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The Fall of Insider Culture?
Rajat Gupta’s tangled web
Rajat Gupta: the ‘Big Fish’ in Wall St ‘tipster’ clean-up Ex-Goldman director Rajat Gupta arrested in Galleon case US pressed me to turn on my friend Rajat Gupta: Rajaratnam The incredibly tangled web that Rajat Gupta wove 04 07 08 10
Is Rajaratnam the whipping boy?
Rajaratnam becomes a ‘whipping boy’ for Wall Street misdeeds Does Rajaratnam deserve 11 years for a ‘victimless crime?’ Rajaratnam sentenced to 11 yrs in prison for insider trading Guilty: Wiretaps sink Rajaratnam in insider trading case 13 16 18 19
The Hedge Fund Industry
SEC promises scrutiny will continue Hedge fund industry shaken, stirred by Rajaratnam verdict 22 25
The South Asia Angle
Raj Rajaratnam: A contest between conflicting narratives What’s so wrong about Wall Street desi boys club? South Asians uncomfortable in glare of Rajaratnam verdict 28 30 31
Rajat Gupta’s tangled web
Rajat Gupta: the ‘Big Fish’ in Wall St ‘tipster’ clean-up Uttara Choudhury Oct 27. “The conduct alleged is not an inadvertent slip of the tongue by Mr Gupta. the US government may be reeling in what it considers the big fish in its crackdown on insider trading on Wall Street. the United States attorney in Manhattan. Connecticut.15 am local time (5. Gupta was accused of leaking confidential information while serving as a director at Goldman Sachs Group Inc. also was charged in a civil insider trading case brought by the US Securities and Exchange Commission.45 pm IST). which arraigned the former Goldman Sachs director on one count of conspiracy to commit securities fraud and five counts of securities fraud. and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders. among their executives and directors. he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate.” said FBI assistant director in charge Janice K Fedarcyk. “As alleged. 2011 New York: In going after high-profile Rajat Gupta. Raj Rajaratnam. who reaped enormous profits from Mr Gupta’s breach of duty.” said Preet Bharara. Gupta. Gupta’s arrest was the latest step in an initiative launched by the FBI in 2007 targeting hedge fund insider trading. His eagerness to pass along inside information to Rajaratnam is nowhere more starkly evident than in the two instances where a total of 39 seconds elapsed between his learning of crucial Goldman Sachs information and lavishing it on his good friend. against whom criminal charges were brought on Wednesday. In a six-count indictment. and Procter & Gamble Co. Criminal charges were brought against Gupta by a federal grand jury in Manhattan. That information (captured by the FBI) was conveyed by phone so quickly it could be termed instant messaging. where he was placed under formal arrest at 8. . 62. on Wednesday and driven to the New York FBI office. “Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms. all related to tips he fed hedge fund Galleon Group co-founder Raj Rajaratnam.” Gupta was picked up by agents from his home in Westport.
Among other things. he was nominated as US attorney for the Southern District of New York. played rough by using wiretaps and strong-arm tactics he first employed against the mob. he called Rajaratnam’s office to share the news. Two minutes before the markets closed that day. 16 seconds after Gupta disconnected from the 23 September 2008 Goldman board meeting (at which the Buffett investment was disclosed). Bharara did several years of white-collar defence work. Gupta’s defence is going to focus on the quid pro quo aspect. They offered Rajaratnam a plea bargain deal in exchange for dirt on Gupta. He became a US citizen at the age of 12 and graduated from Harvard magna cum laude. Prosecutors alleged during the Galleon trial that Gupta gave Rajaratnam information about a $5 billion investment in the bank by Warren Buffett‘s Berkshire Hathaway. always wanted to be a trial lawyer. and did not share . “He did not trade in any securities.000″ the indictment reveals. Gupta’s best defence Typically. Rajaratnam recently told Newsweek that Bharara’s office at least twice — including once two weeks before Rajaratnam’s sentencing — asked him to provide evidence against Gupta.000 shares of Goldman common stock worth $43 million. A day later.Preet Bharara’s crown jewel Bharara. With the possible exception of Michael Milken. Gupta also never traded in any of the securities at issue. Gupta is a big prize for Bharara in fighting white-collar crime. 42. He was born in India’s Ferozepur and came to America two years later. the US government brings insider-trading cases against people who profited directly from trades based on confidential corporate information. Gupta certainly doesn’t fall into that category. Bharara has. The “usual suspects” in insider trading cases are low-level traders and analysts on Wall Street. prosecutors say. which is that Gupta didn’t receive any remuneration for the information that he gave Rajaratnam. He played a key role in the largest mob round-up in recent FBI history by using wiretaps against the Gambino and Colombo crime families. Bharara has charged 46 defendants with insider-trading offenses and procured 30 guilty pleas. Rajaratnam liquidated his position in Goldman and generated an “illegal profit of $840.” Rajaratnam told Newsweek. on 24 September. Goldman tips at the heart of the case The indictment unsealed on Wednesday in a Manhattan federal court stated that during all relevant times. after Goldman made the announcement public and its stock jumped. According to the indictment. In 2009. some say. After Columbia Law School. Gupta invested money in at least two different Galleon funds and formed separate investment and private equity funds with Rajaratnam. To collect those scalps.50. never before has anyone this established and close to the core of corporate America faced such charges. Gupta and Rajaratnam maintained a personal and business relationship. Gupta is the biggest name to be ensnared in Bharara’s widespread insider trading probe. Madoff comes close — but he was always on the periphery of Wall Street. The Galleon case is the crown jewel of his work to date. In less than two years on the job. who lives a quiet suburban life with his wife and three children. “They want to get Rajat. did not tip Mr Rajaratnam so he could trade. Galleon Tech funds purchased 3.
