Rajaratnam and Rajat

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Rajaratnam and Gupta:The Fall of Insider Culture?


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Contents

Rajat Guptas tangled web

Rajat Gupta: the Big Fish in Wall St tipster clean-up 04Ex-Goldman director Rajat Gupta arrested in Galleon case 07US pressed me to turn on my friend Rajat Gupta: Rajaratnam 08The incredibly tangled web that Rajat Gupta wove 10

Is Rajaratnam the whipping boy?

Rajaratnam becomes a whipping boy for Wall Street misdeeds 13Does Rajaratnam deserve 11 years for a victimless crime? 16Rajaratnam sentenced to 11 yrs in prison for insider trading 18Guilty: Wiretaps sink Rajaratnam in insider trading case 19

The Hedge Fund Industry

SEC promises scrutiny will continue 22Hedge fund industry shaken, stirred by Rajaratnam verdict 25

The South Asia Angle

Raj Rajaratnam: A contest between conicting narratives 28Whats so wrong about Wall Street desi boys club? 30South Asians uncomfortable in glare of Rajaratnam verdict 31


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Chapter 1

Rajat Guptas tangled web


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Rajat Gupta: the Big Fish inWall St tipster clean-up

Uttara ChoudhuryOct 27, 2011

New York: In going after high-prole Rajat Gupta, against whom criminal charges were broughton Wednesday, the US government may be reeling in what it considers the big sh in its crack-down on insider trading on Wall Street.

Criminal charges were brought against Gupta by a federal grand jury in Manhattan, which ar-raigned the former Goldman Sachs director on one count of conspiracy to commit securities fraudand ve counts of securities fraud, all related to tips he fed hedge fund Galleon Group co-founderRaj Rajaratnam.

Gupta, 62, also was charged in a civil insider trading case brought by the US Securities and Ex-

change Commission.

In a six-count indictment, Gupta was accused of leaking condential information while serving asa director at Goldman Sachs Group Inc. and Procter & Gamble Co.

Rajat Gupta was entrusted bysome of the premier institutions of

American business to sit inside theirboardrooms, among their execu-tives and directors, and receive theircondential information so that he

could give advice and counsel for thebenet of their shareholders, saidPreet Bharara, the United States at-torney in Manhattan.

As alleged, he broke that trust andinstead became the illegal eyes andears in the boardroom for his friendand business associate, Raj Rajarat-nam, who reaped enormous prots

from Mr Guptas breach of duty.

Gupta was picked up by agents from his home in Westport, Connecticut, on Wednesday and drivento the New York FBI ofce, where he was placed under formal arrest at 8.15 am local time (5.45 pmIST). Guptas arrest was the latest step in an initiative launched by the FBI in 2007 targeting hedgefund insider trading.

The conduct alleged is not an inadvertent slip of the tongue by Mr Gupta. His eagerness to passalong inside information to Rajaratnam is nowhere more starkly evident than in the two instances

where a total of 39 seconds elapsed between his learning of crucial Goldman Sachs information

and lavishing it on his good friend. That information (captured by the FBI) was conveyed by phoneso quickly it could be termed instant messaging, said FBI assistant director in charge Janice KFedarcyk.


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Preet Bhararas crown jewel

Bharara, 42, who lives a quiet suburban life with his wife and three children, always wanted to bea trial lawyer. He was born in Indias Ferozepur and came to America two years later. He becamea US citizen at the age of 12 and graduated from Harvard magna cum laude. After Columbia LawSchool, Bharara did several years of white-collar defence work. He played a key role in the largestmob round-up in recent FBI history by using wiretaps against the Gambino and Colombo crimefamilies. In 2009, he was nominated as US attorney for the Southern District of New York.

In less than two years on the job, Bharara has charged 46 defendants with insider-trading offensesand procured 30 guilty pleas. The Galleon case is the crown jewel of his work to date. To collectthose scalps, Bharara has, some say, played rough by using wiretaps and strong-arm tactics he rstemployed against the mob.

Gupta is the biggest name to be ensnared in Bhararas widespread insider trading probe. Rajarat-nam recently told Newsweek that Bhararas ofce at least twice including once two weeks beforeRajaratnams sentencing asked him to provide evidence against Gupta. They offered Rajaratnama plea bargain deal in exchange for dirt on Gupta. They want to get Rajat, Rajaratnam told News-

week.

Gupta is a big prize for Bharara in ghting white-collar crime. The usual suspects in insider trad-ing cases are low-level traders and analysts on Wall Street. With the possible exception of MichaelMilken, never before has anyone this established and close to the core of corporate America facedsuch charges. Madoff comes close but he was always on the periphery of Wall Street.

Goldman tips at the heart of the case

The indictment unsealed on Wednesday in a Manhattan federal court stated that during all rele-

vant times, Gupta and Rajaratnam maintained a personal and business relationship. Among otherthings, Gupta invested money in at least two different Galleon funds and formed separate invest-ment and private equity funds with Rajaratnam.

Prosecutors alleged during the Galleon trial that Gupta gave Rajaratnam information about a $5billion investment in the bank by Warren Buffetts Berkshire Hathaway.

According to the indictment, 16 seconds after Gupta disconnected from the 23 September 2008Goldman board meeting (at which the Buffett investment was disclosed), he called Rajaratnamsofce to share the news. Two minutes before the markets closed that day, Galleon Tech funds pur-

chased 3,50,000 shares of Goldman common stock worth $43 million, prosecutors say.

A day later, on 24 September, after Goldman made the announcement public and its stock jumped,Rajaratnam liquidated his position in Goldman and generated an illegal prot of $840,000 theindictment reveals.

Guptas best defence

Typically, the US government brings insider-trading cases against people who proted directlyfrom trades based on condential corporate information. Gupta certainly doesnt fall into thatcategory. Guptas defence is going to focus on the quid pro quo aspect, which is that Gupta didnt

receive any remuneration for the information that he gave Rajaratnam. Gupta also never traded inany of the securities at issue.

