March 26, 2023

DealBook: Uninvited Guest Jolts Japan’s Business Culture

Sony's entertainment unit includes a film studio and one of the largest music labels in the world, featuring artists like Taylor Swift.Richard Perry/The New York TimesSony’s entertainment unit includes a film studio and one of the largest music labels in the world, featuring artists like Taylor Swift.

TOKYO — Devil. Vulture. Saboteur.

All these words have been used to greet Western investors who have agitated for change in Japan’s clubby and complacent corporate culture. As the hedge fund billionaire Daniel S. Loeb prepares to take on Sony, he may find the same hostility from the company that at one time single-handedly defined premium quality in entertainment and electronics.

How Sony, and Japan, react to the demands brought by Mr. Loeb on Tuesday could become a test of how far the country has come in making good on promises to open up to more foreign investment and, more important, change.

Prime Minister Shinzo Abe, who took office in December, has promised to shake up corporate Japan by removing onerous regulations, protections and inflexibilities that have sapped profitability and hampered serious revamping.

Related Links

Investors initially are cheering Mr. Loeb’s efforts. Sony’s shares rose nearly 10 percent in the United States to close at $20.76 on Tuesday. The reaction among those who matter — Sony’s managers — has been muted.

Almost no local media outlets carried the story of Mr. Loeb’s hand-delivered list of demands to Sony on Tuesday, hours after those demands had been made public. Sony itself issued only a curt statement, saying its entertainment businesses were “not for sale.”

“Sony is an icon. Until now, it hasn’t had a fellow like this coming in and making demands in public,” said Nicholas Benes, a former Wall Street banker who now advises Japanese companies on corporate governance. “But now he comes in with guns blazing. This hasn’t quite started off right, you might say.”

Activist investors like Mr. Loeb’s fund, Third Point, might seem like natural allies in that mission to prod Japan’s corporations toward change. Mr. Loeb’s demands for Sony’s management center on bringing more focus to its sprawling business, something analysts have long called for, partly by spinning off a part of its entertainment arm. And Mr. Loeb cites Mr. Abe’s promised economic reforms as a big reason behind his recent interest in Japan.

Nowhere has revamping been so painfully needed as in Japan’s electronics industry, where six major manufacturers, including Sony, still produce flat-panel televisions, mostly at a loss. Better labor mobility might make companies more reluctant to close or spin off money-losing operations and focus on profitable lines of business.

Kazuo Hirai, the chief of the entertainment and electronics colossus Sony.Justin Sullivan/Getty ImagesKazuo Hirai, the chief of the entertainment and electronics colossus Sony.

American activist investors have, however, met with frustration in the efforts to add value at other companies. T. Boone Pickens, who acquired a minority stake in the auto parts company Koito Manufacturing in 1989, pressed its management for better dividends and a seat on its board. But the little manufacturer dug in its heels. Shareholders heckled him with anti-American taunts at its annual shareholders meeting; the press branded him an opportunistic vulture. Koito’s president refused even to meet the Texan magnate.

“O.K., Koito; I give up,” Mr. Pickens declared in a statement two contentious years later, before selling his entire stake. “The heck with Japanese business.”

Mr. Loeb is unlikely to get such openly hostile treatment from Sony, now that he is a significant investor with a 6.5 percent stake in the company. After all, it is 2013, and Sony, unlike Koito, is a global, savvy firm.

Gerhard Fasol, president of the Tokyo technology consulting firm Eurotechnology Japan, said Mr. Loeb had probably studied past unsuccessful approaches to Japanese companies.

“My guess is that he learned from the mistakes those activist investors made and was advised to tone things down,” Mr. Fasol said. Mr. Loeb makes a point of starting the note with praise for Mr. Hirai and his commitment to change.

Mr. Loeb has suggested that Sony take 15 to 20 percent of the entertainment unit public by offering current Sony shareholders the opportunity to buy shares. The unit includes a leading film studio and one of the largest music labels in the world, featuring artists like Taylor Swift. A spinoff could lead to higher profit margins, while helping to revive the core electronics business, Mr. Loeb argues.

Yet even though many inside and outside Japan recognize that Sony’s divisions need some shaking up, a hedge fund manager like Mr. Loeb may not be the one who is ultimately successful.

