investor who once ran one of the world’s largest hedge funds, was found guilty on Wednesday of fraud and conspiracy by a federal jury in Manhattan, giving the government its biggest victory yet in a widening investigation of insider trading.

The verdict is expected to embolden prosecutors in their campaign to ferret out criminal activity on Wall Street trading floors. By using wiretaps — a tactic normally reserved for Mafia and drug trafficking cases — to secretly record the phones of Mr. Rajaratnam and others, the government now has a new weapon against white-collar crime.

Mr. Rajaratnam, dressed in a dark suit and a gold tie, remained stoic and stared straight ahead as the courtroom deputy read out the verdict — guilty on all 14 counts.

Just as the insider trading cases of the 1980s focused on the major Wall Street figures of that era — risk arbitragers like Ivan Boesky and junk-bond financiers like Michael R. Milken — the recent wave of prosecutions home in on some of the most influential players in today’s markets: hedge funds. As the investment firms have grown in clout and prominence, now managing more than $2 trillion and minting dozens of billionaires, the industry has attracted more scrutiny.

“Mr. Rajaratnam was among the best and the brightest — one of the most educated, successful and privileged professionals in the country,” said Preet Bharara, the United States attorney for Manhattan. “Yet, like so many others recently, he let greed and corruption cause his undoing.”

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. Bharara’s office has headed the crackdown on insider trading. His office alone has charged 47 people with insider trading over the last 18 months; of those, 36 have been convicted or have pleaded guilty. Some of those who pleaded guilty were cooperating witnesses in Mr. Rajaratnam’s trial.

The case stoked the worst suspicions of Main Street investors: That the stock market was a rigged game controlled by powerful Wall Street financiers who made fortunes trading on secret information unavailable to the public. Over the two months of the trial, jurors heard evidence that Mr. Rajaratnam used a corrupt network of tipsters to gain about $63 million from illegal trading in stocks, including Google and Hilton Worldwide.

Mr. Rajaratnam, 53, could be sentenced to as much as 25 years in prison. Prosecutors said federal sentencing guidelines would suggest a sentence of 15 and half to 19 and a half years. He could also be forced to disgorge tens of millions of dollars in illegal trading profits.

Judge Richard J. Holwell ordered home detention and electronic monitoring for Mr. Rajaratnam while he awaits his sentencing set for July 29.

John Dowd, a lawyer for Mr. Rajaratnam, said his client would appeal.

Jurors, who reached their decision on the 12th day of deliberations, did not respond to requests for comment.

Over a nine-month stretch in 2008, agents from the Federal Bureau of Investigation taped Mr. Rajaratnam’s telephone conversations. They listened in as he matter-of-factly swapped illegal stock tips with corporate insiders and fellow traders.

“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 one of his employees in advance of the bank’s earnings announcement.

For years, Mr. Rajaratnam was lionized as one of Wall Street’s savviest investors. At its peak, his Galleon Group hedge fund managed more than $7 billion in assets. Investment banks counted Galleon, which paid out roughly $300 million in trading commissions annually to brokerage firms, as one of their largest trading clients.

In the early hours of Oct. 16, 2009, federal agents arrested Mr. Rajaratnam at his Sutton Place apartment on the East Side of Manhattan.

Mr. Rajaratnam fought the charges against him, insisting that he had done nothing wrong. Mr. Dowd said that his client’s success as a money manager came from “shoe-leather research, diligence and hard work.”

He based his defense on the so-called mosaic theory of investing. Galleon was famous for doggedly digging for information about publicly traded companies that would form a “mosaic” — a complete picture of a company’s prospects that gave it an investment edge over other investors.

Prosecutors acknowledged that Galleon performed legitimate stock research. But at the same time, they argued, the firm routinely violated securities laws. In the words of a former Galleon portfolio manager who testified during the trial, the firm did its homework — but also cheated on the test.

“Cheating became part of his business model,” said a prosecutor, Reed Brodsky, in his summation.

The verdict marks an end to a Wall Street success story. A native of Sri Lanka, Mr. Rajaratnam came to the United States in 1981 to study business at the prestigious Wharton School at the University of Pennsylvania. He joined Needham Company, a small investment bank, and carved out a reputation as an expert in technology companies.

Mr. Rajaratnam’s ascent coincided with both the tech boom of the 1990s and the emergence of hedge funds. When he formed the Galleon Group in 1997, investors clamored to put their money with him. Mr. Rajaratnam posted superior investment returns, attracting clients like New Jersey’s state pension fund and UBS, the giant Swiss bank.

Galleon brought Mr. Rajaratnam great wealth, estimated by Forbes magazine at $1.3 billion. During the trial, Mr. Rajaratnam’s former friends told the jury about lavish vacations. For his 50th birthday, he chartered a private jet to fly dozens of family and friends to Kenya for a safari.

Fiercely competitive, Mr. Rajaratnam could be heard on wiretaps speaking in sports and military metaphors. He compared himself to fighting Muhammad Ali in the ring and said during the financial crisis, “I’m feeling the pain, but they can’t kill me. I’m a warrior.”

It was that competitiveness that caused Mr. Rajaratnam, despite a blizzard of incriminating evidence, to fight the charges, according to two former Galleon employees who requested anonymity.

“Raj hated to lose and loved a good fight,” one former colleague said. “He’s a big sports fan, and I think in some ways he viewed this trial as a contest.”

His appeal will take aim at the use of wiretaps, contending that they were unconstitutional and that there was no cause for employing such unconventional investigative tactics.

Legal experts say that the biggest blow to Mr. Rajaratnam’s defense came last November, when Judge Holwell denied his request to prohibit the government from using the recorded conversations at trial.

