Case 1:09-cr-01184-RJH Document 304-1

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EXHIBIT 1

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EXHIBIT 2

Case 1:09-cr-01184-RJH Document 304-1

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK
--------------------------------------------------------------x
:
UNITED STATES OF AMERICA,
:
:
-v:
:
RAJ RAJARATNAM
:
:
:
Defendant.
:
:
---------------------------------------------------------------x

Filed 08/09/11 Page 13 of 26

09 Cr. 1184 (RJH)

DECLARATION OF GREGG A. JARRELL

1.

I am a tenured Professor of Economics and Finance at the University of

Rochesters William E. Simon Graduate School of Business Administration and a former Chief
Economist for the United States Securities and Exchange Commission.
2.

I have been retained by Akin Gump Strauss Hauer & Feld, LLP, counsel to Mr.

Raj Rajaratnam, to provide expert opinions in connection with the trial and sentencing phases of
Mr. Rajaratnams criminal proceeding.
3.

I was accepted by the Court as an expert witness in Mr. Rajaratnams criminal

trial and provided extensive expert testimony on a number of subjects including changes in stock
price in response to company-specific events, the materiality of the alleged inside information
and whether it was impounded into the stock price, the custom and practice of securities
professionals, and the economics of various market behaviors.
4.

I have reviewed in detail the governments profit calculations for the stocks at

issue and have analyzed the methodology the government used, i.e., the first in first out or
FIFO method.

Case 1:09-cr-01184-RJH Document 304-1

5.

Filed 08/09/11 Page 14 of 26

I, and others working at my direction, have reviewed Galleons order management

system (OMS) trading records, which include trading by Mr. Rajaratnam.

6.

Based on my review of those OMS trading records, I have determined that, from

2005 to 2009, Galleon engaged in a total of 1,163,591 stock transactions, including buys, sells,
covers and shorts. Mr. Rajaratnam was responsible for 36,437 of those transactions, which was
an average of 7,287 per year or 30 per trading day.
7.

The dollar value of Mr. Rajaratnams transactions from 2005 to 2009 was $172.1

billion. The average yearly dollar value of his trades was $34.4 billion. The daily average value
was $141.5 million.
8.

The trading records I reviewed reflect that Mr. Rajaratnam traded in the stock of

hundreds of different companies each year. Specifically, Mr. Rajaratnam traded in the securities
of 416 different companies in 2005, 460 different companies in 2006, 560 different companies in
2007, 454 different companies in 2008, and 602 different companies in 2009.
9.

The allegations at the trial of this case pertained to 14 different companies and, at

most, 126 transactions in the stock of those companies.

10.

As I testified at Mr. Rajaratnams criminal trial, the trades at issue, when

compared to Mr. Rajaratnams total trades from 2005 to 2009, constituted less than 1% of his
total trades. Specifically, the trades at issue were only about 0.3% of Mr. Rajaratnams total
trades from 2005 to 2009.
11.

It is my understanding from listening to the testimony of FBI Special Agent

Barnacle and reviewing various government exhibits admitted in Mr. Rajaratnams criminal trial,
that the government claims the profit Mr. Rajaratnam realized as a result of his offense was
approximately $63.8 million.

Case 1:09-cr-01184-RJH Document 304-1

12.

Filed 08/09/11 Page 15 of 26

It is my opinion that the governments profit figure is incorrect because:

a. The governments FIFO methodology is not appropriate because it artificially
inflates the profit amount; and
b. Event studies are the more appropriate methodology for calculating excess
price change, and in turn, total profit.

13.

The governments application of the FIFO methodology is flawed because it does

not focus solely on the change in stock price attributable to the public announcement of the
inside information. Instead, the governments methodology incorrectly includes changes in share
price attributable to events other than the announcement of the inside information (e.g., unrelated
new product launches and/or financial releases). As a result, the governments methodology
artificially inflates the alleged profit by taking into account price movements before the official
public announcement and waiting until previously purchased shares are sold to calculate profit,
even if the sales were days or weeks after the relevant public announcement.
14.