He did not trade in any securities, did not tip Mr Rajaratnam so he could trade, and did not share


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in any prots as part of any quid pro quo, Guptas lawyer, Gary P. Naftalis, said in response toWednesdays charges.

There were legitimate reasons for any communications between Mr Gupta and Mr. Rajaratnam not the least of which was Mr Guptas attempt to obtain information regarding his $10 millioninvestment in the GB Voyager fund managed by Mr Rajaratnam. In fact, Mr Gupta lost his entireinvestment in the fund at the time of the events in question, added Naftalis in a statement.

Legal experts say that an absence of a direct prot motive does strengthen Guptas case, al-though prosecutors are likely to dig hard to try and show Gupta was angling for some future fa-

vours.

Defence lawyers are also likely to argue that Gupta never for a moment thought Rajaratnam wouldtrade on what he was telling him as a friend.

If Gupta believed Rajaratnam would keep the information condential, based on the facts ofcircumstances of their longstanding relationship, that could be an effective defence, Thomas Gor-man of Dorsey & Whitney, who represented an Ohio State business-school professor convicted in a

no-prots insider-trading case in 2005, told Reuters.

Guptas lawyers, meanwhile, said they were condent the accusations based on circumstantialevidence couldnt withstand scrutiny and that Gupta would be exonerated of any wrongdoing.

From small beginnings

The charges are a stunning reversal of fortunes for soft-spoken Gupta who grew up in Kolkata andstudied at the Indian Institute of Technology in Delhi. He moved to the US in 1971 to study at Har-

vard Business School. Two years later, he joined the largely white, clubby McKinsey & Company.

In 1994, at the age of 45, Gupta became the rst non-Westerner to lead the blue-blooded consul-tancy rm.

What is sad about Guptas Icarus-like fall is that the man obviously loves India and has workedhard after retiring from McKinsey to give back to the community. He got corporate executives ofmajor companies to donate millions to start the Indian School of Business (ISB) in Hyderabad.Gupta resigned as chairman of the board of directors at ISB in March to save the school embar-rassment. ISB has stayed loyal to him, saying the resignation was unnecessary because he is

blameless.

Gupta also worked with former President Bill Clinton in leadership roles at the American IndiaFoundation as the chairman of the Global Fund for AIDS.


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Ex-Goldman director Rajat Guptaarrested in Galleon case

Agencies Oct 26, 2011

Rajat Gupta, a former Goldman Sachs Group director and ex-global head of McKinsey & Co, wasin FBI custody on Wednesday on criminal charges related to his hedge fund manager friend RajRajaratnam, the central gure in a US crackdown on insider trading.

Sixty-two year-old Gupta appeared in Manhattan federal court but it was not immediately knownwhat charges have been slapped against him by the prosecutors. Gupta was the former director ofGoldman Sachs and Procter & Gamble and head of McKinsey & Company.

He came under the scanner after prose-

cutors charged his Sri Lanka born hedgefund billionaire friend Raj Rajaratnamon insider trading charges. Rajaratnamhad been sentenced earlier this month to11 years in prison.

Securities laws prohibit company insid-ers from divulging corporate secrets tothose who then prot from them.

A native of Kolkata, Gupta had a me-

teoric rise to corporate success afterhe graduated from Harvard BusinessSchool.

He advised business leaders including General Electrics Jeffrey Immelt and Henry Kravis of theprivate equity rm Kohlberg Kravis Roberts & Company. He had also served as special adviser tothe United Nations.

Guptas name emerged in the insider trading scheme a week before Rajaratnams trial in March,when the Securities and Exchange Commission led an administrative proceeding against him

accusing him of passing condential information about Goldman Sachs and Procter & Gamble toRajaratnam, who then traded on the information and proted from it.


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US pressed me to turn on myfriend Rajat Gupta: Rajaratnam

Reuters Oct 24, 2011

Just weeks before fallen hedge fund tycoon Raj Rajaratnam was sentenced to 11 years in prison forinsider trading, US prosecutors pressed him to turn on his friend, former Goldman Sachs directorRajat Gupta, The Daily Beast online newspaper reported.

In his rst interview about his case, Rajaratnam was quoted as saying that he was initially asked onthe day of his October 16, 2009 arrest to wear a wire and record conversations with Gupta, also alongtime global head of elite consultancy, McKinsey & Co.

The article said prosecutors asked Sri Lankan-born Rajaratnam again as late as two weeks beforehis October 13 sentencing in Manhattan federal court.

They wanted me to plea bargain, The Daily Beastquotes the Galleon Group founder as saying, inan interview at his Manhattan apartment where he is under house arrest. They want to get Rajat. Iam not going to do what people did to me. Rajat has four daughters.

The opinion of a Sri Lankan as-trologist combined with a history ofsuspected persecution led to Ra-

jaratnams decision to ght the case,despite extensive phone taps and

other overwhelming evidence, thereport said.

He (the astrologer) said that even-tually I would prevail, Rajaratnam,54, was quoted by the The Daily

Beastas saying.

A spokeswoman for Rajaratnamslawyers at law rm Akin Gump de-

clined to comment on Monday.A spokesman for Guptas lawyer, Gary Naftalis, referred to previous statements that his client haddone nothing wrong and that a civil case brought by the U.S. Securities and Exchange Commission

was baseless.

A spokeswoman for the ofce of the Manhattan U.S. Attorney, who brought the case, declined tocomment.

The investigation featured extensive use of secret FBI phone taps. Such tactics usually are reservedfor Maa and drug trafcking investigations, but the hedge fund manager and several of his South

Asian business associates and friends were recorded or agreed to be recorded.

Rajaratnam, the central gure in a sprawling insider trading case, was convicted by a jury in Mayon all 14 criminal charges he faced. His 11-year prison sentence is the longest ever in an insider-trading case. He must report to prison on November 28.


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Rajaratnam told the newspaper he respected the US justice system.