Active investing has long been seen in Japan as a dangerous, alien practice led by foreigners, or cheeky locals who dare imitate them. And in past cases, lenders, bureaucrats, other shareholders and even rivals have swooped in to rescue companies from investors’ talons. Of the 23 hostile takeover bids in Japan since 2000, only 7 have been successful, according to Dealogic

The cross-shareholdings of Japanese companies — with close ties to their main bank and other companies, known as keiretsu — have helped foster an environment where hostile takeovers are rare and shareholders are docile supporters.

But in the mid-2000s, when Japan seemed to stage a nascent recovery, the country attracted a wave of what company executives came to call “investors who say things.”

In 2006, when Steel Partners, an American fund, took out a stake in the noodle maker Myojo Foods, the company flatly refused to entertain a proposal for a management buyout, accusing the fund of trying to sabotage the company’s future for short-term gain. When Steel Partners instead started a takeover bid, Myojo ran into the arms of its noodle archrival, Nissin Foods, which bought it out.

Undeterred, Steel Partners aimed at another food company, this time a condiment maker called Bull-Dog Sauce, and accumulated a 10 percent stake in 2007. Not satisfied with the management’s reluctance to expand overseas to make up for a waning domestic market, the fund started a tender bid for the rest of the company. This time, it was thwarted by a landmark ruling by Japan’s Supreme Court supporting the use of “poison pill” defenses in Japan.

The media followed the food companies’ tribulations with much gusto, berating the brash manners of Warren Lichtenstein, chief of Steel Partners. The public broadcaster, NHK, showed a drama series, “Vulture,” about an American investment firm that snaps up troubled companies.

“Is he a devil, or a savior?” the narrator asked in a booming voice.

Article source:

DealBook: A Key Witness in Rajaratnam Trial Receives Probation

Rajiv Goel was sentenced on conspiracy and and securities fraud charges in New York on Monday.Peter Foley/Bloomberg NewsRajiv Goel was sentenced on conspiracy and and securities fraud charges in New York on Monday.

A former Intel executive who leaked secret information about his employer to Raj Rajaratnam, the fallen hedge fund billionaire, avoided prison on Monday as a judge sentenced him to two years’ probation.

The former executive, Rajiv Goel, provided prosecutors with extensive assistance in prosecuting Mr. Rajaratnam. During the hedge fund titan’s trial in 2011, Mr. Goel was one of the three key government witnesses who testified against him.

The other two witnesses — Anil Kumar, a former McKinsey executive, and Adam Smith, a Harvard-educated former Galleon trader — also received probationary sentences. Mr. Rajaratnam is now serving an 11-year sentence at a federal prison in Massachusetts.

Judge Barbara S. Jones, who sentenced Mr. Goel in Federal District Court in Manhattan, said that she had given him probation because of his extraordinary help in building a case against Mr. Rajaratnam and his essential testimony during the trial. She also noted that he had already paid a price for his crimes.

“You showed good sense in deciding to cooperate,” the judge said. “You have already been punished in the sense of the shame you feel for your family and your having lost your career.”

The United States attorney’s office in Manhattan has charged 70 people with insider trading crimes since 2009. Of those, 64 have either pleaded guilty or been convicted at trial.

Many of the defendants served as pawns in the sprawling insider trading conspiracy orchestrated by Mr. Rajaratnam, who ran the hedge fund Galleon Group. At the height of his powers, Mr. Rajaratnam managed more than $7 billion and was considered one of Wall Street’s savviest stock pickers.

Mr. Goel and Mr. Rajaratnam had stayed in touch since their days as classmates at the Wharton School at the University of Pennsylvania.

Their paths subsequently diverged. While Mr. Rajaratnam had become a hedge fund titan, Mr. Goel was an unsatisfied middle manager at Intel. Mr. Goel, a native of Mumbai, India, envied the success and power of his old business school pal.

Mr. Rajaratnam lured Mr. Goel into his insider trading conspiracy by bestowing favors upon Mr. Goel. They were friends with financial benefits. He loaned him about $600,000. He made about $750,000 trading — often illegally — in Mr. Goel’s brokerage account. At the same time, he would press Mr. Goel for confidential information about Intel.

Eventually, Mr. Goel succumbed to Mr. Rajaratnam’s cajoling, giving him advance word of Intel’s financial results and a major investment that the chipmaker had planned to make, allowing his old friend to earn hundreds of thousands of dollars in illegal profits.