Event studies are a more accurate and widely-accepted methodology for

calculating profit in securities fraud cases. I have utilized this method in other securities fraud
cases in which I have testified as an expert witness.
15.

In preparing for trial, I, and others working at my direction, performed event

studies on the stock transactions at issue to determine the effect of the alleged inside information
on stock prices and the resulting profits from those transactions.
16.

To perform the event studies, I first used market models to analyze how much a

particular stock typically moves in relation to the market as a whole or in relation to a specific
industry, such as the technology sector. For example, if the historical relation between the
market and a given company reflects a highly correlated one-for-one movement, then the market
models predicted return for that company would be to increase by one percent for each one
percent increase in the market. Similarly, if the historical relation between the market and a
3

Case 1:09-cr-01184-RJH Document 304-1

Filed 08/09/11 Page 16 of 26

given company reflects a two-for-one movement, then the companys stock price would be
expected to increase by two percent for each one percent increase in the market.
17.

When significant information about a company is released into the market, a

market model is further used to determine the component of the stock return (the percentage
change in the stock price) that is the predicted return and the component that is excess return.
18.

The excess return represents how much more the stock price moved on the day

in question than it typically moves in response to ordinary market events. This excess return can
be attributed to the public announcement of the inside information and the markets valuation of
that information, and appropriately excludes market forces that are unrelated to the inside
information.
19.

For example, assume a companys share price typically increases 1.5% when the

overall market increased 1% and that on the day of the companys public revenue and earnings
announcement the overall market increased 1%, but the company increased 2.5%. In that
scenario, the extra 1% increase (i.e., 2.5% actual return - 1.5% predicted return) would be
attributable to the markets reaction to the announcement of the revenue and earnings
information.
20.

Once I calculated the excess return, I multiplied it by the previous days stock

price to obtain the excess price change. The excess price change quantifies the impact of the
public disclosure of the inside information on the value of the stock.
21.

I then multiplied the excess price change from each public announcement (as

identified by Special Agent Barnacle) by the number of shares held at that time in the Galleon
funds at issue (the same number of shares used in Special Agent Barnacles calculations).

Case 1:09-cr-01184-RJH Document 304-1

Filed 08/09/11 Page 17 of 26

19,623,110
37,329,030
22,360,650

3/25/2008
3/26/2008
3/27/2008

10/3/2008
10/6/2008
10/7/2008

9/22/2008
9/23/2008
9/24/2008
9/25/2008

10/31/2008
11/3/2008
11/4/2008
11/5/2008
11/6/2008
11/7/2008
11/10/2008

Clearwire

eBay

Goldman Sachs

Goldman Sachs

Forensic Economics, Inc.

2,263,954
6,122,021
2,199,436

7/20/2006
7/21/2006
7/24/2006
7/25/2006

ATI

24,886,930
19,805,740
22,198,310
15,701,440
25,966,340
31,457,360
47,529,670

21,938,670
20,448,510
46,624,020
19,172,060

7,101,564
32,360,270
151,621,600
74,362,310

26,604,580
79,716,890
46,043,450
29,109,870

10/6/2008
10/7/2008
10/8/2008
10/9/2008

AMD

12,653,640
46,301,390
15,885,010

7/30/2008
7/31/2008
8/1/2008

Volume

Akamai

Date

$92.50
$89.09
$95.00
$87.43
$80.72
$77.78
$71.21

$120.78
$125.05
$133.00
$135.50

$18.94
$17.89
$16.50

$13.39
$14.19
$15.08

$15.73
$16.56
$19.67
$19.71

$4.23
$4.59
$4.05
$4.04

$31.25
$23.34
$23.50

Price

1.53%
-3.69%
6.63%
-7.97%
-7.67%
-3.64%
-8.45%

-6.95%
3.54%
6.36%
1.88%

-1.10%
-5.54%
-7.77%

11.12%
5.97%
6.27%

-0.13%
5.28%
18.78%
0.20%

-6.62%
8.51%
-11.76%
-0.25%

-0.92%
-25.31%
0.69%

Return

1.44%
-0.10%
4.79%
-5.25%
-5.73%
3.61%
-1.19%

-3.28%
-1.68%
-0.21%
2.05%

-1.48%
-4.34%
-5.80%

1.00%
-0.82%
-1.18%

-1.98%
-0.93%
2.05%
0.58%

-3.85%
-5.74%
-1.13%
-7.62%

1.67%
-1.31%
-0.56%

Market
Return

5.08%
1.92%
6.31%
-9.67%
-8.40%
3.67%
-7.44%

-5.78%
-1.45%
-3.26%
3.61%

n/a
n/a
n/a

0.59%
-2.18%
-0.41%

-4.23%
-3.38%
2.43%
1.24%

-2.96%
-5.38%
0.39%
-3.52%

-0.26%
-2.30%
-1.26%

Industry
Return

SUMMARY OF EVENT STUDIES

Exhibit 1

4.26%
1.46%
6.29%
-8.64%
-7.89%
3.99%
-5.64%

-5.16%
-1.50%
-2.30%
3.41%

-1.47%
-4.15%
-5.53%

0.85%
-1.99%
-0.65%

-3.40%
-2.29%
2.37%
0.81%

-3.53%
-5.88%
-0.24%
-4.92%

1.41%
-2.68%
-1.33%

Predicted
Return

-2.74%
-5.15%
0.34%
0.67%
0.21%
-7.63%
-2.80%

-1.78%
5.04%
8.66%
-1.53%

0.37%
-1.39%
-2.24%

10.27%
7.97%
6.93%

3.28%
7.56%
16.41%
-0.60%

-3.09%
14.40%
-11.52%
4.67%

-2.32%
-22.63%
2.02%

Excess
Return

$0.19
-$6.16
-$2.18
-$12.91

-$4.76

$10.83

-$0.26

$1.07

$2.72

$0.61
-$0.53

-$7.07

Excess
Price
Change

**
*

*
**

Page 1 of 2

-2.48
-4.67
0.31
0.61
0.19
-6.93
-2.55

-1.62
4.57 **
7.87 **
-1.39

0.19
-0.71
-1.15

1.90
1.48
1.28

1.73
3.98 **
8.64 **
-0.32

-1.23
5.75 **
-4.60 **
1.86

-0.83
-8.06 **
0.72

t-stat.

Case 1:09-cr-01184-RJH Document 304-1

Filed 08/09/11 Page 18 of 26

12/7/2006
12/8/2006
12/11/2006

Forensic Economics, Inc.

