Wiretaps Play Pivotal Role in Conviction of Hedge Fund Titan Raj Rajaratnam on Insider Trading Charges

On May 11th Raj Rajaratnam, the embattled head of the Galleon Group, a major hedge fund, was found guilty on 14 counts of securities fraud and conspiracy. At his sentencing in July, Rajaratnam faces many, many, many years in jail. The New York jury that convicted Rajaratnam found that he made nearly $64 million from insider tips he obtained from his vast network of corporate executives and other insiders. Trades Mr. Rajaratnam engaged in effected top companies like Goldman Sachs, Google, IBM, and Intel. Rajaratnam paid handsomely for inside tips and confidential information. During his trial, prosecutors were able to show that Rajaratnam paid Anil Kumar, then an executive at the large consulting firm McKinsey & Co., $500,000 a year for tips about a number of the firm’s clients.

Rajaratnam’s trial lasted several weeks and was one of the highest profile insider trading trials in recent memory. On another point, the Rajaratnam trial was noteworthy. Apparently, this was the first insider-trading case in which governmental prosecutors used wiretaps to obtain information on patterns of insider trading. The wiretaps were pivotal in Rajaratnam’s conviction. On one tape-recording, in a conversation about getting an additional McKinsey executive to leak information, Rajaratnam can be heard telling his brother, Rengan, “[e]verybody is a scumbag.”

Rajaratnam has promised to appeal his conviction. This conviction empowers the SEC. The SEC’s is continuing to crackdown on “expert networks,” which I posted about recently. Several other large hedge fund managers are facing damning charges of insider trading on their own. “In the past 18 months, the US Attorney’s Office has charged 47 people with insider trading. Mr. Rajaratnam is the 35th to be convicted.” The action is picking up. The SEC is currently pursuing criminal and administrative proceedings against other individuals linked to Rajaratnam.

Robert Khuzami, the director of enforcement at the SEC, has indicated that the SEC plans to target hedge funds with “aberrational” performance, which in his estimation means hedge funds that are outperforming the market consistently by 3% or more. The SEC’s top watchdog has exposed his deck of cards. Hedge fund managers better watch out. Only time will tell who gets ensnared in the SEC’s web next. What are your thoughts?