At Monday’s sentencing, David Zornow, a lawyer for Mr. Goel, called Mr. Rajaratnam a “master seducer” and “clever seducer” who ”played his client like a fiddle.”

Federal authorities investigating Galleon had secretly recorded telephone calls between Mr. Rajaratnam and Mr. Goel. The conversations revealed not only a close friendship but also the swapping of secret information about Intel. The two were arrested on the same day in October 2009.

While Mr. Rajaratnam fought the charges, a number of his alleged tipsters, including Mr. Goel, pleaded guilty and helped the government prosecute the disgraced hedge fund manager.
The 54-year-old Mr. Goel, who resides in Palo Alto, Calif., has not worked since Intel fired him after his arrest. Appearing in federal court on Monday and accompanied by his wife, Mr. Goel pleaded for leniency in a brief statement that he read to Judge Jones.

“I had a serious lapse of judgment and good sense and I deeply apologize,” said Mr. Goel, speaking in a soft mumble. “I hope that I am given another chance to repair the harm that I have caused and am deeply ashamed for the mistakes that I have made.”

Article source:

DealBook: A Key Witness in Rajaratnam Trial Is Set to Be Sentenced

A disgraced former Intel executive whose testimony helped convict the hedge fund billionaire Raj Rajaratnam of insider trading crimes deserves a lenient sentence because of his cooperation with the government, federal prosecutors said on Friday.

In a letter to Judge Barbara Jones, the United States attorney’s office in Manhattan praised the cooperation of Rajiv Goel, the former Intel executive.

“Goel substantially helped the Government secure a conviction in one the most significant and high-profile insider trading trials in history,” the letter said. “From the first day of Goel’s cooperation through the present, Goel has been a very important, straightforward, and extraordinarily helpful cooperating witness.”

Mr. Goel, 54, is set to be sentenced on Wednesday in Federal District Court in Manhattan. He was one of three main government witnesses who pleaded guilty to conspiring with Mr. Rajaratnam in a far-reaching insider trading conspiracy and then testified against him during his trial.

The other two witnesses have already been sentenced and were spared prison time. Anil Kumar, a former McKinsey executive, and Adam Smith, a former trader at Mr. Rajaratnam’s hedge fund Galleon Group, were both given probationary sentences because of their extensive cooperation.

Mr. Goel met Mr. Rajaratnam while the two were business-school students at the Wharton School of the University of Pennsylvania. Mr. Rajaratnam lured Mr. Goel into his insider trading conspiracy by bestowing favors upon his old friend, including executing profitable — and illegal — trades in Mr. Goel’s Charles Schwab brokerage account. Eventually, Mr. Goel gave Mr. Rajaratnam advance word of Intel’s quarterly earnings results.

“He knew that it was wrong for him to do so and regrets the decision that he made at the time, not only because of the negative consequences that he has justifiably suffered as a result of that decision, but also because of his betrayal of Intel, a company that had vested so much trust in him over the years,” wrote David Zornow, a lawyer for Mr. Goel, in his letter to Judge Jones.

At trial, Mr. Goel proved an effective witness, walking the jury through secretly recorded telephone calls during which he and Mr. Rajaratnam exchanged confidential information about Intel.

“During his testimony, Goel was contrite, truthful, and direct about his criminal conduct,” the government’s letter said.

The government’s letter to Judge Jones indicates that Mr. Goel has continued to help the government since Mr. Rajaratnam’s conviction in May 2011. It says that as recently as July 30, 2012, Mr. Goel spoke with prosecutors to provide information about certain trades in the Galleon case that continue to be investigated.

Mr. Zornow, the lawyer for Mr. Goel, asked Judge Jones to spare his client a prison term and sentence him to probation.

“Mr. Goel has already paid a hefty price for his involvement with Mr. Rajaratnam, in terms of his career prospects and his personal finances, not to mention the toll that the case has exacted on his family,” said Mr. Zornow. “Any sentence of incarceration would delay Mr. Goel’s efforts to rebuild his career, and would limit his ability to support those people who depend on him.”

Separately, an appeal of Mr. Rajaratnam’s conviction has been scheduled to be heard by the Court of Appeals for the Second Circuit on Oct. 25.

Article source:

DealBook: Hedge Fund Founder Gets 11-Year Term in Insider Case

Raj Rajaratnam left federal court in Manhattan on Thursday.John Marshall Mantel for The New York TimesRaj Rajaratnam left federal court in Manhattan on Thursday.

