Rajaratnam and Gupta:

The Fall of Insider Culture?

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

Is Rajaratnam the whipping boy?

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

The Hedge Fund Industry

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

The South Asia Angle

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

Chapter 1

Rajat Guptas tangled web

Rajat Gupta: the Big Fish in Wall St tipster clean-up

Uttara Choudhury Oct 27, 2011

New York: In going after high-profile Rajat Gupta, against whom criminal charges were brought
on Wednesday, the US government may be reeling in what it considers the big fish in its crackdown on insider trading on Wall Street. Criminal charges were brought against Gupta by a federal grand jury in Manhattan, which arraigned the former Goldman Sachs director on one count of conspiracy to commit securities fraud and five counts of securities fraud, all related to tips he fed hedge fund Galleon Group co-founder Raj Rajaratnam. Gupta, 62, also was charged in a civil insider trading case brought by the US Securities and Exchange Commission. In a six-count indictment, Gupta was accused of leaking confidential information while serving as a director at Goldman Sachs Group Inc. and Procter & Gamble Co. Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders, said Preet Bharara, the United States attorney in Manhattan. As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr Guptas breach of duty. Gupta was picked up by agents from his home in Westport, Connecticut, on Wednesday and driven to the New York FBI office, where he was placed under formal arrest at 8.15 am local time (5.45 pm IST). Guptas arrest was the latest step in an initiative launched by the FBI in 2007 targeting hedge fund insider trading. The conduct alleged is not an inadvertent slip of the tongue by Mr Gupta. His eagerness to pass along 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 phone so quickly it could be termed instant messaging, said FBI assistant director in charge Janice K Fedarcyk.

Preet Bhararas crown jewel Bharara, 42, who lives a quiet suburban life with his wife and three children, always wanted to be a trial lawyer. He was born in Indias Ferozepur and came to America two years later. He became a US citizen at the age of 12 and graduated from Harvard magna cum laude. After Columbia Law School, Bharara did several years of white-collar defence work. He played a key role in the largest mob round-up in recent FBI history by using wiretaps against the Gambino and Colombo crime families. 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 offenses and procured 30 guilty pleas. The Galleon case is the crown jewel of his work to date. To collect those scalps, Bharara has, some say, played rough by using wiretaps and strong-arm tactics he first employed against the mob. Gupta is the biggest name to be ensnared in Bhararas widespread insider trading probe. Rajaratnam recently told Newsweek that Bhararas office at least twice including once two weeks before Rajaratnams sentencing asked him to provide evidence against Gupta. They offered Rajaratnam a plea bargain deal in exchange for dirt on Gupta. They want to get Rajat, Rajaratnam told Newsweek. Gupta is a big prize for Bharara in fighting white-collar crime. The usual suspects in insider trading cases are low-level traders and analysts on Wall Street. With the possible exception of Michael Milken, never before has anyone this established and close to the core of corporate America faced such 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 relevant times, Gupta and Rajaratnam maintained a personal and business relationship. Among other things, Gupta invested money in at least two different Galleon funds and formed separate investment and private equity funds with Rajaratnam. Prosecutors alleged during the Galleon trial that Gupta gave Rajaratnam information about a $5 billion investment in the bank by Warren Buffetts Berkshire Hathaway. According to the indictment, 16 seconds after Gupta disconnected from the 23 September 2008 Goldman board meeting (at which the Buffett investment was disclosed), he called Rajaratnams office to share the news. Two minutes before the markets closed that day, Galleon Tech funds purchased 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 profit of $840,000 the indictment reveals. Guptas best defence Typically, the US government brings insider-trading cases against people who profited directly from trades based on confidential corporate information. Gupta certainly doesnt fall into that category. 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 in any 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

in any profits as part of any quid pro quo, Guptas lawyer, Gary P. Naftalis, said in response to Wednesdays 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 million investment in the GB Voyager fund managed by Mr Rajaratnam. In fact, Mr Gupta lost his entire investment 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 profit motive does strengthen Guptas case, although prosecutors are likely to dig hard to try and show Gupta was angling for some future favours. Defence lawyers are also likely to argue that Gupta never for a moment thought Rajaratnam would trade on what he was telling him as a friend. If Gupta believed Rajaratnam would keep the information confidential, based on the facts of circumstances of their longstanding relationship, that could be an effective defence, Thomas Gorman of Dorsey & Whitney, who represented an Ohio State business-school professor convicted in a no-profits insider-trading case in 2005, told Reuters. Guptas lawyers, meanwhile, said they were confident the accusations based on circumstantial evidence 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 and studied at the Indian Institute of Technology in Delhi. He moved to the US in 1971 to study at Harvard Business School. Two years later, he joined the largely white, clubby McKinsey & Company. In 1994, at the age of 45, Gupta became the first non-Westerner to lead the blue-blooded consultancy firm. What is sad about Guptas Icarus-like fall is that the man obviously loves India and has worked hard after retiring from McKinsey to give back to the community. He got corporate executives of major 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 embarrassment. 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 India Foundation as the chairman of the Global Fund for AIDS.

