March 25, 2023

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.”

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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: How Serious a Crime Is Insider Trading?

Raj Rajaratnam leaving federal court during his trial in the spring.Peter Foley/Bloomberg NewsRaj Rajaratnam leaving federal court during his trial in the spring.

As could be expected, the sentencing memos submitted by Raj Rajaratnam, the hedge fund manager convicted of insider trading charges, and by federal prosecutors paint very different pictures of the defendant.

At their core, the two filings put forth dueling views about just how serious the crime of insider trading is and what is an appropriate punishment for an offense that often involves successful individuals who can argue they did not mean to cause any real harm.

The defense filing asserts that “[w]ith 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.”

Prosecutors, on the other hand, maintain in their filing that Mr. Rajaratnam “operated as a billion-dollar force of deception and corruption on Wall Street.”

The truth most likely lies somewhere in between. It will be up to Judge Richard J. Holwell to decide in Federal District Court in Manhattan on Sept. 27 when he sentences Mr. Rajaratnam, who was convicted of 14 counts of conspiracy and securities fraud.

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Although it does not recommend a particular sentence, Mr. Rajaratnam’s memorandum asks Judge Holwell to sentence him to a term of imprisonment well below what is called for by the federal sentencing guidelines, which the government asserts provides for a recommended term of 19 and a half to 24 and a half years in prison.

Mr. Rajaratnam’s lawyers point out that other defendants tied to his firm who entered guilty pleas received comparatively light sentences, like the 30-month sentence given to Danielle Chiesi, a co-defendant of Mr. Rajaratnam, and the 27-month sentence imposed on the hedge fund manager Mark Kurland. They argue that a sentence for Mr. Rajaratnam even close to that recommended by the sentencing guidelines would be wildly disproportionate to the punishments given to Ms. Chiesi and Mr. Kurland for essentially the same conduct.

Beyond just the facts of his case, Mr. Rajaratnam’s memo offers a deeper justification for a lighter sentence: his crime did not involve any identifiable victims, nor did it cause the kind of harm inflicted on investors by the likes of Bernard L. Madoff or such corporate chieftains as Jeffrey K. Skilling of Enron or Bernard Ebbers of WorldCom.

The defense memorandum portrays insider trading as a less pernicious offense than other types of securities fraud, in which individual investors can be identified as particular victims, because no one individual can be shown to have suffered identifiable losses. Even though Mr. Rajaratnam made money from the tips he received, “a defendant tippee who profits from illegal trading does not engage in conduct that is as culpable as a defendant who affirmatively steals the same amount from an identifiable victim,” the defense memorandum states.

Mr. Rajaratnam’s argument that insider trading involves unidentifiable victims, and therefore is less harmful, raises the fundamental question of how a court should view the harm caused by the violation. He is essentially arguing that this is a victimless crime, at least as compared to a case like Mr. Madoff’s vast Ponzi scheme, and therefore violators are less deserving of the kind of significant punishments imposed on those who actually steal from individual investors.

This argument reflects the fact that there are unlikely to be any letters submitted to the court in advance of the sentencing from so-called victims of his crimes, as we saw before the sentencing of Mr. Madoff, when there were poignant reminders of the enormous damage he caused. The trading by Mr. Rajaratnam’s firm, the Galleon Group, was in the stocks of large companies on highly liquid markets. Those who were on the other side of his purchases and sales are in all likelihood unaware of their connection to him and would not perceive themselves as victims.

Federal prosecutors have tried to counter this view by arguing that a substantial sentence is needed “to send a strong and clear message that the time for illegal insider trading to end is now.” Without a lengthy prison sentence, they argue:

“There is a significant danger that these executives and money managers may view a light sentence as an insufficient deterrent to insider trading, secure in the knowledge that if they are ever caught, they would be able to go to trial and argue at sentencing after conviction that whatever their conduct was, it had to have been less extensive than the crimes committed by Rajaratnam, and therefore worthy of a shorter sentence than him.”

This is similar to the Justice Department’s argument in the sentencing of Lee B. Farkas, a former mortgage company executive who received a 30-year term of imprisonment for his role in a fraud the government estimated at $2.9 billion. Insider trading is different from mortgage fraud, however, because the harm is much more difficult to measure, even if it is clear what a defendant gained from the trading.

The sentencing of Mr. Rajaratnam can almost be seen as a referendum on how insider trading should be viewed: a lighter sentence means that it is not a crime that causes significant social harm because its impact is dissipated, while a heavier sentence sends a message of deterrence in order to maintain the integrity of the markets.

An interesting question is whether the message of deterrence, what prosecutors called the desire to end insider trading, is one that will be heard. For a crime that does not involve an identifiable victim beyond the disembodied securities markets, defendants seem to be able to convince themselves that they really are not doing anything wrong, or at least not nearly as wrong as someone like Mr. Madoff and the corporate executives who destroyed their companies through accounting fraud.

Three insider trading cases announced last week involved prominent defendants who traded on and tipped confidential information used for trading that resulted in comparatively small gains. These cases lend some support to the view that those who engage in this type of conduct may not perceive themselves as violating the law because there is no immediate victim.