said in response to Wednesday’s charges. Rajaratnam — not the least of which was Mr Gupta’s attempt to obtain information regarding his $10 million investment in the GB Voyager fund managed by Mr Rajaratnam. Naftalis. that could be an effective defence. He moved to the US in 1971 to study at Harvard Business School.” added Naftalis in a statement. Gary P. told Reuters. “There were legitimate reasons for any communications between Mr Gupta and Mr. meanwhile. saying the resignation was unnecessary because he is blameless. ISB has stayed loyal to him. who represented an Ohio State business-school professor convicted in a no-profits insider-trading case in 2005. “If Gupta believed Rajaratnam would keep the information confidential. In fact. although prosecutors are likely to dig hard to try and show Gupta was angling for some future favours. based on the facts of circumstances of their longstanding relationship. Gupta also worked with former President Bill Clinton in leadership roles at the American India Foundation as the chairman of the Global Fund for AIDS. Mr Gupta lost his entire investment in the fund at the time of the events in question. In 1994. Defence lawyers are also likely to argue that Gupta never for a moment thought Rajaratnam would trade on what he was telling him as a friend. said they were confident the accusations based “on circumstantial evidence” couldn’t withstand scrutiny and that Gupta would be exonerated of any wrongdoing. He got corporate executives of major companies to donate millions to start the Indian School of Business (ISB) in Hyderabad. Gupta became the first non-Westerner to lead the blue-blooded consultancy firm.” Thomas Gorman of Dorsey & Whitney. Two years later. at the age of 45. he joined the largely white. . What is sad about Gupta’s Icarus-like fall is that the man obviously loves India and has worked hard after retiring from McKinsey to give back to the community. From small beginnings… The charges are a stunning reversal of fortunes for soft-spoken Gupta who grew up in Kolkata and studied at the Indian Institute of Technology in Delhi. clubby McKinsey & Company. Legal experts say that an absence of a “direct profit motive” does strengthen Gupta’s case. Gupta’s lawyers.” Gupta’s lawyer. Gupta resigned as chairman of the board of directors at ISB in March to save the school embarrassment.in any profits as part of any quid pro quo.
Securities laws prohibit company insiders from divulging corporate secrets to those who then profit from them. a former Goldman Sachs Group director and ex-global head of McKinsey & Co. when the Securities and Exchange Commission filed an administrative proceeding against him accusing him of passing confidential information about Goldman Sachs and Procter & Gamble to Rajaratnam. A native of Kolkata. Gupta had a meteoric rise to corporate success after he graduated from Harvard Business School. 2011 Rajat Gupta. Rajaratnam had been sentenced earlier this month to 11 years in prison.Ex-Goldman director Rajat Gupta arrested in Galleon case Agencies Oct 26. He advised business leaders including General Electric’s Jeffrey Immelt and Henry Kravis of the private equity firm Kohlberg Kravis Roberts & Company. was in FBI custody on Wednesday on criminal charges related to his hedge fund manager friend Raj Rajaratnam. the central figure in a US crackdown on insider trading. . He had also served as special adviser to the United Nations. He came under the scanner after prosecutors charged his Sri Lanka born hedge fund billionaire friend Raj Rajaratnam on insider trading charges. who then traded on the information and profited from it. Gupta was the former director of Goldman Sachs and Procter & Gamble and head of McKinsey & Company. Gupta’s name emerged in the insider trading scheme a week before Rajaratnam’s trial in March. Sixty-two year-old Gupta appeared in Manhattan federal court but it was not immediately known what charges have been slapped against him by the prosecutors.
“They want to get Rajat. The Daily Beast online newspaper reported. Rajat has four daughters. A spokeswoman for Rajaratnam’s lawyers at law firm Akin Gump declined to comment on Monday. declined to comment. despite extensive phone taps and other overwhelming evidence.S. He must report to prison on November 28.” The opinion of a Sri Lankan astrologist combined with a history of suspected persecution led to Rajaratnam’s decision to fight the case.” The Daily Beast quotes the Galleon Group founder as saying. The investigation featured extensive use of secret FBI phone taps. but the hedge fund manager and several of his South Asian business associates and friends were recorded or agreed to be recorded. Such tactics usually are reserved for Mafia and drug trafficking investigations.S. I am not going to do what people did to me. Attorney. McKinsey & Co. Rajaratnam was quoted as saying that he was initially asked on the day of his October 16. the central figure in a sprawling insider trading case. The article said prosecutors asked Sri Lankan-born Rajaratnam again as late as two weeks before his October 13 sentencing in Manhattan federal court. A spokeswoman for the office of the Manhattan U. was convicted by a jury in May on all 14 criminal charges he faced. former Goldman Sachs director Rajat Gupta. who brought the case.” Rajaratnam. 54. “He (the astrologer) said that eventually I would prevail. Gary Naftalis. A spokesman for Gupta’s lawyer. in an interview at his Manhattan apartment where he is under house arrest. referred to previous statements that his client had done nothing wrong and that a civil case brought by the U. the report said. His 11-year prison sentence is the longest ever in an insidertrading case. also a longtime global head of elite consultancy. Securities and Exchange Commission was baseless. Rajaratnam.US pressed me to turn on my friend Rajat Gupta: Rajaratnam Reuters Oct 24. “They wanted me to plea bargain. In his first interview about his case. 2011 ust weeks before fallen hedge fund tycoon Raj Rajaratnam was sentenced to 11 years in prison for insider trading. J . was quoted by the The Daily Beast as saying. 2009 arrest to “wear a wire” and record conversations with Gupta. US prosecutors pressed him to turn on his friend.