Ex-Goldman director Rajat Gupta arrested in Galleon case

Agencies Oct 26, 2011

Rajat Gupta, a former Goldman Sachs Group director and ex-global head of McKinsey & Co, was
in FBI custody on Wednesday on criminal charges related to his hedge fund manager friend Raj Rajaratnam, the central figure in a US crackdown on insider trading. Sixty-two year-old Gupta appeared in Manhattan federal court but it was not immediately known what charges have been slapped against him by the prosecutors. Gupta was the former director of Goldman Sachs and Procter & Gamble and head of McKinsey & Company. He came under the scanner after prosecutors charged his Sri Lanka born hedge fund billionaire friend Raj Rajaratnam on insider trading charges. Rajaratnam had been sentenced earlier this month to 11 years in prison. Securities laws prohibit company insiders from divulging corporate secrets to those who then profit from them. A native of Kolkata, Gupta had a meteoric rise to corporate success after he graduated from Harvard Business School. He advised business leaders including General Electrics Jeffrey Immelt and Henry Kravis of the private equity firm Kohlberg Kravis Roberts & Company. He had also served as special adviser to the United Nations. Guptas name emerged in the insider trading scheme a week before Rajaratnams trial in March, when the Securities and Exchange Commission filed an administrative proceeding against him accusing him of passing confidential information about Goldman Sachs and Procter & Gamble to Rajaratnam, who then traded on the information and profited from it.

US pressed me to turn on my friend Rajat Gupta: Rajaratnam

Reuters Oct 24, 2011
ust weeks before fallen hedge fund tycoon Raj Rajaratnam was sentenced to 11 years in prison for insider trading, US prosecutors pressed him to turn on his friend, former Goldman Sachs director Rajat Gupta, The Daily Beast online newspaper reported. In his first interview about his case, Rajaratnam was quoted as saying that he was initially asked on the day of his October 16, 2009 arrest to wear a wire and record conversations with Gupta, also a longtime global head of elite consultancy, McKinsey & Co. The article said prosecutors asked Sri Lankan-born Rajaratnam again as late as two weeks before his October 13 sentencing in Manhattan federal court. They wanted me to plea bargain, The Daily Beast quotes the Galleon Group founder as saying, in an interview at his Manhattan apartment where he is under house arrest. They want to get Rajat. I am not going to do what people did to me. Rajat has four daughters. The opinion of a Sri Lankan astrologist combined with a history of suspected persecution led to Rajaratnams decision to fight the case, despite extensive phone taps and other overwhelming evidence, the report said. He (the astrologer) said that eventually I would prevail, Rajaratnam, 54, was quoted by the The Daily Beast as saying. A spokeswoman for Rajaratnams lawyers at law firm Akin Gump declined to comment on Monday. A spokesman for Guptas lawyer, Gary Naftalis, referred to previous statements that his client had done nothing wrong and that a civil case brought by the U.S. Securities and Exchange Commission was baseless. A spokeswoman for the office of the Manhattan U.S. Attorney, who brought the case, declined to comment. The investigation featured extensive use of secret FBI phone taps. Such tactics usually are reserved for Mafia and drug trafficking 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 figure in a sprawling insider trading case, was convicted by a jury in May on all 14 criminal charges he faced. His 11-year prison sentence is the longest ever in an insidertrading case. He must report to prison on November 28.

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 my house, Rajaratnam was quoted as saying. Here, I got my shot. The American justice system is by and large fair.