Xilinx

1/25/2006
1/26/2006
1/27/2006

Polycom

4/17/2007
4/18/2007
4/19/2007

Intel

10/6/2008
10/7/2008
10/8/2008
10/9/2008

6/15/2005
6/16/2005
6/17/2005

IDTI

PeopleSupport

6/15/2005
6/16/2005
6/17/2005

ICST

8/1/2008
8/4/2008
8/5/2008

7/2/2007
7/3/2007
7/5/2007
7/6/2007

Hilton

PeopleSupport

7/19/2007
7/20/2007
7/23/2007

Google

Date

6,289,603
19,739,430
9,543,767

1,815,154
7,345,595
1,757,203

159,288
1,057,201
943,109
457,104

305,647
6,423,317
1,662,357

103,163,700
112,595,700
97,601,660

4,471,449
23,434,440
7,057,715

1,287,133
19,732,800
4,606,559

3,821,594
7,470,585
104,785,400
20,367,280

10,580,680
17,767,310
6,347,670

Volume

$26.44
$24.83
$24.63

$16.98
$19.54
$18.91

$12.01
$9.25
$11.34
$11.03

$9.53
$11.95
$11.95

$20.98
$21.35
$21.81

$12.53
$11.51
$11.60

$19.74
$21.77
$21.94

$33.87
$36.05
$45.39
$45.71

$548.59
$520.12
$512.51

Price

-2.00%
-6.09%
-0.81%

1.07%
15.08%
-3.22%

1.09%
-22.98%
22.59%
-2.73%

2.69%
25.39%
0.00%

1.40%
1.76%
2.15%

0.72%
-8.14%
0.78%

2.39%
10.28%
0.78%

1.20%
6.44%
25.91%
0.71%

-0.17%
-5.19%
-1.46%

Return

-0.74%
0.40%
0.23%

-0.65%
1.15%
0.46%

-4.34%
-5.80%
-0.83%
-5.47%

-0.63%
-1.10%
2.81%

-0.05%
-0.26%
-0.21%

0.28%
0.69%
0.05%

0.28%
0.69%
0.05%

1.07%
0.36%
0.03%
0.33%

0.76%
-1.19%
0.11%

Market
Return

-1.42%
-0.09%
-0.13%

0.05%
2.58%
-0.64%

n/a
n/a
n/a
n/a

n/a
n/a
n/a

n/a
n/a
n/a

0.65%
1.64%
0.25%

0.65%
1.64%
0.25%

1.85%
0.64%
6.39%
-0.53%

0.63%
-1.86%
-0.66%

Industry
Return

SUMMARY OF EVENT STUDIES

Exhibit 1

-1.30%
0.20%
0.08%

0.19%
2.46%
-1.08%

-4.92%
-6.55%
-1.02%
-6.18%

-0.80%
-1.32%
3.02%

-0.14%
-0.36%
-0.31%

0.64%
1.69%
0.20%

0.46%
1.22%
0.13%

1.99%
0.72%
3.84%
0.02%

0.76%
-1.27%
-0.04%

Predicted
Return

-0.70%
-6.29%
-0.89%

0.88%
12.62%
-2.14%

6.01%
-16.44%
23.62%
3.44%

3.49%
26.72%
-3.02%

1.54%
2.13%
2.46%

0.08%
-9.83%
0.58%

1.93%
9.06%
0.66%

-0.79%
5.72%
22.07%
0.69%

-0.93%
-3.92%
-1.42%

Excess
Return

-$1.66

$2.14

$2.18

$2.55

$0.45

-$1.23

$1.79

$7.96

-$21.50

Excess
Price
Change

Page 2 of 2

-0.44
-3.92 **
-0.55

0.53
7.63 **
-1.29

1.52
-4.14 **
5.95 **
0.87

0.88
6.73 **
-0.76

1.15
1.58
1.83

0.06
-6.75 **
0.40

1.32
6.22 **
0.45

-0.71
5.13 **
19.82 **
0.62

-0.67
-2.82 **
-1.03

t-stat.

Case 1:09-cr-01184-RJH Document 304-1

Filed 08/09/11 Page 19 of 26

DIV
TMT
TAM
TAM
TAM
TMT
DIV

TMT
TAM
DIV

TMT
Goel

GRC
GRC

Profit
Profit
Profit
Profit
Losses Avoided(b)
Profit
Profit

Profit
Losses Avoided(b)
(b)
Losses Avoided

Profit
Profit

Profit
Profit

ATI ($15 August Call Option)

Clearwire

eBay

Google

Google (Put Options)(a)

Hilton

ICST

IDTI

Forensic Economics, Inc.

Google

Goldman Sachs (equity infusion)

Goldman Sachs (Q4'08 earnings)

2,625,000
2,050,000
1,000,000
5,675,000

TAM/GRC
GLT
DIV

Profit
Profit
Profit

ATI

-435,000

1,272,314

400,000
7,500
407,500

-125,000
-10,000
-135,000

610,000

-125,000
-40,000
-165,000

217,200
-150,000

-200,000

385,000

250,000

n/a

-575,000
200,000

-$1.23

$1.79

$7.96
$7.96
$7.96

-$21.50
-$21.50
-$21.50

$2.04

-$21.50
-$21.50
-$21.50

$10.83
-$12.91

-$0.26

$1.07

$2.40

$2.72
$2.72
$2.72
$2.72

n/a

-$7.07
$1.31

[B]

[A]

n/a

TAM
TAM

Profit
Profit

Excess
Price
Change

AMD

Akamai
Akamai ($25 August Put Option)

Manager
Code

Profit or
Losses Avoided

Shares
(+) Held
(-) Shorted
Immediately
Prior to
Announcement
Total
Profit

$535,927

$2,275,932

$3,182,227
$59,667
$3,241,894

$2,687,077
$214,966
$2,902,043

$1,241,374

$2,687,077
$859,865
$3,546,941

$2,352,709
$1,937,185

$52,746

$410,795

$600,000

$7,134,048
$5,571,352
$2,717,733
$15,423,132

n/a

$4,066,874
$261,196

[C] = [A] x [B]

