Ilya Marritz covers business for WNYC.
When hedge fund boss Raj Rajaratnam was arrested in October 2009 on charges of insider trading, his name was unfamiliar to most. But now the Galleon group founder has the dubious and historic distinction of being convicted in the biggest insider trading case involving hedge funds in U.S. history.
A Manhattan jury on Wednesday convicted the hedge fund boss of on 14 federal fraud and conspiracy charges after prosecutors used wiretapped phone calls and the testimony of cooperating witnesses to prove that Rajaratnam used tips that made his hedge fund more than $60 million in profits.
Rajaratnam now faces up to 25 years and will be sentenced in July.
Shortly after the verdict was announced, John Dowd, Rajaratnam's defense attorney, told reporters outside the court room that he planned to appeal.
"We're going to take an appeal on this conviction," Dowd said. "We'll see you in the 2nd circuit."
Before he was arrested in 2009, his business acumen earned him a spot on Forbes' list of the richest Americans (No. 262), with net worth estimated at $1.8 billion. But prosecutors said Rajaratnam came into riches the wrong way. They accused the former billionaire of insider trading and in the months after he was charged arrested dozens of suspected accomplices.
U.S. Attorney Preet Bharara said the case was special for another reason: investigators relied on wiretaps. The taped conversations were some of the strongest evidence prosecutors presented during the trial.
"When sophisticated business people begin to adopt the methods of common criminals, we have no choice but to treat them as such," he said.
In addition to the tapped conversations the jurors also heard testimony from Lloyd Blankfein, CEO of Goldman Sachs during the trial.
In the fall of 2008, as the financial world was in meltdown, Goldman received a $5 billion cash infusion from the celebrated investor Warren Buffett. Blankfein said he informed board members about it in a conference call on October 23, and expected them to keep the information secret. Sixteen seconds after that call ended, one board member, Rajat Gupta, got on the phone with Rajaratnam. Then, just before the closing bell, Rajaratnam purchased $43 million of Goldman stock.
Wherever possible, Rajaratnam's team tried to raise doubts about the meaning of the tapes, discredit witnesses and emphasize Galleon's legitimate trading and research.
Rajaratnam never took the stand on his own behalf, but he attended the trial regularly, wearing dark suits and drawing little attention to himself.
The Department of Justice has also been criticized for making this a marquee case, when hedge funds played little role in the financial crisis. Insider trading is seen as a largely victimless crime, since losses are spread among so many investors.
Although prosecutors have now tried and convicted the biggest named target, they say the investigation into insider trading in hedge funds is ongoing.