U.S. vs Rajaratnam

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New York – Today marks the first day of the much-awaited Galleon case (U.S. vs. Rajaratnam), where Raj Rajaratnam has been charged with insider trading allegations. These proceedings have been anxiously awaited by the hedge fund community, which is waiting for guidance on how information can be gathered and used in the investment process.

The case is unique in three respects: 1) it is one of the most extensive investigations into insider trading ever; 2) rather than the usual middle management infractions, this case involves the upper echelon on corporate decision makers (even Goldman CEO Lloyd Blankfien may testify); and 3) the courts will allow the evidence from wiretapped telephone conversations recorded between Mr. Rajaratnam and persons with inside information. Another interesting fact – and an attestation to his risk-loving nature – is that Mr. Rajaratnam intends to take the stand in his own defense.

The case will be heard by Southern District Judge, Richard Howell – Preet Bharara is the U.S. Attorney for the Southern District and brought the charges in the case. In the preceding investigation 19 individuals have pled guilty. Today Judge Howell will qualify about 40 jurors with the intent to arriving at 12 jurors and 6 alternates for the case.

One quirky development has been the SEC’s civil suit brought against Rajat Gupta. The suit alleges that, among other instances, Mr. Gupta tipped Mr. Rajaratnam about the impending announcement by Goldman, that Warren Buffet was about to invest $5.0 billion into Goldman Sachs at the height of the financial crisis. Mr. Gupta was the head of McKinsey for a number of years and had taken several board positions including Goldman Sachs and Proctor and Gamble over the ensuing years. Questions about the SEC case include the fact that it is a civil rather than a criminal suit and why the timing was so close to the start of proceedings of this case. Defense council has been vocal about the timing of the charges, alleged potential intent to prejudice the jury.

Indeed, the first witness to be called by the government will be Mr. Kumar, an ex-colleague of Mr. Gupta, who had worked with him for a number of years at McKinsey. Mr. Kumar has already pled guilty to insider charges when he was at McKinsey. The purpose of calling this witness seems to be to cast further dispersions on Mr. Gupta’s character, as far back as his McKinsey days.

The prosecution team includes Manhattan assistant U.S. attorneys Andrew Michaelson, Jonathan Streeter, Joshua Klein, and Reed Brodsky.  The defense team is led by John Dowd and Terence Lynam of Akin Gump Strauss Hauer & Feld. John Dowd is known for his work for Major League Baseball in investigating the gambling activities of Pete Rose. Mr. Dowd is expected to rely heavily on the Mosaic Theory in Mr. Rajaratnam’s defense. The mosaic theory implies that an investment research process, unearths a number of small pieces of information, none of which are inside information, but when these pieces are assembled, they can present a cogent and compelling investment thesis.

The trial is expected to last from 6 to 8 weeks. The ramifications of the case, especially how it may affect investment research, are expected to last much longer.

 

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