In Sri Lanka I would have given the judge 50,000 rupees and hed be sitting having dinner at myhouse, Rajaratnam was quoted as saying. Here, I got my shot. The American justice system is byand large fair.


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friend, told Bloomberg that urgent desire to live a ashy lifestyle may have driven him to makequestionable choices:

He wanted a billionaires life and the question for him was how could he become a billionaire in ashort time, Balachandran says.

Meanwhile, Terry Connelly of the Ageno School of Business at Golden Gate University in San Fran-cisco told Bloomberg that Gupta may have been motivated by a desire to keep up with the super-

wealthy.

You can never underestimate the seductive power of three or more zeroes added to net-worthnumbers, Connelly told Bloomberg. You can be successful, but if youre in hedge fund managerscircles and youre not rich like them, you can start asking, Why cant I get that? Im every bit assmart.


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Chapter 2

Is Rajaratnam the whipping boy?


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Rajaratnam becomes a whippingboy for Wall Street misdeeds

Uttara ChoudhuryOct 14, 2011

New York: No one harboured any illusion that Galleon founder Raj Rajaratnam was going to beatthe rap for insider trading, but the courts sent a shock message to Wall Street on Thursday by sen-tencing the hedge fund billionaire to 11 years in prison, one of the longest prison terms in historyfor insider trading.

The 54-year-old Sri Lankan, used inside information to trade in stocks such as Goldman Sachs,Google, Hilton, ATI Technologies Inc, Clearwire Corp and Intel. The trading generated prots oravoided losses of well over $50 million, prosecutors estimated.

Rajaratnam was ordered to forfeit $53.4 million and pay a ne of $10 million. Currently out on a

$100 million bail, Judge Richard Holwell has denied Rajaratnams request to remain free on bailwhile he appeals his conviction, and asked him to report to the federal correctional center in NorthCarolina on 28 November.

The punishment doesnt t the crime. Rajaratnam is a victim of prosecutorial overreach, said aninvestment banker of Indian heritage, whose rms policy do not allow use of his name.

Instead of going after the bigsh, prosecutors socked it to arst generation immigrant as Raj

is not part of the connected-elite.This isnt going to stem illegalexchange of condential informa-tion on Wall Street.

More than 200 letters were writ-ten on Rajaratnams behalf. Hehas also found surprisingly vocalsupport in the blogosphere and instray media outlets like the Fox

Small Business Channel and TheDaily Beast which noted; Ra-jaratnam was not a player in the2008 nancial crisis. Like Mad-off, hes a kind of consolationprize, a distraction from the fact that none of the meltdowns central gures have even been in-dicted.

Rick Ackerman who is a partner in Blue Fin Financial LLC, a commodity trading advisor, had nodoubt way back in May that Rajaratnam was going to jail but couldnt help rooting for him: Thepoor schmuck! Like some zoo specimen of ecopistes miratorius, the common pigeon, he seems

so very unlucky for having been one guy among 10,000 quasi-criminals on Wall Street whom theFeds chose to make an example of. Now, Rajaratnam will go to jail for crimes against no one inparticular, even though many of his colleagues who stole directly from investors through deceit,misrepresentation and gray-area fraud will remain free and unaccused.


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Spotlight on South Asians

Two years ago, Rajaratnam stood at the summit of Wall Street, commanding his own nancialempire, Manhattan US Attorney Preet Bharara said after the hearing. It is a sad conclusion to

what once seemed to be a glittering story.

From attorney Bharara who brought the insider trading case, to the accused, to a galaxy of star wit-nesses, there are South Asian ngerprints all over the sordid Rajaratnam saga. The trial grabbedattention because it exposed the illegal exchange of condential information on Wall Street. Pros-ecutors also took the unusual step for a white collar probe by using telephone wiretaps to gatherevidence.

Prosecutors said Rajaratnams sources of information included Rajat Gupta, who until last yearwas a director at Goldman Sachs and Kamal Ahmed, a Morgan Stanley investment banker. Thesaga has diminished Guptas reputation, a former McKinsey global head who retired in 2007 after

becoming the rst Indian-born CEO of a big transnational company.

Prosecutors maximised the impact of the Gupta tape by calling Goldman Sachs chairman Lloyd

Blankfein to testify that Guptas gossipy, buddy-buddy phone call to Rajaratnam violated the Gold-mans condentiality policies. In a July 2008 call, Gupta dishes the dirt on condential board-priv-ileged M&A discussions regarding Goldmans interest in acquiring Wachovia or AIG.

Gupta could get a clean chit in the civil suit but it is still a huge embarrassment, said nancialresearch analyst A Subramaniam.

Two of Rajaratnams Wharton classmates, Anil Kumar, who became a partner at McKinsey andRajiv Goel, who was a managing director at Intel testied against him at the trial. Kumar testiedthat he violated client condentiality and leaked secrets about chipmaker Advanced Micro Devices.

Appealing the sentence

This courts role is not to validate a prosecutorial public relations effort, nor is it to single out oneman to serve as the whipping boy for Wall Street misdeeds, Rajaratnams lawyers argued in courtpapers.

His defense lawyers said they would appeal the sentence to save their client from spending whatcould be the rest of his life behind bars. They said the federal guideline range overstated the seri-ousness of Rajaratnams crimes, and called the term sought by the US grotesquely severe. The

core of their argument is that insider trading is mostly a victimless crime and that nothing Ra-jaratnam did caused others to lose money.

Hedge fund industry

Rajaratnams crimes reect a virus in our business culture that needs to be eradicated, JudgeHolwell said at the sentencing on Thursday in New York.

Amit Bhatiani, a partner at private equity rm CX Partners, earlier told Firstpost that the Rajarat-nam case exposed the pressures to get an edge in the hedge fund business; It has put the hedgefund industry on the back foot rather than South Asians. The hedge fund industry has to be more

cautious about how it gets information.

Rajaratnams sentence will reect the changing attitudes toward nancial crimes, Buchanan Inger-soll & Rooneys Stuart Slotnick told The New York Times.


