A one-time billionaire hedge fund founder tapped ex-classmates and longtime friends at public companies for secrets to earn tens of millions of dollars in illegal profits, a prosecutor said Wednesday at the only trial to result from what the government calls the biggest hedge fund insider-trading probe ever.
"Greed and corruption. That's what this case is all about," Assistant U.S. Attorney Jonathan Streeter told the federal jury in Manhattan at the start of his opening statement in the trial of Raj Rajaratnam, who founded the now defunct Galleon Group LLC family of hedge funds in 1997. Rajaratnam, 53, remained still as Streeter described securities fraud crimes in stark terms, repeatedly pointing at the defendant.
Given his turn, defense lawyer John Dowd said, "the evidence will show the government has it wrong. And the government has it wrong because it believed the word of unbelievable people." He said Rajaratnam spent $300 million annually at Galleon on research and called it the best in the business to the benefit of pension funds, wealthy individuals and hard-working citizens.
For jurors, Dowd countered the image Streeter tried to project of a hard-driving, greedy, win-at-all-costs Wall Street dynamo by saying: "When you invest in mutual funds, you're relying on somebody like Raj to manage your money."
As Streeter told it, Rajaratnam traded on secret information "again and again and again" between 2003 and 2009, going to great lengths to cheat, even offering a job to the wife of someone he wanted to glean inside information from.
"The defendant often knew tomorrow's business news today," he said. "But there was one critical thing he didn't know. He didn't know that the FBI was listening."
The trial comes more than a year after prosecutors announced they had raised the stakes to root out corruption on Wall Street by using wiretaps for the first time on a wide scale to eavesdrop on private conversations of those trading inside information at public companies and at hedge funds. Too often, they said, those calls revealed insider information being passed around casually.
The prosecution of Rajaratnam, first announced with his October 2008 arrest, has been accompanied by the arrest of more than two dozen others. Nineteen of them have pleaded guilty and many are cooperating. It has led to a second probe of research specialists in the financial industry, nine of whom have been arrested in a crackdown on those who disguise inside information as legitimate research.
Rajaratnam has pleaded not guilty to securities fraud and conspiracy to commit securities fraud. He has been free on $100 million bail. Prosecutors tried to have him jailed without bail prior to trial, saying he may have made more than $50 million illegally.
Streeter said Rajaratnam got secrets from several of his former classmates at the University of Pennsylvania's Wharton School as part of his exploitation of "a corrupt network of people."
Rajaratnam paid one of them, Anil Kumar, a former senior partner and director at McKinsey & Co., on a quarterly basis from 2003 to 2006 for inside information, putting the money in the overseas account of Kumar's housekeeper until Kumar's information made him more than $20 million for a single tip in 2006, the prosecutor said. He said Rajaratnam paid Kumar a $1 million bonus for that tip.
Streeter said Kumar will testify.
Dowd said Galleon records prove that Kumar was paid consulting fees for overseas information and that he was hiding what Rajaratnam paid him from the Internal Revenue Service.
"Kumar was the one with something to hide," Dowd said.
Streeter said Rajaratnam also received trips from another Wharton classmate, Rajiv Goel, who was director of strategic investments at Intel Capital, the investment arm of microprocessor maker Intel Corp. until he was arrested in the Galleon probe in October 2009. He pleaded guilty to charges in February 2010.
Streeter told jurors that they would hear Rajaratnam on secretly recorded phone calls before and after he learned inside information but that they wouldn't hear all calls because the government was permitted to tap only one of his phones, leaving him to talk freely at home, at a second office and on his office telephone.
The prosecutor said one call jurors will hear was with fellow employees a day after Rajaratnam learned in October 2008 from a board member at Goldman Sachs that the firm was going to lose money for the first time in its history as a public company.
"I heard yesterday from somebody who's on the board of Goldman Sachs that they're going to lose $2 a share," Streeter said Rajaratnam told employees on the call.
The prosecutor said Wall Street had it "exactly wrong" at the time, expecting Goldman Sachs to earn a profit amid the worst of the economic crisis.
Streeter said Rajaratnam saved millions of dollars by selling all his Goldman stock. A month earlier, he had earned close to $1 million when the same Goldman board member, Rajat Gupta, told him that Goldman had received an offer from Warren Buffett's Berkshire Hathaway to invest $5 billion in the banking giant, Streeter said.
Gupta has not been charged criminally but has been charged civilly by the Securities and Exchange Commission. His lawyer has said he did nothing wrong.
Streeter said other evidence in the case will include phone and trading records and will show Rajaratnam led a campaign to cover his tracks, even advising a co-defendant on how to make trades based on inside information seem legitimate.
Dowd was dismissive of much of the wiretap evidence, saying they did not contain any conversations in which inside information was passed. He was particularly critical of conversations between his client and Rajaratnam's one-time co-defendant, Danielle Chiesi, who claimed during a January guilty plea that she had given inside information to Rajaratnam.
He said the calls contain "a lot of self-promotion and gibberish" but no inside information. "Just a lot of drama," he added.
That, Dowd said, was typical of Rajaratnam, the richest Sri Lankan-born person in the world and a man listed by Forbes in 2009 as the world's 559th wealthiest billionaire, with a net worth of $1.3 billion. Rajaratnam, Dowd has said, is no longer a billionaire.
Dowd did make Rajaratnam sound legendary in financial circles, saying he became the foremost expert on semiconductor companies just when the industry was starting to take off because of the computer revolution, soon after Rajaratnam had become a citizen in 1983, the same year he graduated at the top of his class at Wharton.
"Raj listens. When he's along with people, he tries to make them feel important," he said.
Seated in the spectator section of the courtroom Wednesday was U.S. Attorney Preet Bharara, who has made a point of attacking Wall Street corruption since he began the job just weeks before Rajaratnam's arrest.