A breakthrough in the multi-year investigation of Mr. Rajaratnam came in 2006 during an inquiry of a hedge fund run by Rengan Rajaratnam, Mr. Rajaratnam’s younger brother who has not been charged.

While reviewing e-mails and instant messages, a prosecutor discovered incriminating communications between the brothers.

More than a year later, a government informant taped calls with Mr. Rajaratnam on which he exchanged confidential tips. On the basis of those recordings, a federal judge agreed to allow a wiretap on Mr. Rajaratnam’s phone.

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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: Rajaratnam Away as Jurors Begin 2nd Week of Deliberation

Where’s Raj?

The question began bubbling up shortly after 9:30 Monday morning as reporters and lawyers arrived at the Federal District Court in Manhattan for the second week of deliberation in the insider trading trial of Raj Rajaratnam.

Like most criminal defendants, Mr. Rajaratnam has not missed a day of his trial, and has stayed close to his lawyers during deliberation.

The defense team issued this statement later in the day:

Mr. Rajaratnam is absent from the courthouse today because he underwent emergency surgery on Sunday morning. Mr. Rajaratnam had developed a bacterial infection in his foot that required surgery. Mr. Rajaratnam has waived his right to be present until he can return. The Court has approved this absence. It is hoped that he will be recovered sufficiently to return to the courthouse this week. We thank you in advance for your respect for Mr. Rajaratnam’s privacy concerning this medical and personal matter.

Aside from Mr. Rajaratnam’s emergency trip to the doctor, it was typical verdict-watch atmosphere, with journalists and court observers sat idly, reading papers or chatting on the phone.

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.

At noon, word of a jury note – the first in two full days – sent a wave of people rushing into the courtroom. In short order the prosecution and defense team assembled in the courtroom, checking BlackBerrys and whispering to one another as they awaited the judge’s appearance.

But the judge did not make an appearance.

Instead, the lawyers filed into the judge’s chambers without a word and remained for more than a half hour. Presumably after the meeting ended, the lawyers left just as quickly, declining to answer the questions of the anxious reporters about nearby what had transpired.

On his way into the elevator, one prosecutor told reporters it was about “nothing profound.”

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DealBook: F.B.I. Agent Describes Tips and Galleon Trades

8:43 p.m. | Updated

Over the last three weeks, jurors in the insider-trading trial of Raj Rajaratnam have heard more than a dozen witnesses, been presented with pages of data, listened to snippets of secretly recorded phone calls and been introduced to an alphabet soup of stocks.

On Tuesday, the prosecution sought to connect all the dots as it started to wrap up its case against the hedge fund manager, who is accused of making millions of dollars in illicit stock trades.

Federal prosecutors pointed to a dizzying array of documents related to those stocks, including records of calls, trades, instant messages and e-mails between Mr. Rajaratnam, the co-founder of the Galleon Group hedge fund, and a network of contacts.

In each case, they sought to create a narrative of illicit activity. All told, prosecutors revisited 13 stocks, including Hilton Hotels, a company that was acquired on July 3, 2007 by the Blackstone Group.

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.

A phone log was shown to jurors, detailing a complex tree of calls culminating in the purchase of Hilton shares by Mr. Rajaratnam, prosecutors contend..

The first call was from the Hilton Group to an executive at Moody’s Investors Service, the day before the announcement, alerting the executive to the deal.

Calls then flowed from a junior analyst at Moody’s, Deep Shah, to Roomy Khan, a cooperating witness who has pleaded guilty to insider trading. About half an hour later, Ms. Khan called Mr. Rajaratnam, the phone records show.

The next day, 400,000 shares of Hilton stock were bought using Mr. Rajaratnam’s trading codes. Though other funds at Galleon had previously owned shares in Hilton, the purchase marked the first time all year that Hilton was bought using Mr. Rajaratnam’s codes, according to James C. Barnacle Jr., an F.B.I. agent who testified Tuesday.

Earlier, jurors heard testimony from Rajiv Goel, a former executive at Intel who has pleaded guilty to leaking inside information about his former employer to Mr. Rajaratnam.

Mr. Goel testified that Mr. Rajaratnam had bought Hilton shares in Mr. Goel’s personal trading account. On Tuesday, prosecutors produced that document, which detailed the purchase of 7,500 shares of Hilton on the day of the announcement placed through a Galleon computer.

All told, the trade made Galleon more than $4 million, Ms. Khan more than $630,000 and Mr. Goel about $78,000, prosecutors claimed.

Prosecutors also highlighted trading in ATI Technologies, which they say netted Mr. Rajaratnam nearly $23 million. Anil Kumar, a former McKinsey Company executive, said in trial testimony that he passed along illegal tips about ATI’s acquisition to Mr. Rajaratnam before it was announced in late July 2006.

In court on Tuesday, prosecutors presented an instant message conversation between Mr. Rajaratnam and another hedge fund manager with whom Mr. Rajaratnam was invested.

In the April 2006 exchange, Mr. Rajaratnam tells the hedge fund manager to “buy some atyt,” referring to the company’s stock symbol. When the manager asks why, Mr. Rajaratnam writes: “i will tell u why on fon.”

Prosecutors then showed an e-mail that Mr. Kumar received in May 2006 suggesting ATI was amenable to the acquisition. Then they showed that Mr. Rajaratnam’s position in the stock swelled, reaching almost $90 million before the acquisition was announced.

Mr. Barnacle, the F.B.I. agent who spent Tuesday walking jurors through the various trades and communication records, will be the last witness called by the government before it rests its case. On Wednesday, he is expected to go through records and trades Mr. Rajaratnam is said to have made related to Polycom and Goldman Sachs.

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