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Watch video of Rajaratnam being sentenced to 11 years in prison
http://av.firstpost.com/2011/10/rajarataman_11yr_term.mp4


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Does Rajaratnam deserve 11 yearsfor a victimless crime?

R Jagannathan Oct 14, 2011

His crimes and the scope of his crimes reect a virus in our business culture that needs to beeradicated, said US District Judge Richard Holwell before sentencing Galleon founder Raj Ra-

jaratnam to 11 years in prison and a ne of $10 million for insider trading.

Two years ago, Bernie Madoff got similar stinging rebukes from Judge Denny Chen for causinginvestors losses of a massive $18 billion (billion, not million) through a Ponzi scheme involving hisrm Bernard L. Madoff Investment Securities. Among other things, Chin used words and phraseslike extraordinary evil and unprecedented while giving Madoff a 150-year sentence, says theThe Wall Street Journal.

While harsh words have always been par for the course in American judgments, the high sentenc-ing for white collar crimes is a relatively new thing in the context of growing public suspicion about

Wall Street and the Greed Brigade after the crash of Lehman Brothers and the collapse of theAmerican Dream.

Earlier, white collar criminals gotmore bark than bite from the US jus-tice system.

Take the case of Mike Milken, junkbond king of the 1980s, who was sen-tenced to 10 years in prison in 1990.

At his sentencing, Judge Kimba Woodsaid: You were willing to commit onlycrimes that were unlikely to be detect-ed. When a man of your power in thenancial world repeatedly conspiresto violate, and violates, securities andtax business in order to achieve morepower and wealth for himself a sig-

nicant prison term is required.

But he was let off within 22 months because he had prostate cancer. But he is still around, with hiscancer in remission.

Nick Leeson, the rogue trader who single-handedly brought down Barings Bank, got six-and-a-halfyears for his crime in Singapore. He was let off in three since he, too, was diagnosed with cancer.He is still around, having defeated cancer.

Both Leeson and Milken are today wined and dined as celebs. The former is a regular in the after-

dinner and keynote speaking circuit, while the latter is reckoned to be an ace philanthropist withFortune magazine eulogising him as The Man who changed medicine in a cover story, for hiscontributions to ghting incurable diseases though his foundation.

If Rajaratnam has the same luck as Milken and Leeson, and given his medical condition of


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advanced diabetes and a kidney on the verge of imminent failure, he should spend less than his11 years as Uncle Sams guest. He could, of course, receive a lesser sentence on appeal anyway.

What is signicant about the Rajaratnam sentence is that hes got 11 years for insider trading which is almost a victimless crime.

Insider trading is broadly dened as a crime in which a person who obtains inside informationabout a companys performance or a price-sensitive development uses it to make money in thestock market. It is considered a crime because while the insider has an advantage on the informa-tion, the market does not know the same and is, therefore, handicapped vis--vis the insider.

Insider trading cases are notoriously hard to crack, because prosecutors have to not only prove thatyou had inside information, but that you used it to benet yourself or passed it on to someone whoused it. Worldwide, barely one in 100 insider traders gets caught in the act. Only the very careless,or the very unlucky, get caught. Rajaratnam was probably a bit of both.

However, the moral case for treating insider trading as a crime is disputed by many free marketers.Reason: the insiders counter-party in trading is not buying or selling shares unwillingly. He is only

operating on weaker information. Thus, insider trading is not a crime like cheating or defraudingsomeone else.

Some free-marketeers go so far as to say that insider trading should, in fact, be encouraged or elsethe market would not know something was in the air. The late Milton Friedman, an Economics No-

bel winner, said in 2003: You want more insider dealing, not less. You want to give people mostlikely to have knowledge about deciencies of the company an incentive to make the public awareof that.

Knowledge@Wharton, an online journal of the Wharton School of Business in Pennsylvania, also

quotes an opinion piece in The Wall Street Journal: Far from being so injurious to the economythat its practice must be criminalised, insiders buying and selling stocks based on their knowledgeplay a critical role in keeping asset prices honest in keeping prices from lying to the public aboutcorporate realities.

But the consensus is clearly moving against this line of thought, especially in the context of WallStreets egregious behaviour in recent years. Quoting Wharton nance professor Jeremy Siegel,

K@W says: I think insider trading is not a good thing. It makes it more risky to buy securities.When someone is offering to buy or sell, it might be that he or she has some inside informationand you are going to get duped. So you cannot trust that you are going to get a fair price. Put

another way, insider trading means other investors pay more than they should when they buy andget less than they should when they sell.

Perhaps, the middle ground is best. Treat it like a crime where nancial gain is penalised by repa-rations. Going to jail for a victimless crime seems a bit much. The best way to deal with Rajarat-nams crime is to ask him to disgorge his prots and pay a stiff penalty for it.


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Rajaratnam sentenced to 11 yrs inprison for insider trading

Reuters Oct 13, 2011

New York: Raj Rajaratnam, a self-made hedge fund tycoon convicted in the biggest Wall Streettrading scandal in a generation, was ordered on Thursday to serve 11 years in prison, one of thelongest sentences on record in an insider-trading case but less than prosecutors had sought.

Prosecutors had asked US District Judge Richard Holwell in Manhattan to impose a sentence of atleast 19-1/2 years on the Galleon Group founder, the central gure in a sweeping criminal case thattouched some of Americas top companies, including Goldman Sachs Group Inc, Intel Corp, IBMand the elite McKinsey & Co consultancy.

Defence lawyers had argued thatRajaratnam deserved a much short-er prison term, citing unspeciedhealth problems and arguing thatthe government was pushing for apunishment more appropriate to a

violent criminal.

Prosecutors have called Rajarat-nam, 54, the modern face of insid-

er trading, putting him in a dubiouspantheon of Wall Street power play-ers such as takeover specialist IvanBoesky and junk bond nancierMichael Milken, principal gures ina mid-1980s insider-trading case.Both men served about two years inprison.