” .000 rupees and he’d be sitting having dinner at my house. “Here. The American justice system is by and large fair. I got my shot.Rajaratnam told the newspaper he respected the US justice system. “In Sri Lanka I would have given the judge 50.” Rajaratnam was quoted as saying.
a General Electric spin-off based in Gurgaon that manages business processes.The incredibly tangled web that Rajat Gupta wove Bernice Yeung May 19. the brilliant businessman and regarded philanthropist.S. valued at 93 cents each in 2008. Rajat Gupta ascendancy in global business was a feat of smarts and determination. how the mighty have fallen! The philanthropist who has raised millions for Indian education and healthcare charities. according to SEC filings.000 stock options. paid the consulting firm with 200. went so far astray. the disgraced Galleon hedge fund billionaire convicted of insider trading earlier this month. is now facing a civil case brought by the U. According to Bloomberg: • Gupta and Anil Kumar (another Rajaratnam co-conspirator who pleaded guilty in the Galleon insider trading case) set up a consulting company in 2001 called Mindspirit LLC under their wives’ names. Gupta secretly ran consulting businesses on the side—which often involving Indian companies—while still at the helm of McKinsey. according to Bloomberg.) And what’s more. and was granted more than 81. What happened to his moral compass? Bala Balachandran. Overcome by greed? What’s baffling is why Gupta. But oh. One of Mindspirit’s clients. database company InfoGroup. dean of the Great Lakes Institute of Management in Chennai and a long-time .. 2011 From Kolkata’s lower-middle-class to Harvard Business School to the head of international con- sulting firm McKinsey. Gupta served as an advisory director for Genpact from 2005 to 2007. which was exercised for an undisclosed amount.) McKinsey has since conducted an internal investigation and has implemented stricter rules to make it more difficult for these kinds of conflicts to occur in the future.000 stock options. (SEC filings show that Gupta hasn’t yet exercised the options. Securities and Exchange Commission for passing confidential information to Raj Rajaratnam. Gupta also advised Genpact Ltd. and he could face a monetary fine and could potentially be barred from serving on the boards of public companies. • While on McKinsey’s payroll. which are currently trading at nearly $17 per share. (Gupta’s SEC hearing will take place in July. Gupta’s questionable business behaviour didn’t stop there. In direct violation of the consulting firm’s policies.
” Balachandran says. “You can be successful. told Bloomberg that urgent desire to live a flashy lifestyle may have driven him to make questionable choices: “He wanted a billionaire’s life and the question for him was how could he become a billionaire in a short time.friend.” Connelly told Bloomberg. but if you’re in hedge fund managers’ circles and you’re not rich like them. “You can never underestimate the seductive power of three or more zeroes added to net-worth numbers. you can start asking. ‘Why can’t I get that? I’m every bit as smart. Terry Connelly of the Ageno School of Business at Golden Gate University in San Francisco told Bloomberg that Gupta may have been motivated by a desire to keep up with the superwealthy.’” . Meanwhile.
Chapter 2 Is Rajaratnam the whipping boy? .
” . used inside information to trade in stocks such as Goldman Sachs. he seems so very unlucky for having been one guy among 10. Hilton. and asked him to report to the federal correctional center in North Carolina on 28 November. whose firm’s policy do not allow use of his name. one of the longest prison terms in history for insider trading. The 54-year-old Sri Lankan. a distraction from the fact that none of the meltdown’s central figures have even been indicted. 2011 New York: No one harboured any illusion that Galleon founder Raj Rajaratnam was going to beat the rap for insider trading. “The punishment doesn’t fit the crime. ATI Technologies Inc. He has also found surprisingly vocal support in the blogosphere and in stray media outlets like the Fox Small Business Channel and “The Daily Beast” which noted. The trading generated profits or avoided losses of well over $50 million. prosecutors estimated. Rajaratnam will go to jail for crimes against no one in particular. had no doubt way back in May that Rajaratnam was going to jail but couldn’t help rooting for him: “The poor schmuck! Like some zoo specimen of ecopistes miratorius. Now.” More than 200 letters were written on Rajaratnam’s behalf. he’s a kind of consolation prize. Currently out on a $100 million bail. Google. Like Madoff. Rajaratnam is a victim of prosecutorial overreach. but the courts sent a shock message to Wall Street on Thursday by sentencing the hedge fund billionaire to 11 years in prison. the common pigeon. Rajaratnam was ordered to forfeit $53. a commodity trading advisor. Clearwire Corp and Intel. even though many of his colleagues who stole directly from investors through deceit.” Rick Ackerman who is a partner in Blue Fin Financial LLC. Judge Richard Holwell has denied Rajaratnam’s request to remain free on bail while he appeals his conviction. “Rajaratnam was not a player in the 2008 financial crisis. “Instead of going after the big fish. misrepresentation and gray-area fraud will remain free and unaccused. prosecutors socked it to a first generation immigrant as Raj is not part of the connected-elite.4 million and pay a fine of $10 million.000 quasi-criminals on Wall Street whom the Feds chose to make an example of. This isn’t going to stem illegal exchange of confidential information on Wall Street.” said an investment banker of Indian heritage.Rajaratnam becomes a ‘whipping boy’ for Wall Street misdeeds Uttara Choudhury Oct 14.