The two civil cases brought by the Securities and Exchange Commission involved William A. Marovitz, husband of Christie Hefner, the former chief executive of Playboy Enterprises, and a former major league baseball player, Douglas V. DeCinces. Both men were successful in other business ventures, and while Mr. DeCinces made more than $1 million from his trading, Mr. Marovitz’s case involved gains and avoided losses of about $100,000, a modest amount to break the law.

The criminal prosecution of a former director of Mariner Energy, H. Clayton Peterson, which will very likely result in his serving a prison term, involved about $150,000 in profits realized by his son Drew, who received the tips.

Is it worth risking your reputation, and perhaps even going to federal prison, for such paltry amounts? I doubt these men would participate in a grocery store robbery or help set up a Ponzi scheme, but they appear to have willingly engaged in insider trading.

In contrast, of course, the government contends Mr. Rajaratnam pulled in $63.8 million in profits through insider trading.

The length of Mr. Rajarantman’s term may not have much deterrent effect so long as insider trading is viewed as a victimless crime. The fact that the harm is to the trust in the market makes it easier to argue that there is little measurable impact from the violation when there is no victim who will stand up in court and explain what happened after the crime, as we saw at Mr. Madoff’s sentencing.

Whether that means insider trading should be treated as less serious, with a commensurately reduced punishment, will be reflected in Judge Holwell’s sentencing decision.

Defense’s Sentencing Memorandum

Prosecution’s Sentencing Memorandum

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

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DealBook: After 22 Years, K.K.R. Is Exiting Primedia

Henry R. Kravis, co-chief executive of Kohlberg Kravis Roberts  Company, which sold Primedia for $525 million.Peter Foley/Bloomberg NewsHenry R. Kravis, co-chief executive of Kohlberg Kravis Roberts Company, which sold Primedia for $525 million.

7:12 p.m. | Updated

If you happened to stroll by the offices of the private equity firm  Kohlberg Kravis Roberts Company on Monday, you might have seen Henry R. Kravis removing an albatross from around his neck.

The albatross was Primedia, the media business that K.K.R. has owned since the Bush administration — the first Bush administration.

Primedia, a publicly traded company majority owned by K.K.R., agreed to sell itself to the buyout firm TPG Capital in a deal valued at $525 million including debt. The sale, assuming it closes, will end K.K.R.’s 22-year stewardship of the company, making it the firm’s longest investment ever — and one of its least successful.

Private equity firms typically own a company for about five years before exiting their investment.

A spokeswoman for K.K.R. declined to comment.

In 1989, Mr. Kravis and his partners at K.K.R. formed K-III Holdings to acquire print media assets. Its first deal was the purchase of a book club division from Macmillan and other assets for $310 million. A couple of years later, it paid $600 million for nine magazine titles from the News Corporation, including New York and Seventeen.

The company went public in 1995, with K.K.R. retaining majority control. In 1997, K-III changed its name to the flashier Primedia. (“K-III’s a horrible name,” the late Bill Reilly, Primedia’s chief executive, said at the time.)

Then, just as the dot-com bubble was inflating, Primedia began an aggressive Web strategy. Under the direction of Thomas S. Rogers, a prominent media executive brought in by K.K.R., Primedia paid $690 million for

in the fall of 2000. The next year, it spent $515 million on the American holdings of the magazine publisher Emap, whose titles included Motor Trend and Teen.

K.K.R. paid for all of these assets with nearly $1 billion of its own money. It borrowed the rest, racking up more than $2 billion in debt. The excessive leverage hobbled Primedia over the last decade as it wrestled with the inexorable decline of the print media business.

Facing the twin problems of a crushing debt load and an advertising downturn, K.K.R. was forced to disassemble Primedia. The buyout shop brought in its Capstone consulting group, which aggressively cut costs, shut magazine titles and sold the others, including the marquee properties New York and Seventeen. Indeed, Primedia has completely exited the magazine business.

Primedia announced in February 2005 that it had sold to The New York Times Company for $410 million.

So what does TPG, which paid a 62 percent premium to Primedia’s closing stock price on Friday, see in Primedia? Today, the company’s main assets are real estate properties like and

“Primedia is a leading resource for consumers in search of housing,” David Trujillo, a TPG executive, said in a statement. Mr. Trujillo also highlighted the continued shift away from print, adding: “We believe the company will continue to benefit from the continuing secular transition from print to digital media.”

As for Mr. Kravis, he and his investors lost money on Primedia, although a firm spokeswoman declined to specify how much. Using simple math, it would appear that K.K.R. funds lost several hundred million dollars on the deal. But private equity math is never simple. Over the last two decades, K.K.R. has earned back some of its investment by paying itself dividends and buying back debt.

K.K.R. also employed another private equity trick in selling Primedia. It offloaded the company to TPG, another buyout firm. These so-called secondary buyouts, in which a company is passed from one private equity shop to another, have a mixed reputation among investors.

At least no one can accuse K.K.R. of having a short-term focus.

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