Rajaratnams legal battle will go on, as he appeals his conviction on 14 criminal charges by a NewYork jury in May. The appeal targets the legality of the FBI wiretaps used to gain evidence that he

improperly pumped corporate insiders for condential data. Jurors heard dozens of the wiretaprecordings during the two-month trial.


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Guilty: Wiretaps sink Rajaratnamin insider trading case

Bernice Yeung May 11, 2011

In the end, it was the secretly taped phone calls that did Raj Rajaratnam in.

The Galleon Group hedge fund chief was found guilty on Wednesday of nine counts of securitiesfraud and ve counts of conspiracy. He could serve more than 20 years in prison for the crimes.

In what the U.S. Securities and Exchange Commission (SEC) has called a massive insider tradingscheme that netted up to $25 million in illict prots, Sri Lankan-born Rajaratnam was found tohave colluded with high-powered friends and business associates at major companies and invest-ment banks to gain material, non-public information that he used to his benet when trading onthe stock market.

The high-prole case led to charges against 25 defendants. Twenty-one pled guilty, includingformer executives of IBM, Intel, and Bear Stearns.

In a statement, Manhattan U.S. Attorney Preet Bharara, who prosecuted the case, said that Ra-jaratnam, who is among the best and brightest let greed and corruption cause his undoing.

The message today is clearthere are rules and there are laws, and they apply to everyone, nomatter who you are and how much money you have, Bharara added.

Rajaratnam will appeal the case.

Taped calls Rajaratnams downfall

Rajaratnam was arrested in Octo-ber 2009 for insider trading, and hepleaded not guilty. At trial, his attorneyargued that Rajaratnam relied onlyon public information to make invest-ments, advancing a theory that Galleongathered a mosaic of readily available

information through expert networksand from the public domain, such asnewspaper articles, to research its in-

vestment decisions.

But this theory proved no match for the

nine months of secretly taped phone callswhich the U.S. government produced at trial as evi-dencebetween Rajaratnam and his colluders, many of whom are Indian-American.

Rajaratnam was convinced by a combination of wiretaps and testimony by those who were taped,

with people in the tapes explaining what the conversations meant, John C. Coffee, Jr., a securitieslaw professor at Columbia Law School told Firstpost. That convinced the jury totally.

Coffee added that it is unusual to get a conviction on all 14 counts in a complex securities fraud


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case, but the jury was convinced by the evidence in each of those episodes, and thats as resound-ing of a victory as the government could hope for.

Examples of the deals that were captured on tape:

In 2008, Goldman Sachs board member Rajat Gupta called Rajaratnam after a meeting to tell thehedge fund chief that Warren Buffet was going to invest $5 billion in the rm. Rajaratnam boughtstock following the call.

Intels Rajiv Goel gave earnings numbers ahead of the ofcial release date, and Rajaratnambought or sold shares based on the information.


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Chapter 3

The Hedge Fund Industry


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SEC promises scrutiny willcontinue

Sujata Srinivasan May 12, 2011

Sanjay Wadhwa, a senior enforcement ofcial at the U.S. Securities and Exchange Commission(SEC), discusses with Sujata Srinivasan the ramications of insider trading in the hedge fund in-dustry.

Boards of directors at hedge funds also sit on the boards of large corporations and are thereforeprivy to information. What kind of ramications will the growing number of insider trading inves-tigations into this nexus have on the hedge fund industry?

Hedge funds are constantly seeking information that gives them an edge in the marketplace rela-tive to their competitors. The SECs recent insider trading actions against several hedge funds,

including Galleon Management and its founder Raj Rajaratnam, should not be viewed as an attackon the ability of hedge funds to develop market insight by gathering information from differentpublic and private sources. (Rajaratnam was found guilty on all 14 counts of securities fraud andconspiracy.) Instead, it is the nature of that information that can make a resulting trade legal orillegal.

There is nothing inherently wrong with a board member of a public company also being afliatedwith a hedge fund, whether in the capacity of an investor, a consultant, an employee, or a boardmember (at the fund). However, if that person shares condential information belonging to thepublic company with the hedge fund, and he or she knows or should have known that the hedge

fund will trade on such information, then a violation of the insider trading laws may well have oc-curred.

Hedge fund managers depend on money-making tips clubbed under the vague andbroad non-material information category.

Does this make compliance difcult?

Hedge funds depend on information thatgives them a competitive edge. Toward that

end, it is perfectly legitimate for hedge fundmanagers to consult sources such as aca-demics or analysts about the future perform-ance of any company in the industry that isin their area of research expertise. However,that is quite different from a scenario wherea trader pays cash to employees of public

companies to steal and sell condential information, which the trader then uses to trade prot-ably. The SECs recent insider trading actions in the expert networks arena, which include chargesagainst Barai Capital Management and its founder, Samir Barai, allege exactly this kind of illegalconduct.

What mechanisms should hedge funds have in place so that they dont end up in the same situa-tion as Barai Capital?


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Hedge funds should ensure that the information they gather is legitimate. Executives can enablecompliance by setting up a robust compliance group empowered by the senior management. Thegroup should set clear guidelines that inform traders what constitutes legitimate information gath-ering, and take proactive steps to prevent illegal information gathering. This could include institut-ing chaperoned conversations, whereby compliance ofcials silently monitor random phone calls

between hedge fund employees and consultants.

In addition, the hedge fund might evaluate the controls that are in place at the expert networkrm, with which the hedge fund does business, and prohibit conversations with an expert who isan employee of a public company. Compliance personnel should also have the ability to ask tradershard questions concerning suspiciously well-timed, protable trades. These measures, among oth-ers, could help a hedge fund root out illegal information gathering before the SEC comes calling.

Will the industry see an aggressive crackdown on expert networks, going forward?