Hedge fund industry Rajaratnam’s crimes “reflect a virus in our business culture that needs to be eradicated. a former McKinsey global head who retired in 2007 after becoming the first Indian-born CEO of a big transnational company. to the accused. buddy-buddy phone call to Rajaratnam violated the Goldman’s confidentiality policies. The trial grabbed attention because it exposed the illegal exchange of confidential information on Wall Street.” Rajaratnam’s sentence will reflect the changing attitudes toward financial crimes. Amit Bhatiani. commanding his own financial empire. who became a partner at McKinsey and Rajiv Goel. earlier told Firstpost that the Rajaratnam case exposed the pressures to get an edge in the hedge fund business. Prosecutors maximised the impact of the Gupta tape by calling Goldman Sach’s chairman Lloyd Blankfein to testify that Gupta’s gossipy. Rajaratnam stood at the summit of Wall Street. Prosecutors said Rajaratnam’s sources of information included Rajat Gupta. The saga has diminished Gupta’s reputation. there are South Asian fingerprints all over the sordid Rajaratnam saga. The hedge fund industry has to be more cautious about how it gets information. “It is a sad conclusion to what once seemed to be a glittering story. a Morgan Stanley investment banker. Buchanan Ingersoll & Rooney’s Stuart Slotnick told “The New York Times.” .” Judge Holwell said at the sentencing on Thursday in New York. Kumar testified that he violated client confidentiality and leaked secrets about chipmaker Advanced Micro Devices. who until last year was a director at Goldman Sachs and Kamal Ahmed. In a July 2008 call.” The core of their argument is that insider trading is mostly a “victimless crime” and that nothing Rajaratnam did caused others to lose money. Appealing the sentence “This court’s role is not to validate a prosecutorial public relations effort. They said the federal guideline range overstated the seriousness of Rajaratnam’s crimes.” Manhattan US Attorney Preet Bharara said after the hearing. “Gupta could get a clean chit in the civil suit but it is still a huge embarrassment. who was a managing director at Intel testified against him at the trial. His defense lawyers said they would appeal the sentence to save their client from spending what could be the rest of his life behind bars. nor is it to single out one man to serve as the whipping boy for Wall Street misdeeds.” Rajaratnam’s lawyers argued in court papers. Prosecutors also took the unusual step for a white collar probe by using telephone wiretaps to gather evidence. Anil Kumar. and called the term sought by the US “grotesquely severe. “It has put the hedge fund industry on the back foot rather than South Asians.” said financial research analyst A Subramaniam.” From attorney Bharara who brought the insider trading case. Two of Rajaratnam’s Wharton classmates. to a galaxy of star witnesses. a partner at private equity firm CX Partners. Gupta dishes the dirt on confidential board-privileged M&A discussions regarding Goldman’s interest in acquiring Wachovia or AIG.Spotlight on South Asians “Two years ago.
Watch video of Rajaratnam being sentenced to 11 years in prison .
the high sentencing for white collar crimes is a relatively new thing in the context of growing public suspicion about Wall Street and the Greed Brigade after the crash of Lehman Brothers and the collapse of the American Dream. “His crimes and the scope of his crimes reflect a virus in our business culture that needs to be Two years ago. who was sentenced to 10 years in prison in 1990. says the The Wall Street Journal. When a man of your power in the financial world… repeatedly conspires to violate. not million) through a Ponzi scheme involving his firm Bernard L. white collar criminals got more bark than bite from the US justice system. 2011 eradicated. Among other things.Does Rajaratnam deserve 11 years for a ‘victimless crime?’ R Jagannathan Oct 14. junk bond king of the 1980s. Nick Leeson.” But he was let off within 22 months because he had prostate cancer. Chin used words and phrases like “extraordinary evil” and “unprecedented” while giving Madoff a 150-year sentence. and given his medical condition of . while the latter is reckoned to be an ace philanthropist with Fortune magazine eulogising him as “The Man who changed medicine” in a cover story. Both Leeson and Milken are today wined and dined as celebs. Bernie Madoff got similar stinging rebukes from Judge Denny Chen for causing investors losses of a massive $18 billion (billion. securities and tax business in order to achieve more power and wealth for himself… a significant prison term is required. He is still around. having defeated cancer. At his sentencing. He was let off in three since he. Madoff Investment Securities. While harsh words have always been par for the course in American judgments. Judge Kimba Wood said: “You were willing to commit only crimes that were unlikely to be detected…. Earlier. The former is a regular in the afterdinner and keynote speaking circuit. was diagnosed with cancer. with his cancer in remission. and violates. too. Take the case of Mike Milken. But he is still around.” said US District Judge Richard Holwell before sentencing Galleon founder Raj Rajaratnam to 11 years in prison and a fine of $10 million for insider trading. for his contributions to fighting incurable diseases though his foundation. got six-and-a-half years for his crime in Singapore. the rogue trader who single-handedly brought down Barings Bank. If Rajaratnam has the same luck as Milken and Leeson.
insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest — in keeping prices from lying to the public about corporate realities. the middle ground is best. also quotes an opinion piece in The Wall Street Journal: “Far from being so injurious to the economy that its practice must be criminalised. However. Thus. an online journal of the Wharton School of Business in Pennsylvania. He could. insider trading is not a crime like cheating or defrauding someone else.” Perhaps. So you cannot trust that you are going to get a fair price.advanced diabetes and a kidney on the verge of “imminent failure”. The best way to deal with Rajaratnam’s crime is to ask him to disgorge his profits and pay a stiff penalty for it. When someone is offering to buy or sell. receive a lesser sentence on appeal anyway. It is considered a crime because while the insider has an advantage on the information. especially in the context of Wall Street’s egregious behaviour in recent years. Treat it like a crime where financial gain is penalised by reparations. He is only operating on weaker information.” Insider trading is broadly defined as a crime in which a person who obtains inside information about a company’s performance or a price-sensitive development uses it to make money in the stock market. Reason: the insider’s counter-party in trading is not buying or selling shares unwillingly. barely one in 100 insider traders gets caught in the act. Worldwide. Insider trading cases are notoriously hard to crack. get caught.” But the consensus is clearly moving against this line of thought. Some free-marketeers go so far as to say that insider trading should. You want to give people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that. an Economics Nobel winner. be encouraged or else the market would not know something was in the air. It makes it more risky to buy securities. the moral case for treating insider trading as a crime is disputed by many free marketers. Quoting Wharton finance professor Jeremy Siegel. .” Knowledge@Wharton. because prosecutors have to not only prove that you had inside information. but that you used it to benefit yourself or passed it on to someone who used it. of course. it might be that he or she has some inside information and you are going to get duped. What is significant about the Rajaratnam sentence is that he’s got 11 years for insider trading – which is almost a “victimless crime. Going to jail for a “victimless crime” seems a bit much.” Put another way. he should spend less than his 11 years as Uncle Sam’s guest. The late Milton Friedman. in fact. K@W says: “I think insider trading is not a good thing. Rajaratnam was probably a bit of both. not less. or the very unlucky. Only the very careless. “insider trading means other investors pay more than they should when they buy and get less than they should when they sell. handicapped vis-à-vis the insider. the market does not know the same and is. said in 2003: “You want more insider dealing. therefore.