1:09 p.m. | Updated

The fallen hedge fund billionaire Raj Rajaratnam received the longest prison sentence ever for insider trading on Thursday, a watershed moment in the government’s aggressive two-year campaign to root out the illegal exchange of confidential information on Wall Street.

Judge Richard J. Holwell sentenced Mr. Rajaratnam, the former head of the Galleon Group hedge fund, to 11 years in prison and fined him $10 million and ordered him to forfeit $53.8 million. A jury convicted Mr. Rajaratnam of securities fraud and conspiracy in May after a two-month trial.

Calling him “the modern face of illegal insider trading,” prosecutors accused Mr. Rajaratnam of using a corrupt network of well-placed tipsters — including former executives of Intel, I.B.M. and the consulting firm McKinsey Company — to illicitly gain about $70 million.

“Insider trading is an assault on the free markets,” Judge Holwell said. “His crimes reflect a virus in our business culture that needs to be eradicated.”

The Galleon Trial
View all posts

Related Links

Mr. Rajaratnam showed no emotion as Judge Holwell read his sentence in a packed courtroom. The 54-year-old Sri Lankan native, who has not spoken publicly since his arrest in October 2009 and declined to testify at his trial, did not speak at the sentencing. His wife, absent from the trial, sat stoically in the spectators’ gallery during the hour-long proceeding.

At 11 years, the sentence lacks the symbolic heft of the range of 19 to 24 years that the government had sought under federal sentencing guidelines. At Thursday’s hearing, Reed Brodsky, a federal prosecutor, said Mr. Rajaratnam deserved an outsize penalty because his crimes were “brazen, pervasive and egregious” and “there is no one who is Mr. Rajaratnam’s equal in terms of the breadth and scope of his insider-trading crimes.”

In imposing his sentence, Judge Holwell cited a number of mitigating factors that he said caused him to hand down a term that was substantially lower than the nonbinding federal guidelines. He said Mr. Rajaratnam’s “good works figure into the equation,” citing his financial help for victims of the tsunami in Sri Lanka, the earthquakes in Pakistan and the Sept. 11 attacks.

Judge Holwell also disclosed that Mr. Rajaratnam had advanced diabetes that was leading to kidney failure, and said that prison “is a more intense experience for people with serious health conditions.”

“Some form of forbearance, however constrained by circumstance, is fundamental to our system of justice and appropriate here,” the judge said.

Nevertheless, Mr. Rajaratnam’s prison sentence continues a trend of ever-stiffer penalties against white-collar criminals. Legal experts say the increased prison terms are in part a result of federal sentencing guidelines passed in 1987 that link the length of a sentence to the dollar amount involved in the fraud.

Historically, judges showed leniency when penalizing corporate criminals because they were not seen as a threat to society and perhaps because they empathized with people who often came from similar backgrounds as themselves. But gone, for the most part, are the days of slap-on-the-wrist sentences and “country club” prisons where white-collar defendants would serve short stints in relatively comfortable quarters.

Corporate wrongdoers have received record-length sentences in recent years. Bernard L. Madoff is serving 150 years for cheating investors in an epic Ponzi scheme. Lee B. Farkas, a former mortgage company executive, received 30 years for his role in a $2.9 billion bank-fraud scheme. Last month, Adley H. Abdulwahab, who was convicted of participating in a $100 million fraud scheme that preyed on retirees, was sentenced to 60 years in prison.

On the insider-trading front, judges’ penalties have also been severe.

Zvi Goffer, a former trader at Galleon, received a 10-year prison term, matching the longest sentence to date for insider trading. The average sentence of the 13 other defendants connected to Mr. Rajaratnam’s case has been about three years.

Legal experts say that because prison terms across all federal crimes have substantially increased over the last two decades, it stands to reason that the length of sentences for executives on Wall Street and in corporate American would also grow.

“Often the question is raised, ‘Why shouldn’t crime in the suites be punished as severely as crimes on the streets?’ ” said Douglas A. Berman, a law professor at Ohio State University who teaches sentencing law and policy. “While that sounds like a sound bite, it’s an important question.”

It is a question that played a crucial role in the debate over the appropriate prison term for Mr. Rajaratnam.