The SEC is actively investigating expert network rms and their consulting arrangements withthose who provide information and the traders who pay to receive this information. The expertnetworks industry should expect the SECs scrutiny to continue. However, it should be noted that

only conduct that crosses the line has resulted in SEC enforcement action. Individuals and entitiescharged by the SEC include corporate employees who stole and sold condential information, di-rectly or indirectly through an expert network rms employees. The SEC has also charged a hedgefund and several hedge fund employees who arranged cash payments to receive this stolen infor-mation and trade protably using that information.

The corporate employees, the tippers, lined their pockets with tens of thousands of dollars in con-sulting fees while the hedge fund tippees made millions of dollars in illicit gains from trading onthe information. The information itself was detailed, company-specic information about earn-ings, sales, top-line revenue, product orders and other similar material information. Given these

egregious facts, the SECs actions cannot and should not be read as a condemnation of all expertnetworking rms or the consultants who are associated with them. That said, the SECs investiga-tion into the practices of various expert networks is continuing and, if the facts warrant it, it will

bring additional charges.

There are genuine and honest executives who are found not guilty of insider trading allegations.But the mere suspicion of such activity can tarnish their credibility. What are some common mis-takes that well-meaning executives make that can put them in trouble?

There are instances where people charged by the SEC are found not liable for the securities law

violations that were alleged. However, the decision to charge someone is not based on commonmistakes made by the defendant but rather on the totality of the facts gathered in the investigation.SEC investigations are fact-nding investigations, meaning that the staff seeks to learn the factsthrough witness testimony, document production and other means. The staff expects truthful andcomplete responses to its testimony questions and its requests for documents, and anything lessraises red ags for the staff.

It is also important to note that the agency is mindful of the impact that an SEC action can have ona defendants reputation and future livelihood, and its processes are designed to ensure that anycharges recommended by the staff and any defenses available to the defendant receive close andcareful deliberation by the Commission before an action is authorised.

In India, where the hedge fund industry is still nascent and poised for growth, what tips from theSEC can you share with SEBI to prevent fund managers from obtaining non-public information?


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For any regulator to effectively oversee an industry, it must actively engage industry participants.The key is to encourage them to collaborate with the regulator to develop a common vision regard-ing generally accepted industry practices, and to take action aimed at curbing conduct that under-mines that vision.

In the U.S., such a relationship exists between the SEC and the securities industry. The SECs re-cent enforcement actions, apart from having their own deterrent effect, have underscored the needfor investment advisers to have policies and procedures reasonably designed to prevent insidertrading. To that end, senior SEC staff members have publicly articulated appropriate front-endand back-end controls that could be built around information obtained from expert networks that

would minimise the risk arising from consulting with such rms.


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Hedge fund industry shaken,stirred by Rajaratnam verdict

FP Editors May 12, 2011

The howl you hear is of hedge fund managers crying.Reuters reports:

Some hedge fund managers and investors attending a conference (in Las Vegas) audibly gaspedwhen the news ashed on TV screens that Raj Rajaratnam had been convicted on all 14 counts ofinsider trading.

Wow, gosh. I dont know what to say, whispered a prominent industry executive.

Several people attending the Skybridge Alternatives Conference, one of the hedge fund industrysmost prestigious events of the year, privately said they had long ago written him off as one of the$2 trillion industrys bad apples.

How will the verdict affect the way hedge funds work?The moneybags are nervous. Do they have to do the things they do very differently? A legal eagle

weighs in.Watch.

Caught on camera: Raj Rajarat-nams attorney is mad and itshows!Soon after Raj Rajaratnam was found

guilty of insider trading, his attorney,John Dowd was approached by aCNBC team for his reaction. His re-sponse was pretty distinctive. Watch.

The role of Starbucks in thecase

A lot of the action in the case unfold-ed in Starbucks outlets. Wonder why?

The Wall Street JournalsLaw Blogreports:

Starbucks offers the kind of bustling environment that can provide cover for individuals duringtheir interactions, lawyers say. The WSJ notes, for example, that Anna Chapman, the Russian whoadmitted to working as spy in the U.S., also used a Manhattan Starbucks for covert communica-tions with a consular ofcial from Russia.

Says lawyer Ira Lee Sorkin: The Oak Room at the Plaza is now pass. Its now lattes at Starbucksthe government should be focussing on.

Jury verdict transcriptsIf you want all the inside dope on the jury verdict, here are the transcripts of the jury verdict. Lets

just say the word GUILTY is a big part of it.
http://www.reuters.com/article/2011/05/11/galleon-hedgefundmanagers-idUSN1118369020110511http://online.wsj.com/video/will-the-galleon-verdict-affect-hedge-funds/49F60AE5-CF67-4429-A4B4-A8D5AB5D6A92.html?mod=djemlawblog_hhttp://blogs.wsj.com/law/2011/05/11/starbucks-cameo-role-in-the-galleon-trial/?mod=djemlawblog_hhttp://blogs.wsj.com/law/2011/05/11/starbucks-cameo-role-in-the-galleon-trial/?mod=djemlawblog_hhttp://online.wsj.com/public/resources/documents/GalleonVerdict.pdfhttp://online.wsj.com/public/resources/documents/GalleonVerdict.pdfhttp://blogs.wsj.com/law/2011/05/11/starbucks-cameo-role-in-the-galleon-trial/?mod=djemlawblog_hhttp://blogs.wsj.com/law/2011/05/11/starbucks-cameo-role-in-the-galleon-trial/?mod=djemlawblog_hhttp://online.wsj.com/video/will-the-galleon-verdict-affect-hedge-funds/49F60AE5-CF67-4429-A4B4-A8D5AB5D6A92.html?mod=djemlawblog_hhttp://www.reuters.com/article/2011/05/11/galleon-hedgefundmanagers-idUSN1118369020110511


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The trial was a drama worthy of HollywoodThe case featured friends-turned government witnesses, a blonde trader uent in locker-roomlanguage, and the disclosure of secrets from the highest levels of the corporate world, reports theFinancial Times. Details here.