The incredibly tangled web that Rajat Gupta wove

Bernice Yeung May 19, 2011

From Kolkatas lower-middle-class to Harvard Business School to the head of international con-

sulting firm McKinsey, Rajat Gupta ascendancy in global business was a feat of smarts and determination. But oh, how the mighty have fallen! The philanthropist who has raised millions for Indian education and healthcare charities, is now facing a civil case brought by the U.S. Securities and Exchange Commission for passing confidential information to Raj Rajaratnam, the disgraced Galleon hedge fund billionaire convicted of insider trading earlier this month. (Guptas SEC hearing will take place in July, and he could face a monetary fine and could potentially be barred from serving on the boards of public companies.) And whats more, according to Bloomberg, Guptas questionable business behaviour didnt stop there. In direct violation of the consulting firms policies, Gupta secretly ran consulting businesses on the sidewhich often involving Indian companieswhile still at the helm of McKinsey. According to Bloomberg: Gupta and Anil Kumar (another Rajaratnam co-conspirator who pleaded guilty in the Galleon insider trading case) set up a consulting company in 2001 called Mindspirit LLC under their wives names. One of Mindspirits clients, database company InfoGroup, paid the consulting firm with 200,000 stock options, which was exercised for an undisclosed amount, according to SEC filings.

While on McKinseys payroll, Gupta also advised Genpact Ltd., a General Electric spin-off based in Gurgaon that manages business processes. Gupta served as an advisory director for Genpact from 2005 to 2007, and was granted more than 81,000 stock options, valued at 93 cents each in 2008. (SEC filings show that Gupta hasnt yet exercised the options, which are currently trading at nearly $17 per share.) McKinsey has since conducted an internal investigation and has implemented stricter rules to make it more difficult for these kinds of conflicts to occur in the future. Overcome by greed? Whats baffling is why Gupta, the brilliant businessman and regarded philanthropist, went so far astray. What happened to his moral compass? Bala Balachandran, dean of the Great Lakes Institute of Management in Chennai and a long-time

friend, told Bloomberg that urgent desire to live a flashy lifestyle may have driven him to make questionable choices: He wanted a billionaires life and the question for him was how could he become a billionaire in a short time, Balachandran says. Meanwhile, Terry Connelly of the Ageno School of Business at Golden Gate University in San Francisco told Bloomberg that Gupta may have been motivated by a desire to keep up with the superwealthy. You can never underestimate the seductive power of three or more zeroes added to net-worth numbers, Connelly told Bloomberg. You can be successful, but if youre in hedge fund managers circles and youre not rich like them, you can start asking, Why cant I get that? Im every bit as smart.

Chapter 2

Is Rajaratnam the whipping boy?

Rajaratnam becomes a whipping boy for Wall Street misdeeds

Uttara Choudhury Oct 14, 2011

New York: No one harboured any illusion that Galleon founder Raj Rajaratnam was going to beat
the rap for insider trading, but the courts sent a shock message to Wall Street on Thursday by sentencing the hedge fund billionaire to 11 years in prison, one of the longest prison terms in history for 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 profits or avoided losses of well over $50 million, prosecutors estimated. Rajaratnam was ordered to forfeit $53.4 million and pay a fine of $10 million. Currently out on a $100 million bail, Judge Richard Holwell has denied Rajaratnams request to remain free on bail while he appeals his conviction, and asked him to report to the federal correctional center in North Carolina on 28 November. The punishment doesnt fit the crime. Rajaratnam is a victim of prosecutorial overreach, said an investment banker of Indian heritage, whose firms policy do not allow use of his name. Instead of going after the big fish, prosecutors socked it to a first generation immigrant as Raj is not part of the connected-elite. This isnt going to stem illegal exchange of confidential information on Wall Street. More than 200 letters were written on Rajaratnams behalf. He has also found surprisingly vocal support in the blogosphere and in stray media outlets like the Fox Small Business Channel and The Daily Beast which noted; Rajaratnam was not a player in the 2008 financial crisis. Like Madoff, hes a kind of consolation prize, a distraction from the fact that none of the meltdowns central figures have even been indicted. Rick Ackerman who is a partner in Blue Fin Financial LLC, a commodity trading advisor, had no doubt way back in May that Rajaratnam was going to jail but couldnt help rooting for him: The poor 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 the Feds chose to make an example of. Now, Rajaratnam will go to jail for crimes against no one in particular, even though many of his colleagues who stole directly from investors through deceit, misrepresentation and gray-area fraud will remain free and unaccused.

Spotlight on South Asians Two years ago, Rajaratnam stood at the summit of Wall Street, commanding his own financial empire, 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 witnesses, there are South Asian fingerprints all over the sordid Rajaratnam saga. The trial grabbed attention because it exposed the illegal exchange of confidential information on Wall Street. Prosecutors also took the unusual step for a white collar probe by using telephone wiretaps to gather evidence. Prosecutors said Rajaratnams sources of information included Rajat Gupta, who until last year was a director at Goldman Sachs and Kamal Ahmed, a Morgan Stanley investment banker. The saga has diminished Guptas reputation, a former McKinsey global head who retired in 2007 after becoming the first 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 Goldmans confidentiality policies. In a July 2008 call, Gupta dishes the dirt on confidential board-privileged 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 financial research analyst A Subramaniam. Two of Rajaratnams Wharton classmates, Anil Kumar, who became a partner at McKinsey and Rajiv Goel, who was a managing director at Intel testified against him at the trial. Kumar testified that he violated client confidentiality 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 one man to serve as the whipping boy for Wall Street misdeeds, Rajaratnams lawyers argued in court papers. His defense lawyers said they would appeal the sentence to save their client from spending what could be the rest of his life behind bars. They said the federal guideline range overstated the seriousness 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 Rajaratnam did caused others to lose money. Hedge fund industry Rajaratnams crimes reflect a virus in our business culture that needs to be eradicated, Judge Holwell said at the sentencing on Thursday in New York. Amit Bhatiani, a partner at private equity firm CX Partners, earlier told Firstpost that the Rajaratnam case exposed the pressures to get an edge in the hedge fund business; It has put the hedge fund 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 reflect the changing attitudes toward financial crimes, Buchanan Ingersoll & Rooneys Stuart Slotnick told The New York Times.

Watch video of Rajaratnam being sentenced to 11 years in prison

Does Rajaratnam deserve 11 years for a victimless crime?

R Jagannathan Oct 14, 2011
eradicated, said US District Judge Richard Holwell before sentencing Galleon founder Raj Rajaratnam to 11 years in prison and a fine of $10 million for insider trading.

His crimes and the scope of his crimes reflect a virus in our business culture that needs to be

Two years ago, Bernie Madoff got similar stinging rebukes from Judge Denny Chen for causing investors losses of a massive $18 billion (billion, not million) through a Ponzi scheme involving his firm Bernard L. Madoff Investment Securities. Among other things, Chin used words and phrases like extraordinary evil and unprecedented while giving Madoff a 150-year sentence, says the The Wall Street Journal. While harsh words have always been par for the course in American judgments, the high sentencing 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 the American Dream. Earlier, white collar criminals got more bark than bite from the US justice system. Take the case of Mike Milken, junk bond king of the 1980s, who was sentenced to 10 years in prison in 1990. At his sentencing, Judge Kimba Wood said: You were willing to commit only crimes that were unlikely to be detected. When a man of your power in the financial world repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself a significant prison term is required. But he was let off within 22 months because he had prostate cancer. But he is still around, with his cancer in remission. Nick Leeson, the rogue trader who single-handedly brought down Barings Bank, got six-and-a-half years 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 afterdinner and keynote speaking circuit, while the latter is reckoned to be an ace philanthropist with Fortune magazine eulogising him as The Man who changed medicine in a cover story, for his contributions to fighting incurable diseases though his foundation. If Rajaratnam has the same luck as Milken and Leeson, and given his medical condition of

advanced diabetes and a kidney on the verge of imminent failure, he should spend less than his 11 years as Uncle Sams guest. He could, of course, receive a lesser sentence on appeal anyway. What is significant about the Rajaratnam sentence is that hes got 11 years for insider trading which is almost a victimless crime. Insider trading is broadly defined as a crime in which a person who obtains inside information about a companys performance or a price-sensitive development uses it to make money in the stock market. It is considered a crime because while the insider has an advantage on the information, 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 that you had inside information, but that you used it to benefit yourself or passed it on to someone who used 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 defrauding someone else. Some free-marketeers go so far as to say that insider trading should, in fact, be encouraged or else the market would not know something was in the air. The late Milton Friedman, an Economics Nobel winner, said in 2003: You want more insider dealing, not less. You want to give people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of 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 economy that its practice must be criminalised, insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest in keeping prices from lying to the public about corporate realities. But the consensus is clearly moving against this line of thought, especially in the context of Wall Streets egregious behaviour in recent years. Quoting Wharton finance 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 information and 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 and get less than they should when they sell. Perhaps, the middle ground is best. Treat it like a crime where financial gain is penalised by reparations. Going to jail for a victimless crime seems a bit much. The best way to deal with Rajaratnams crime is to ask him to disgorge his profits and pay a stiff penalty for it.