John C. Dowd, Mr. Rajaratnam’s lawyer, had asked the judge to impose a sentence closer to six to eight years, calling the government’s request “grotesquely severe.” In arguing for a lesser term, Mr. Dowd noted that a stiff penalty for Mr. Rajaratnam would be on par with the average sentences for violent crimes like kidnapping and sexual abuse.

Advocates of more lenient insider-trading sentences also say that the crime does not have any real identifiable victims, whereas other white-collar crimes like Ponzi schemes or corporate accounting frauds destroy lives and livelihoods.

Preet S. Bharara, the United States attorney in Manhattan who spearheaded the government’s crackdown on insider trading, disagrees with that view. His office, working in many cases with the Securities and Exchange Commission, has charged 54 people with insider trading crimes during the last two years. Fifty of those individuals have pleaded guilty or been convicted by a jury.

In a series of public speeches, Mr. Bharara has described the illegal exchange of secret information on Wall Street trading floors as “rampant.” He echoed that view in a talk last week at the Wharton School of the University of Pennsylvania, the business school from which Mr. Rajaratnam graduated in 1983.

“We’re talking about people, in some instances, who are basically creating a business model for a stable of insider sources,” he said. “That has been distressing.”

Mr. Bharara also noted the deterrent effect of harsh insider-trading sentences, which are designed to “convince rational business people that the risk is not worth it.”

Another potential deterrent is the unprecedented investigatory tactics and vast resources deployed by federal authorities in their pursuit of Mr. Rajaratnam and his co-conspirators.

For the first time in an insider-trading inquiry, the government used wiretaps to secretly record the phone conversations of hedge fund traders. Mr. Rajaratnam’s cellphone was tapped for nine months during 2008, yielding damning evidence used against him at trial.

“One legacy of this case is that Wall Street will be more careful about what they say on telephones than they used to be,” said David Siegal, a white-collar defense lawyer and former federal prosecutor at Haynes Boone.

Mr. Rajaratnam’s lawyers are expected to focus their appeal on attacking the judge’s decision to admit the wiretapped calls as evidence. They will argue, among other things, that Congress has not authorized the use of wiretap surveillance for insider-trading cases.

But most lawyers say the odds of a reversal are low.

“An appeals court will show great deference to the trial court judge on this issue,” Mr. Siegal said.

When federal agents arrested Mr. Rajaratnam almost exactly two years ago, his case brought to mind the insider trading scandal of the 1980s. Rudolph W. Giuliani, then the top federal prosecutor in Manhattan, brought charges against Ivan Boesky and Michael R. Milken, two of the leading financiers of that era.

Mr. Rajaratnam represented a new breed of Wall Street power player: the hedge fund tycoon. Over the last decade, these money managers — boasting superior performance and princely fees — became among the most powerful players in global finance, controlling more than $2 trillion in assets. And as their influence and wealth grew — in 2009, Mr. Rajaratnam had a net worth of $1.5 billion, according to Forbes magazine — they attracted attention from regulators.

The government placed Mr. Rajaratnam and his hedge fund, Galleon, which at its peak managed $7 billion, at the center of what it billed as the largest hedge fund insider trading case ever charged. During the trial, federal prosecutors played scores of dozens of phone conversations during which Mr. Rajaratnam exchanged illegal stock tips about companies including Goldman Sachs and Google with corporate insiders and fellow traders.

Mr. Rajaratnam must report within 45 days to the Bureau of Prisons, which will assign him to a correctional facility. Until then, he will be confined to his home, a duplex apartment on Sutton Place. Judge Holwell said he would recommend that Mr. Rajaratnam serve his time at the federal medical center in Butner, N.C., part of the same complex where Mr. Madoff is incarcerated.

Despite the Justice Department’s focus on insider trading, Mr. Rajaratnam’s case and the government’s broader crackdown have been something of a sideshow to the larger problems related to the global financial crisis and America’s continued economic woes.

For instance, insider trading at hedge funds — and the notion that the stock market is a rigged game — does not rate on the list of grievances from the anti-Wall Street protestors spreading across the country.

“Unless people can identify lost money as a result of insider trading, or have had their savings stolen by Madoff, they don’t view their own economic difficulties as being caused by a few bad apples,” said Mr. Berman, the Ohio State law professor. “They see the problems with our economy and financial markets as far more systemic than that.”

William Alden contributed reporting.

Article source: