Galleon Verdict: Implications for Independent Research

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New York – Raj Rajaratnam, the co-founder of Galleon Group LLC, was found guilty of 14 counts today:

A jury of eight women and four men in Manhattan returned its verdict today after hearing evidence that Rajaratnam, 53, engaged in a seven-year conspiracy to trade on inside information from corporate executives, bankers, consultants, traders and directors of public companies including Goldman Sachs Group Inc. (GS) He gained $63.8 million, prosecutors said.

The trial came as Manhattan U.S. Attorney Preet Bharara promised to crack down on “rampant” illegal trading on Wall Street. Rajaratnam was convicted on five counts of conspiracy and nine counts of securities fraud. Prosecutors today said he faces 15 1/2 years to 19 1/2 years in prison at his July 29 sentencing.

“Rajaratnam, once a high-flying billionaire and hedge fund manager, is now a convicted felon, 14 times over,” Bharara said in a statement after the verdict. “Rajaratnam was among the best and the brightest — one of the most educated, successful and privileged professionals in the country. Yet, like so many others recently, he let greed and corruption cause his undoing.”

“We started out with 37 stocks, we’re down to 14,” defense attorney John Dowd said at a press conference outside the courthouse, standing next to his client. “The score is 23 to 14 for the defense. We’ll see you in the Second Circuit.” Dowd said earlier that he would appeal the verdict to the U.S. Court of Appeals for the Second Circuit in Manhattan.

Bharara, who is directing the nationwide probe, said his office has charged 47 people with insider-trading crimes during the past 18 months, and that Rajaratnam is the 35th person to be convicted.

“We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught,” Bharara said in the statement.

Among others charged are executives affiliated with Primary Global Research LLC, a Mountain View, California-based networking firm that links investors with industry experts who work for public companies. A related case against former Galleon trader Zvi Goffer is scheduled for trial next week.

First of all, we are glad to see a clear guilty verdict handed down in this high profile case, as it spells out in stark terms the exact consequences of seeking and trading on insider information. For fund managers who may have thought it was worthwhile to continue to look for material non-public information, this verdict sends a clear warning.

Expert networks, which have already seen a significant drop-off in business as a result of the case centering on Primary Global, are unlikely to be impacted further as a result of this Galleon verdict. This verdict may even marginally help some expert networks with strong compliance systems. They may win business from funds looking to have stronger oversight of expert usage.

By providing closure to the largest insider trading case in a generation,the verdict helps to remove some of the uncertainty from the market for research services. For fund managers who have been in a ‘wait and see’ holding pattern recently regarding their research activities, this verdict may provide some level of security about going forward with legal research methods. As those funds return to doing fundamental research on stocks, this could help independent research and data shops, which remain important inputs to the buy-side research process.

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