was ordered on Thursday to serve 11 years in prison. principal figures in a mid-1980s insider-trading case. 2011 New York: Raj Rajaratnam. Defence lawyers had argued that Rajaratnam deserved a much shorter prison term. Intel Corp. Jurors heard dozens of the wiretap recordings during the two-month trial. citing unspecified health problems and arguing that the government was pushing for a punishment more appropriate to a violent criminal. as he appeals his conviction on 14 criminal charges by a New York jury in May.Rajaratnam sentenced to 11 yrs in prison for insider trading Reuters Oct 13. Rajaratnam’s legal battle will go on. IBM and the elite McKinsey & Co consultancy. putting him in a dubious pantheon of Wall Street power players such as takeover specialist Ivan Boesky and junk bond financier Michael Milken. The appeal targets the legality of the FBI wiretaps used to gain evidence that he improperly pumped corporate insiders for confidential data. one of the longest sentences on record in an insider-trading case but less than prosecutors had sought. Prosecutors have called Rajaratnam. Both men served about two years in prison. including Goldman Sachs Group Inc. the “modern face” of insider trading. Prosecutors had asked US District Judge Richard Holwell in Manhattan to impose a sentence of at least 19-1/2 years on the Galleon Group founder. . the central figure in a sweeping criminal case that touched some of America’s top companies. a self-made hedge fund tycoon convicted in the biggest Wall Street trading scandal in a generation. 54.
with people in the tapes explaining what the conversations meant. Intel. He could serve more than 20 years in prison for the crimes. who prosecuted the case. Securities and Exchange Commission (SEC) has called a “massive insider trading scheme” that netted up to $25 million in illict profits.Guilty: Wiretaps sink Rajaratnam in insider trading case Bernice Yeung May 11. many of whom are Indian-American. and Bear Stearns.” Bharara added. it was the secretly taped phone calls that did Raj Rajaratnam in. advancing a theory that Galleon gathered a “mosaic” of readily available information through expert networks and from the public domain. including former executives of IBM. and they apply to everyone.” “The message today is clear—there are rules and there are laws. “Rajaratnam was convinced by a combination of wiretaps and testimony by those who were taped. Attorney Preet Bharara.S.. Jr. who is “among the best and brightest” let “greed and corruption cause his undoing.” John C. The Galleon Group hedge fund chief was found guilty on Wednesday of nine counts of securities fraud and five counts of conspiracy.S. The high-profile case led to charges against 25 defendants.S. 2011 In the end. “That convinced the jury totally. and he pleaded not guilty. Twenty-one pled guilty. his attorney argued that Rajaratnam relied only on public information to make investments. such as newspaper articles. a securities law professor at Columbia Law School told Firstpost. to research its investment decisions. said that Rajaratnam. In a statement. Manhattan U. Sri Lankan-born Rajaratnam was found to have colluded with high-powered friends and business associates at major companies and investment banks to gain material. Coffee. In what the U. Taped calls Rajaratnam’s downfall Rajaratnam was arrested in October 2009 for insider trading. no matter who you are and how much money you have.” Coffee added that it is “unusual” to get a conviction on all 14 counts in a complex securities fraud . government produced at trial as evidence—between Rajaratnam and his colluders. But this theory proved no match for the nine months of secretly taped phone calls—which the U. non-public information that he used to his benefit when trading on the stock market. Rajaratnam will appeal the case. At trial.
but the jury was “convinced by the evidence in each of those episodes. • Intel’s Rajiv Goel gave earnings numbers ahead of the official release date. Goldman Sachs board member Rajat Gupta called Rajaratnam after a meeting to tell the hedge fund chief that Warren Buffet was going to invest $5 billion in the firm.case. .” Examples of the deals that were captured on tape: • In 2008. and that’s as resounding of a victory as the government could hope for. and Rajaratnam bought or sold shares based on the information. Rajaratnam bought stock following the call.
Chapter 3 The Hedge Fund Industry .