A victory for the phone-tappingLawyers say the verdict opens the door to more widespread use of phone-tapping in insider-trad-ing probes. More here.
http://www.ft.com/cms/s/0/efb52e6e-71ab-11e0-9adf-00144feabdc0.html#axzz1M6FXrcXZhttp://www.ft.com/cms/s/0/d218d0d8-71ae-11e0-9adf-00144feabdc0.html#axzz1M6FXrcXZhttp://www.ft.com/cms/s/0/d218d0d8-71ae-11e0-9adf-00144feabdc0.html#axzz1M6FXrcXZhttp://www.ft.com/cms/s/0/efb52e6e-71ab-11e0-9adf-00144feabdc0.html#axzz1M6FXrcXZ


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Chapter 4

The South Asia Angle


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Raj Rajaratnam: A contestbetween conicting narratives

N S Ramnath May 12, 2011

Last month, Janet Malcolm, a New Yorker journalist, published her latest book: Iphigenia in For-est Hills: Anatomy of a Murder Trial. The trial in question is of a young doctor, Mazoltuv Borukho-

va, accused of hiring a hitman to kill her estranged husband. She was found guilty and sentencedto life. In the book, Malcolm uses the trial to raise some serious questions about the process of thetrial itself.

Malcolm has done that before. Her most famous book, at least among us reporters, is The Jour-nalist and the Murderer. It starts with this explosive paragraph: Every journalist who is not toostupid or too full of himself to notice what is going on knows that what he does is morally indefen-sible. He is a kind of condence man, preying on peoples vanity, ignorance or loneliness, gaining

their trust and betraying them without remorse. Like the credulous widow who wakes up one dayto nd the charming young man and all her savings gone, so the consenting subject of a piece ofnonction learns when the article or book appears his hard lesson. Journalists justify theirtreachery in various ways according to their temperaments. The more pompous talk about freedomof speech and the publics right to know; the least talented talk about Art; the seemliest murmurabout earning a living.

The Journalist and the Murdereris also based on a trial of a doc-tor accused of killing his wife, and a

journalist who wrote a book aboutthat. Its a short book, and like manyshort books, it leaves a deep impact.It made me think about my profes-sion as no other book on journalismdid.

In Iphigenia in Forest Hill, Malcolmturns her attention to the judicialprocess. I have read only the shorter

form that appeared in New Yorkeraround the same time last year.I was reminded of it when I readabout the jury verdict of Raj Rajarat-

nam, who was accused of insider trading. The jury found him guilty. He could end up in jail forupto 25 years.

The parallels between the two cases are obvious. Both trials got a lot of media attention, and bothwere defended by highly capable lawyers. That aside, the defendants were, in many ways, out-siders. Borukhova was from Uzbekistan; she grew up in Samarkhand and moved to US after the

Soviet Union collapsed. She belonged to the Bukhran Jewish sect seen even by some Jews asoutsiders and her dress and accent only highlighted her otherness.

Raj Rajaratnam is a Tamil from Sri Lanka (and some would argue, an outsider in his own land,even though he grew up in a privileged circumstances. Anyway, throughout his career he had close


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ties with other South Asians. Interestingly, both trials used secretly taped conversations. For rea-son known only to her, Borukhova had secretly taped conversations she had with the assassin. Oneof those turned out to be evidence against her. In both cases, few had little doubt about the guilt ofthe accused. Janet Malcolm, who sometimes comes out as very sympathetic to Borukhova, says atone point she struggled with the enigma of the case: She couldnt have done it, and she must havedone it. Only, in the case of Rajaratnam, there is no enigma.

To me, however, the most interesting parallel is this: both trials raise questions about truth and thejudicial process itself. The broad sense one gets out of reading Iphigenia in Forest Hill is that thetrial is not so much about the truth as it is about the most consistent and convincing narrative. Atrial is a contest between conicting narratives.

Rajaratnams narrative was in many ways strong and credible. His team did spend a lot of time andeffort on research. They were consistent with his mosaic theory of investment. Some of the infor-mation he got from his tippers was already in the public domain, in various newspaper articles.

And as one of the professors who testied for Rajaratnam showed, he could have made the samegains by just using the publicly available information.

What really weakened his case was the wiretap evidence. Perhaps that was the single most impor-tant factor that turned the verdict against Rajaratnam. During the deliberations, the jury had oftenturned to these wiretaps for clarication.

Imagine, if the prosecution didnt have those wiretaps, or was not allowed to use the wiretaps. Thatwould have meant the prosecution turning to circumstantial evidence, which would in turn havemeant a weaker narrative, and a different verdict.

Thats evidently what Rajaratnam also believes. According to a Reuters report, Rajaratnam willappeal the case. In particular, he is expected to challenge the use of secret recordings tactics

historically deployed in organized crime and drug trafcking cases, not white-collar probes. Thisis the rst time they have used wiretaps for insider trading. (Some have argued that insider tradingshould be made legal).

I have no idea where this will go. But even as of now, it has all the elements of a great novel. And agreat novel always raises questions about the truth.
http://online.wsj.com/article/SB10001424052748704224004574489324091790350.htmlhttp://online.wsj.com/article/SB10001424052748704224004574489324091790350.htmlhttp://online.wsj.com/article/SB10001424052748704224004574489324091790350.htmlhttp://online.wsj.com/article/SB10001424052748704224004574489324091790350.html


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Whats so wrong about WallStreet desi boys club?

Sandip RoyApr 26, 2011

Desis in North America are nally making news for something other than Pulitzers, spelling beesor plum positions in the White House. Hedge fund billionaire Raj Rajaratnams trial is heading tojury, the biggest insider trading trial in years.

Gary Weiss in The Daily Beasthas cottoned on to the fact that the trial is not just shining a light onthe murky dealings in the world of high nance. Its also a symbol of a changing Wall Street. WallStreet is no longer a white mans preserve, he writes.

