January 21, 2021

High & Low Finance: For Prosecutors, the Case That Got a Head Start on the Crime

With insider trading, the answer until now was always simple: the crime came first. But the case against Raj Rajaratnam, the hedge fund manager who was convicted by a federal court jury on Wednesday, stemmed from an investigation that began well before the crimes were committed.

And that made all the difference.

In normal insider trading cases, whether the ones involving someone’s brother-in-law or the celebrated one that brought down Ivan F. Boesky a generation ago, the investigation started only after someone noticed suspicious trading, like the purchase of a stock just before a takeover offer was announced or the short sale of the stock just before bad earnings news was released.

Once the investigation began, the Securities and Exchange Commission could find out who made the trades, and could ask why they chose to make the trades in question. It could also search for a source who might have leaked the “material nonpublic information,” to use the legal term for inside information.

That investigative technique often failed to find proof, even if the investigators were convinced the law had been broken. It was more likely to work with small fish than with whales. If the trader in question had never bought options before and then made a killing by purchasing call options just before a merger was announced, the investigators would be virtually certain there had been a leak.

If it turned out that the chief financial officer of the company being acquired was also a neighbor of the lucky investor, and that phone records showed they had talked just before the trade was made, the case was clear. In many cases, either leaker or leakee would admit what had happened, and often identify others who had shared in the tip.

But that technique is all but useless if the suspect is a hedge fund manager like Mr. Rajaratnam. His firm made dozens, if not hundreds, of trades every day. It had a bevy of analysts and access to all the research by Wall Street firms.

If a trade were somehow questioned, the firm could come up with any number of reasonable-sounding explanations, as Mr. Rajaratnam’s lawyer, John M. Dowd, did in the case that ended in his conviction.

But those explanations sounded pretty lame when stacked up against the audio tape recordings of conversations in which corporate insiders gave confidential information to Mr. Rajaratnam.

Those tapes exist only because the Justice Department got involved in the investigation at the beginning. Presumably, it had reason to believe that insider trading was happening, and that persuaded a federal judge to approve wiretaps.

As a result, the F.B.I. could listen in as the information was provided just before trades were made. And they could hear Mr. Rajaratnam discuss ways to throw off a normal insider trading investigation. He suggested sending choreographed e-mails with fake reasons for a trade. He recommended trading in and out of a stock that was being accumulated because of inside information.

It seems likely that Mr. Rajaratnam had used just such tactics in the past to explain away trades that had aroused suspicion. But hearing him describe them turned a defense into a virtual confession.

Those tapes “showed that the defendant knew what he was doing was not only wrong, but illegal,” said a prosecutor, Reed M. Brodsky, in closing arguments to the jury.

Insider trading was a common practice at Galleon. There were numerous leakers, and they came from the cream of American business — from insiders at major corporations like Intel and Goldman Sachs and from McKinsey, perhaps the most prestigious management consulting firm. Chief executives of smaller firms provided Mr. Rajaratnam inside information about their companies, and profited because they were allowed to invest in his funds.

Galleon ended up sounding like a criminal enterprise, where illegal information was bought through elaborate chains aimed at concealing the source of the money. Hedge fund investments were made in the name of a housekeeper, and money was transferred overseas and back merely to cover up the trail.

Article source: http://feeds.nytimes.com/click.phdo?i=47bfcf4bfa1ff3d37e13d7b456c13879

DealBook: German Exchange Doesn’t Plan to Sweeten NYSE Offer

Deutsche Börse does not plan to sweeten the terms of its merger with NYSE Euronext, because top managers of the German exchange operator are convinced that a rival bid has little chance of success, people with knowledge of the transaction said Monday.

Speaking a day after the NYSE Euronext board rejected a takeover offer that the Nasdaq OMX Group made in partnership with the IntercontinentalExchange, people close to the deal in Germany also disputed estimates that the competing offer is worth 20 percent more than a takeover by Deutsche Börse.

The estimates failed to take into account other costs, like the $355 million breakup fee that NYSE would owe to Deutsche Börse if it accepted another offer, said these people, who spoke on condition of anonymity because they were not authorized to speak publicly. Moreover, they said, there is a big risk that a tie-up with Nasdaq might never come to pass because of regulatory hurdles. For example, a combined Nasdaq and NYSE would have a practical monopoly on new listings, raising antitrust concerns.

On Sunday, NYSE Euronext rejected the Nasdaq bid, citing a long list of concerns, including the job cuts in New York and the amount of debt necessary to finance their bid. Debt rating agencies have said that Nasdaq’s credit rating would suffer from the strain of financing the $11.3 billion offer.

Executives at NYSE Euronext and Deutsche Börse have been talking about a merger off and on for more than two years, giving them a huge head start on seeking the numerous regulatory approvals that will be required. Deutsche Börse planned to submit a draft of an offer to its shareholders to Germany’s bank regulator on Tuesday.

The filing is an important step in making it possible for shareholders of both companies to vote on the deal in July. NYSE and Deutsche Börse plan to complete the merger by the end of the year.

The head start also means that the two companies have already dealt with difficult questions like who will run the combined company. Reto Francioni, chief executive of Deutsche Börse, would be chairman, and Duncan Niederauer, chairman of NYSE Euronext, would be chief executive.

NYSE and Deutsche Börse have a binding contract, while the Nasdaq offer is what Mr. Niederauer on Sunday called a “loosely worded proposal.”

However, the two companies have not agreed on a name for the new entity. They said that, in any case, they will preserve the NYSE Euronext and Deutsche Börse brand names.

Article source: http://feeds.nytimes.com/click.phdo?i=50fe8ed0e92362ea9c576a6cd4cd197b