Exhibit 2
UNITED STATES OF AMERICA v. RAJ RAJARATNAM
Insider Trading Profits

$147,316

$2,678,211

$4,093,142
$78,621
$4,171,763

$4,918,750
$393,500
$5,312,250

$7,929,139

$3,675,102
$1,347,550
$5,022,652

$840,990
$3,800,565

$883,973

$851,724

$663,142

$9,584,887
$8,496,473
$4,194,364
$22,275,724

n/a

$4,767,111
$372,740

[D]

Profit
According
to Barnacle

GX 29, OMS Database

GX 28, 3534-A

GX 50, 53, 55-56, 3534-G

GX 60, 62, 3534-J

GX 60, 62, 3534-J

GX 60, 62, 3534-J

GX 71, 74, 3534-B

GX 76-77, 3534-B

GX 24-25, 3534-M

GX 9, 12, 3534-H

GX 21, 3534-K

GX 21, 3534-K

GX 41, 44, 3534-F

GX 40-41, 44, 3534-F

Source

Case 1:09-cr-01184-RJH Document 304-1

Filed 08/09/11 Page 20 of 26

Losses Avoided

Intel

$201,583
$36,358,313

Goel

$393,500
$9,995,730
$63,812,164

$5,137,560
$214,966
$5,352,526
$41,710,839

DIV

Forensic Economics, Inc.

$9,602,230

$3,308,487

TAM

(a) Excess price change based on weighted average excess price change for the $520, $530, $540 and $550 July put options.
(b) Shares sold to avoid loss.
(c) Covered short position to avoid loss.
Note: For option transactions, the number of contracts is multiplied by 100 to reflect the number of underlying shares.

TOTAL PROFIT / LOSSES AVOIDED

Total Losses Avoided by Manager Code:

$230,570
$53,816,434

$3,261,809

GRC

$8,496,473
$6,522,051

$5,571,352
$4,372,383

DIV

$9,584,887

$17,429,088

$8,244,878

$879,981
$98,703
$978,684

$482,960

$102,143
$49,806

$882,915

$1,380,064
$218,292
$1,598,356

[D]

Profit
According
to Barnacle

GLT

$7,134,048

TAM/GRC

$790,389
$83,199
$873,588

$8,311,862

-$1.66
-$1.66
-$1.66

$449,950

$76,380
$65,537

$513,298

$7,505,276

-475,000
-50,000
-525,000

$2.14

$2.55
$2.18

$0.45

$771,752
$111,587
$883,339

[C] = [A] x [B]

Total
Profit

TMT

TMT
DIV

Profit
Profit

Xilinx

210,000

30,000
30,000

1,150,000

$0.45
$0.45
$0.45

[B]

[A]

1,729,044
250,000
1,979,044

Excess
Price
Change

TAM

GRC

Profit

Polycom

Total Profit by Manager Code:

Goel
Goel

Profit
Profit

PeopleSupport (takeover)
PeopleSupport (closing)

TAM

TAM
DIV

Profit
Profit

Intel

(c)

Manager
Code

Profit or
Losses Avoided

Shares
(+) Held
(-) Shorted
Immediately
Prior to
Announcement

GX 35, 37, 3534-E

GX 65, 67, 3534-D

GX 15-16, 3534-L
GX 18-19, 3534-L

GX 4, 6, 3534-N

GX 4, 6, 3534-N

Source

Case 1:09-cr-01184-RJH Document 304-1

Filed 08/09/11 Page 21 of 26

Case 1:09-cr-01184-RJH Document 304-1

Filed 08/09/11 Page 22 of 26

EXHIBIT 3

Case 1:09-cr-01184-RJH Document 304-1

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Case 1:09-cr-01184-RJH Document 304-1

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Case 1:09-cr-01184-RJH Document 304-1

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Case 1:09-cr-01184-RJH Document 304-1

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