Securities and Exchange Commission (SEC).SEC promises scrutiny will continue Sujata Srinivasan May 12. (Rajaratnam was found guilty on all 14 counts of securities fraud and conspiracy. Boards of directors at hedge funds also sit on the boards of large corporations and are therefore privy to information. What kind of ramifications will the growing number of insider trading investigations into this nexus have on the hedge fund industry? Hedge funds are constantly seeking information that gives them an edge in the marketplace relative to their competitors. allege exactly this kind of illegal conduct. The SEC’s recent insider trading actions against several hedge funds. 2011 Sanjay Wadhwa. including Galleon Management and its founder Raj Rajaratnam. that is quite different from a scenario where a trader pays cash to employees of public companies to steal and sell confidential information. Does this make compliance difficult? Hedge funds depend on information that gives them a competitive edge.) Instead. There is nothing inherently wrong with a board member of a public company also being affiliated with a hedge fund. Samir Barai. However. Toward that end. then a violation of the insider trading laws may well have occurred. However. a consultant. if that person shares confidential information belonging to the public company with the hedge fund. What mechanisms should hedge funds have in place so that they don’t end up in the same situation as Barai Capital? . Hedge fund managers depend on moneymaking tips clubbed under the vague and broad non-material information category. which include charges against Barai Capital Management and its founder. and he or she knows or should have known that the hedge fund will trade on such information. or a board member (at the fund). discusses with Sujata Srinivasan the ramifications of insider trading in the hedge fund industry. it is perfectly legitimate for hedge fund managers to consult sources such as academics or analysts about the future performance of any company in the industry that is in their area of research expertise. it is the nature of that information that can make a resulting trade legal or illegal. The SEC’s recent insider trading actions in the expert networks arena. should not be viewed as an attack on the ability of hedge funds to develop market insight by gathering information from different public and private sources. an employee. a senior enforcement official at the U.S. which the trader then uses to trade profitably. whether in the capacity of an investor.
with which the hedge fund does business. The corporate employees.Hedge funds should ensure that the information they gather is legitimate. document production and other means. it should be noted that only conduct that crosses the line has resulted in SEC enforcement action. SEC investigations are fact-finding investigations. it will bring additional charges. In addition. Individuals and entities charged by the SEC include corporate employees who stole and sold confidential information. and take proactive steps to prevent illegal information gathering. These measures. product orders and other similar material information. That said. the decision to charge someone is not based on common mistakes made by the defendant but rather on the totality of the facts gathered in the investigation. and anything less raises red flags for the staff. The expert networks industry should expect the SEC’s scrutiny to continue. top-line revenue. Will the industry see an aggressive crackdown on expert networks. and its processes are designed to ensure that any charges recommended by the staff and any defenses available to the defendant receive close and careful deliberation by the Commission before an action is authorised. However. and prohibit conversations with an expert who is an employee of a public company. However. Given these egregious facts. directly or indirectly through an expert network firm’s employees. where the hedge fund industry is still nascent and poised for growth. Compliance personnel should also have the ability to ask traders hard questions concerning suspiciously well-timed. The SEC has also charged a hedge fund and several hedge fund employees who arranged cash payments to receive this stolen information and trade profitably using that information. profitable trades. The information itself was detailed. But the mere suspicion of such activity can tarnish their credibility. lined their pockets with tens of thousands of dollars in ‘consulting’ fees while the hedge fund tippees made millions of dollars in illicit gains from trading on the information. meaning that the staff seeks to learn the facts through witness testimony. could help a hedge fund root out illegal information gathering before the SEC comes calling. The staff expects truthful and complete responses to its testimony questions and its requests for documents. the SEC’s actions cannot and should not be read as a condemnation of all expert networking firms or the consultants who are associated with them. It is also important to note that the agency is mindful of the impact that an SEC action can have on a defendant’s reputation and future livelihood. among others. going forward? The SEC is actively investigating expert network firms and their consulting arrangements with those who provide information and the traders who pay to receive this information. if the facts warrant it. the SEC’s investigation into the practices of various expert networks is continuing and. whereby compliance officials silently monitor random phone calls between hedge fund employees and consultants. sales. what tips from the SEC can you share with SEBI to prevent fund managers from obtaining non-public information? . The group should set clear guidelines that inform traders what constitutes legitimate information gathering. This could include instituting ‘chaperoned’ conversations. the tippers. the hedge fund might evaluate the controls that are in place at the expert network firm. In India. company-specific information about earnings. What are some common mistakes that well-meaning executives make that can put them in trouble? There are instances where people charged by the SEC are found not liable for the securities law violations that were alleged. Executives can enable compliance by setting up a robust compliance group empowered by the senior management. There are genuine and honest executives who are found not guilty of insider trading allegations.
apart from having their own deterrent effect. . senior SEC staff members have publicly articulated appropriate front-end and back-end controls that could be built around information obtained from expert networks that would minimise the risk arising from consulting with such firms. and to take action aimed at curbing conduct that undermines that vision.For any regulator to effectively oversee an industry. The key is to encourage them to collaborate with the regulator to develop a common vision regarding generally accepted industry practices.S. have underscored the need for investment advisers to have policies and procedures reasonably designed to prevent insider trading. it must actively engage industry participants. The SEC’s recent enforcement actions. such a relationship exists between the SEC and the securities industry. In the U.. To that end.
his attorney. Let’s just say the word GUILTY is a big part of it. . His response was pretty distinctive. one of the hedge fund industry’s most prestigious events of the year.” How will the verdict affect the way hedge funds work? The moneybags are nervous. Wonder why? The Wall Street Journal’s Law Blog reports: “Starbucks offers the kind of bustling environment that can provide cover for individuals during their interactions.” Says lawyer Ira Lee Sorkin: “The Oak Room at the Plaza is now passé. also used a Manhattan Starbucks for covert communications with a consular official from Russia. gosh. The WSJ notes.” Jury verdict transcripts If you want all the inside dope on the jury verdict.. Watch. here are the transcripts of the jury verdict. privately said they had long ago written him off as one of the $2 trillion industry’s ‘bad apples’. Reuters reports: Some hedge fund managers and investors attending a conference (in Las Vegas) audibly gasped when the news flashed on TV screens that Raj Rajaratnam had been convicted on all 14 counts of insider trading. for example. It’s now lattes at Starbucks the government should be focussing on. The role of Starbucks in the case A lot of the action in the case unfolded in Starbucks outlets.” whispered a prominent industry executive. lawyers say. John Dowd was approached by a CNBC team for his reaction. Caught on camera: Raj Rajaratnam’s attorney is mad – and it shows! Soon after Raj Rajaratnam was found guilty of insider trading. Watch. 2011 The howl you hear is of hedge fund managers crying.Hedge fund industry shaken. “Wow. the Russian who admitted to working as spy in the U. I don’t know what to say. that Anna Chapman.S. Several people attending the Skybridge Alternatives Conference. Do they have to do the things they do very differently? A legal eagle weighs in. stirred by Rajaratnam verdict FP Editors May 12.
and the disclosure of secrets from the highest levels of the corporate world. More here. a blonde trader fluent in locker-room language.” reports the Financial Times. A ‘victory for the phone-tapping’ Lawyers say the verdict opens the door to more widespread use of phone-tapping in insider-trading probes.The trial was a drama worthy of Hollywood The case featured “friends-turned government witnesses. Details here. .