So far so good. But then the article goeson to talk about the insularity ofIndians, Pakistanis, Bengalis and Sri

Lankans. Rajaratnams college buddyAnil Kumar, a former McKinsey execu-tive pleaded guilty to getting $2 millionfrom Rajaratnam for inside informa-tion. Rajiv Goel, Rengan Rajaratnam,Rajat Gupta are all desis involved inthe scandal. (Even the prosecutor PreetBharara is India-born!)

Weiss says outsiders cant help but

note this ethnic clubbiness, althoughfor South Aisans its merely an exten-sion of a style of business working anetwork of friends and acquaintances thats played out for centuries on the subcontinent, onlyapplied, in this case, for allegedly criminal ends.

Hmmm. That sounds like exactly the way everyone else does business. Presidents of the UnitedStates go back to their college buddies and early work days when they appoint staff members. Cor-porate CEOs and heads of non-prots go through their rolodexes when making key hires. In thatcase its just called networking, not a strange exotic ethnic-specic hawala style of business. Weissadmits that Wall Street for its rst 200 years remained a WASP preserve. The old boys club shuteveryone else out but no one talks about its ethnic clubbiness. White is always regarded as theabsence of ethnicity.

In fact, while Rajaratnam will be judged for his alleged nancial shenanigans by the courts, heshould be congratulated on one count. Desis can be insular but not in the way Weiss imagines. Inthe US, the proliferation of Telegu

Associations and Bengali Associations suggests that desis abroad cling to caste and clan with evengreater fervour than they did back home. The grand gathering of Bengalis every year in the BangaSammelan is all about the glory of the Bengali language. But even amidst the dulcet tones of Rab-indrasangeet, the Bangladeshis complain they are being sidelined by the West Bengalis and the

West Bengalis complain about how demanding the Bangladeshis are.

That Sri Lankan-born Rajaratnam spread his largess among all his South Asian brothers is in itselfa sign of progress. He didnt just benet the Sri Lankan Tamils and their temple associations. Per-haps the organisers of SAARC should take note.


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South Asians uncomfortable inglare of Rajaratnam verdict

Uttara ChoudhuryMay 12, 2011

Agroup of South Asian bankers in spiffy dark suits working next door at Goldman Sachs hadslipped into Financier Patisserie in New Yorks glass-enclosed World Financial Center for coffee.Suddenly news broke that Galleon founder Raj Rajaratnam had been convicted of insider tradingand prying illegal information from a cluster of Indian tipsters. Will the guilty verdict tarnish thegrowing number of South Asians working on Wall Street?

Its a big embarrassment, muttered the Indian banker at the World Financial Center before dash-ing back to the tall, fortress-like Goldman Sachs headquarters on Vesey Street.

Others feel the only cultural signicance of the largest insider trading case involving hedge funds

is as a signal that South Asians have risen high enough in nance to be entangled in a multimil-lion-dollar asco.

Call it the law of large numbers or probability. When there are so many South Asians on WallStreet some will inevitably get enmeshed in these incidents. There is embarrassment involved but

why should every South Asian feel defensive? Arvind Panagariya, professor of economics at Co-lumbia University and author of the bestselling book, India: the Emerging Giant toldFirstpost.

During Wall Streets halcyon days,the second annual Asians in Wall

Street networking event hosted byMerrill Lynch saw hundreds of Indi-ans ll a 500-seat auditorium. Theorganiers had to turn away 700 bank-ers at the door because the venue

was lled to bursting. Next year, theywisely pulled rank and invited onlymiddle-level and senior bankers.

According to the industry, there aremore Indians and Chinese in bulge

bracket investment banks like Gold-man Sachs, JP Morgan Chase, Deut-sche Bank and Credit Suisse than anyother minority community.

Undoubtedly, the insider trading scandal has shocked all the Indian American overachievers. Itsan uncomfortable moment. Suddenly we are not just perceived as conformist, law-abiding people

brilliant at math, science, computers and medicine. I think there will be this cloud hanging overthe South Asian community, said nancial analyst Kaliyur Venkat.

Indian rock stars in the corporate world like Rajat Gupta are teetering. He could get a clean chit in

the civil suit but it is a damaging moment, added Venkat.

From US attorney Preet Bharara who brought the insider trading case, to the accused, to a galaxyof star witnesses, there are South Asian ngerprints all over the sordid Rajaratnam saga. It has


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diminished the reputation of former McKinsey global head Rajat Gupta who retired in 2007 afterbecoming the rst Indian-born CEO of a big transnational company. After his 34 years at McKin-sey, Gupta won a seat on Goldman Sachs.

But prosecutors sought to maximise the impact of the Gupta tape by calling Goldman Sachs chair-man Lloyd Blankfein to testify that Guptas gossipy, buddy-buddy phone call to Rajaratnam vio-lated the investment banks condentiality policies. In a July 2008 call, Gupta dishes the dirt oncondential board-privileged M&A discussions regarding Goldmans interest in acquiring Wacho-

via or AIG.

Anil Kumar, another former McKinsey consultant who has been a trial witness for the government,has testied that he violated client condentiality. He leaked secrets about chipmaker AdvancedMicro Devices.

Eyebrows are now being raised about the ethnic clubbiness of desis on Wall Street but that is atad unfair as Wall Street is rife with countless cliques that trade tips. It shouldnt come as a sur-prise that Rajaratnams personal network embraced other South Asians like Kumar he had studied

with in the University of Pennsylvanias Wharton B-school in the early 1980s.

Hedge funds strive very hard to get an informational edge but Raj obviously crossed the line.I dont think you can paint all South Asians as unethical. This incident has more to do with thehedge fund industry and the pressures to get an edge in the business. I dont think it has anythingto do with whether you come from the East, West or the middle, Amit Bhatiani, a partner at pri-

vate equity rm CX Partners, told Firstpost.

Yes, Rajs personal network was South Asian so a lot of his friends are caught up in the scandal,but it still doesnt mean all South Asians are in the dock. It has put the hedge fund industry on thebackfoot rather than South Asians. The hedge fund industry has to be more cautious about how it

gets information.


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Rajaratnam and Rajat

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