Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, March 13, 2011

Rajaratnam on Trial: The First Week

This past week the criminal trial of Raj Rajaratnam on fourteen counts of securities fraud and conspiracy began in Manhattan.  RR is the founder of Galleon Group, a hedge fund, who was arrested in October 2009 and charged with running a vast network of corporate insiders, consultants, Wall Street bankers and traders to make profits through illegal insider trading.  RR maintains his innocence, asserting that his profits were the result of diligent research, and is presenting an aggressive, spare-no-expense defense.  In short, a spectacle worth following for those with an interest in securities fraud and enforcement.  Throughout the trial, expected to last 10 weeks, I'll provide periodic summaries of what has transpired.

On March 8, both the government and the defense presented their opening statements to the jury.  The prosecutor emphasized a network of "greed and corruption" to provide confidential inside information and specifically identified four of RR's associates:  Anil Kumar, former Partner at McKinnsey & Co.; Rajil Goel, former Intel executive; Adam Smith, Galleon portfolio manager; and Rajat Gupta, former director of Goldman and P&G.  The first three have pleaded guilty and are cooperating with the government.  The prosecutor focussed, in particular, on Gupta's alleged tip that Goldman had just approved a $5 billion investment from Warren Buffett, an important transaction that took place during the financial crisis when banks were searching for additional capital.

The defense, in contrast, emphasized his client's research, diligence and hard work in achieving profits.  The attorney made clear that the "mosaic theory" -- collecting bits of detailed, non-material information to form a mosaic on which investment decisions were based -- was an important part of the defense.  (For a good summary of the first day, see NYTimes, It’s Greed vs. a Picture of Solid Research in Galleon Trial)

On March 11, the jury heard three taped telephone conversations between RR and three key figures:  Adam Smith, Anil Kumar, Rajiv Goel.  Much of the government's case is expected to be made on the basis of hundreds of secretly taped conversations, which are of high quality.  (the WSJ has the audioi tapes.)  These conversations took place in 2008 and, according to the government, show that RR was receiving tips on forthcoming deals.  On cross-examination, the defense attempted to show that the conversations were taken out of context.  (For a good summary of the second day, see NYTimes, Galleon Jurors Hear Tapes)

Stay tuned for next week's developments.

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