Chapter 4 The South Asia Angle .
even though he grew up in a privileged circumstances. I have read only the shorter form that appeared in New Yorker around the same time last year. who was accused of insider trading. It starts with this explosive paragraph: “Every journalist who is not too stupid or too full of himself to notice what is going on knows that what he does is morally indefensible. throughout his career he had close L . He could end up in jail for upto 25 years. at least among us reporters. accused of hiring a hitman to kill her estranged husband. she grew up in Samarkhand and moved to US after the Soviet Union collapsed. the seemliest murmur about earning a living. and a journalist who wrote a book about that. I was reminded of it when I read about the jury verdict of Raj Rajaratnam. published her latest book: Iphigenia in Forest Hills: Anatomy of a Murder Trial.” The Journalist and the Murderer is also based on a trial – of a doctor accused of killing his wife. Janet Malcolm. She belonged to the Bukhran Jewish sect – seen even by some Jews as outsiders – and her dress and accent only highlighted her otherness. preying on people’s vanity. It’s a short book. and both were defended by highly capable lawyers. That aside. in many ways. an outsider in his own land. outsiders.Raj Rajaratnam: A contest between conflicting narratives N S Ramnath May 12. Raj Rajaratnam is a Tamil from Sri Lanka (and some would argue. Borukhova was from Uzbekistan. the defendants were. He is a kind of confidence man. Her most famous book. so the consenting subject of a piece of nonfiction learns – when the article or book appears – his hard lesson. In the book. In Iphigenia in Forest Hill. Mazoltuv Borukhova. The trial in question is of a young doctor. Journalists justify their treachery in various ways according to their temperaments. the least talented talk about Art. Both trials got a lot of media attention. The jury found him guilty. Malcolm uses the trial to raise some serious questions about the process of the trial itself. She was found guilty and sentenced to life. is The Journalist and the Murderer. a New Yorker journalist. It made me think about my profession as no other book on journalism did. gaining their trust and betraying them without remorse. Malcolm turns her attention to the judicial process. ignorance or loneliness. The more pompous talk about freedom of speech and “the public’s right to know”. Like the credulous widow who wakes up one day to find the charming young man and all her savings gone. Anyway. The parallels between the two cases are obvious. it leaves a deep impact. Malcolm has done that before. and like many short books. 2011 ast month.
Perhaps that was the single most important factor that turned the verdict against Rajaratnam. the jury had often turned to these wiretaps for clarification. Janet Malcolm.’ Rajaratnam’s narrative was in many ways strong and credible. or was not allowed to use the wiretaps. Interestingly. His team did spend a lot of time and effort on research. Borukhova had secretly taped conversations she had with the assassin. For reason known only to her. But even as of now. if the prosecution didn’t have those wiretaps. he could have made the same gains by just using the publicly available information. in the case of Rajaratnam. The broad sense one gets out of reading Iphigenia in Forest Hill is that the trial is not so much about the truth as it is about the most consistent and convincing narrative. . who sometimes comes out as very sympathetic to Borukhova.” This is the first time they have used wiretaps for insider trading. it has all the elements of a great novel. In particular. What really weakened his case was the wiretap evidence. Imagine. in various newspaper articles. few had little doubt about the guilt of the accused. which would in turn have meant a weaker narrative. I have no idea where this will go. One of those turned out to be evidence against her. (Some have argued that insider trading should be made legal). and a different verdict.ties with other South Asians. And a great novel always raises questions about the truth. he is expected to challenge the use of secret recordings — tactics historically deployed in organized crime and drug trafficking cases. A trial is ‘a contest between conflicting narratives. not white-collar probes. They were consistent with his mosaic theory of investment. “…Rajaratnam will appeal the case. During the deliberations. And as one of the professors who testified for Rajaratnam showed. That’s evidently what Rajaratnam also believes. In both cases. there is no enigma. says at one point she struggled with the enigma of the case: “She couldn’t have done it. and she must have done it. the most interesting parallel is this: both trials raise questions about truth and the judicial process itself. According to a Reuters report. both trials used secretly taped conversations. To me.” Only. Some of the information he got from his tippers was already in the public domain. however. That would have meant the prosecution turning to circumstantial evidence.
Rajat Gupta are all desis involved in the scandal. only applied. not a strange exotic ethnic-specific hawala style of business. for allegedly criminal ends. in this case. . (Even the prosecutor Preet Bharara is India-born!) Weiss says outsiders can’t help but note this “ethnic clubbiness”. Perhaps the organisers of SAARC should take note. In that case it’s just called networking. the biggest insider trading trial in years. the proliferation of Telegu Associations and Bengali Associations suggests that desis abroad cling to caste and clan with even greater fervour than they did back home. The old boys club shut everyone else out but no one talks about its “ethnic clubbiness”. spelling bees or plum positions in the White House. “Wall Street is no longer a white man’s preserve. Rajiv Goel. The grand gathering of Bengalis every year in the Banga Sammelan is all about the glory of the Bengali language. while Rajaratnam will be judged for his alleged financial shenanigans by the courts. In fact. That Sri Lankan-born Rajaratnam spread his largess among all his South Asian brothers is in itself a sign of progress. he should be congratulated on one count. But even amidst the dulcet tones of Rabindrasangeet. 2011 Desis in North America are finally making news for something other than Pulitzers.” Hmmm. So far so good. Pakistanis. Hedge fund billionaire Raj Rajaratnam’s trial is heading to jury. White is always regarded as the absence of ethnicity. Rengan Rajaratnam. In the US. It’s also a symbol of a changing Wall Street. Presidents of the United States go back to their college buddies and early work days when they appoint staff members. Weiss admits that Wall Street for its first 200 years remained a WASP preserve. Corporate CEOs and heads of non-profits go through their rolodexes when making key hires.” he writes. a former McKinsey executive pleaded guilty to getting $2 million from Rajaratnam for inside information. although for South Aisans “it’s merely an extension of a style of business — working a network of friends and acquaintances — that’s played out for centuries on the subcontinent. That sounds like exactly the way everyone else does business. But then the article goes on to talk about the “insularity” of Indians. Rajaratnam’s college buddy Anil Kumar. Gary Weiss in The Daily Beast has cottoned on to the fact that the trial is not just shining a light on the murky dealings in the world of high finance. He didn’t just benefit the Sri Lankan Tamils and their temple associations. the Bangladeshis complain they are being sidelined by the West Bengalis and the West Bengalis complain about how demanding the Bangladeshis are. Bengalis and Sri Lankans. Desis can be insular but not in the way Weiss imagines.What’s so wrong about Wall Street desi boys club? Sandip Roy Apr 26.
It has . to a galaxy of star witnesses. Suddenly we are not just perceived as conformist. there are South Asian fingerprints all over the sordid Rajaratnam saga.” said financial analyst Kaliyur Venkat. During Wall Street’s halcyon days.” muttered the Indian banker at the World Financial Center before dashing back to the tall. The organiers had to turn away 700 bankers at the door because the venue was filled to bursting. I think there will be this cloud hanging over the South Asian community. to the accused. “Call it the law of large numbers or probability. Deutsche Bank and Credit Suisse than any other minority community. Will the guilty verdict tarnish the growing number of South Asians working on Wall Street? “It’s a big embarrassment. JP Morgan Chase. the insider trading scandal has shocked all the Indian American overachievers. Suddenly news broke that Galleon founder Raj Rajaratnam had been convicted of insider trading and prying illegal information from a cluster of Indian tipsters. 2011 A group of South Asian bankers in spiffy dark suits working next door at Goldman Sachs had slipped into Financier Patisserie in New York’s glass-enclosed World Financial Center for coffee. fortress-like Goldman Sachs headquarters on Vesey Street. “Indian rock stars in the corporate world like Rajat Gupta are teetering. there are more Indians and Chinese in bulge bracket investment banks like Goldman Sachs. India: the Emerging Giant told Firstpost. science. He could get a clean chit in the civil suit but it is a damaging moment. When there are so many South Asians on Wall Street some will inevitably get enmeshed in these incidents.South Asians uncomfortable in glare of Rajaratnam verdict Uttara Choudhury May 12. the second annual “Asians in Wall Street” networking event hosted by Merrill Lynch saw hundreds of Indians fill a 500-seat auditorium. Others feel the only “cultural significance” of the largest insider trading case involving hedge funds is as a signal that South Asians have risen high enough in finance to be entangled in a multimillion-dollar fiasco. According to the industry. From US attorney Preet Bharara who brought the insider trading case. computers and medicine. Undoubtedly. professor of economics at Columbia University and author of the bestselling book. Next year. law-abiding people brilliant at math. There is embarrassment involved but why should every South Asian feel defensive?” Arvind Panagariya. they wisely pulled rank and invited only middle-level and senior bankers.” added Venkat. “It’s an uncomfortable moment.
“Hedge funds strive very hard to get an informational edge but Raj obviously crossed the line. I don’t think you can paint all South Asians as unethical. Gupta dishes the dirt on confidential board-privileged M&A discussions regarding Goldman’s interest in acquiring Wachovia or AIG. buddy-buddy phone call to Rajaratnam violated the investment bank’s confidentiality policies. Gupta won a seat on Goldman Sachs. After his 34 years at McKinsey. “Yes. has testified that he violated client confidentiality. It shouldn’t come as a surprise that Rajaratnam’s personal network embraced other South Asians like Kumar he had studied with in the University of Pennsylvania’s Wharton B-school in the early 1980s.diminished the reputation of former McKinsey global head Rajat Gupta who retired in 2007 after becoming the first Indian-born CEO of a big transnational company. but it still doesn’t mean all South Asians are in the dock. I don’t think it has anything to do with whether you come from the East. This incident has more to do with the hedge fund industry and the pressures to get an edge in the business. Eyebrows are now being raised about the “ethnic clubbiness” of desis on Wall Street but that is a tad unfair as Wall Street is rife with countless cliques that trade tips. He leaked secrets about chipmaker Advanced Micro Devices. Raj’s personal network was South Asian so a lot of his friends are caught up in the scandal. But prosecutors sought to maximise the impact of the Gupta tape by calling Goldman Sach’s chairman Lloyd Blankfein to testify that Gupta’s gossipy.” . The hedge fund industry has to be more cautious about how it gets information. It has put the hedge fund industry on the backfoot rather than South Asians. Anil Kumar.” Amit Bhatiani. a partner at private equity firm CX Partners. In a July 2008 call. West or the middle. told Firstpost. another former McKinsey consultant who has been a trial witness for the government.
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