Rajaratnam sentenced to 11 yrs in prison for insider trading

Reuters Oct 13, 2011

New York: Raj Rajaratnam, a self-made hedge fund tycoon convicted in the biggest Wall Street
trading scandal in a generation, was ordered on Thursday to serve 11 years in prison, one of the longest 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 at least 19-1/2 years on the Galleon Group founder, the central figure in a sweeping criminal case that touched some of Americas top companies, including Goldman Sachs Group Inc, Intel Corp, IBM and the elite McKinsey & Co consultancy. Defence lawyers had argued that Rajaratnam deserved a much shorter prison term, citing unspecified health problems and arguing that the government was pushing for a punishment more appropriate to a violent criminal. Prosecutors have called Rajaratnam, 54, the modern face of insider trading, putting him in a dubious pantheon of Wall Street power players such as takeover specialist Ivan Boesky and junk bond financier Michael Milken, principal figures in a mid-1980s insider-trading case. Both men served about two years in prison. Rajaratnams legal battle will go on, as he appeals his conviction on 14 criminal charges by a New York jury in May. The appeal targets the legality of the FBI wiretaps used to gain evidence that he improperly pumped corporate insiders for confidential data. Jurors heard dozens of the wiretap recordings during the two-month trial.

Guilty: Wiretaps sink Rajaratnam in 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 securities fraud and five 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 trading scheme that netted up to $25 million in illict profits, Sri Lankan-born Rajaratnam was found to have colluded with high-powered friends and business associates at major companies and investment banks to gain material, non-public information that he used to his benefit when trading on the stock market. The high-profile case led to charges against 25 defendants. Twenty-one pled guilty, including former executives of IBM, Intel, and Bear Stearns. In a statement, Manhattan U.S. Attorney Preet Bharara, who prosecuted the case, said that Rajaratnam, 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, no matter who you are and how much money you have, Bharara added. Rajaratnam will appeal the case. Taped calls Rajaratnams downfall Rajaratnam was arrested in October 2009 for insider trading, and he pleaded not guilty. At trial, his attorney argued that Rajaratnam relied only on public information to make investments, advancing a theory that Galleon gathered a mosaic of readily available information through expert networks and from the public domain, such as newspaper articles, to research its investment decisions. But this theory proved no match for the nine months of secretly taped phone callswhich the U.S. government produced at trial as evidencebetween 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 securities law 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

case, but the jury was convinced by the evidence in each of those episodes, and thats as resounding 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 the hedge fund chief that Warren Buffet was going to invest $5 billion in the firm. Rajaratnam bought stock following the call. Intels Rajiv Goel gave earnings numbers ahead of the official release date, and Rajaratnam bought or sold shares based on the information.

Chapter 3

The Hedge Fund Industry

SEC promises scrutiny will continue

Sujata Srinivasan May 12, 2011

Sanjay Wadhwa, a senior enforcement official at the U.S. Securities and Exchange Commission

(SEC), discusses with Sujata Srinivasan the ramifications of insider trading in the hedge fund industry. Boards of directors at hedge funds also sit on the boards of large corporations and are therefore privy to information. What kind of ramifications will the growing number of insider trading investigations into this nexus have on the hedge fund industry? Hedge funds are constantly seeking information that gives them an edge in the marketplace relative 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 attack on the ability of hedge funds to develop market insight by gathering information from different public and private sources. (Rajaratnam was found guilty on all 14 counts of securities fraud and conspiracy.) Instead, it is the nature of that information that can make a resulting trade legal or illegal. There is nothing inherently wrong with a board member of a public company also being affiliated with a hedge fund, whether in the capacity of an investor, a consultant, an employee, or a board member (at the fund). However, if that person shares confidential information belonging to the public 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 occurred.

Hedge fund managers depend on moneymaking tips clubbed under the vague and broad non-material information category. Does this make compliance difficult? Hedge funds depend on information that gives them a competitive edge. Toward that end, it is perfectly legitimate for hedge fund managers to consult sources such as academics or analysts about the future performance of any company in the industry that is in their area of research expertise. However, that is quite different from a scenario where a trader pays cash to employees of public companies to steal and sell confidential information, which the trader then uses to trade profitably. The SECs recent insider trading actions in the expert networks arena, which include charges against Barai Capital Management and its founder, Samir Barai, allege exactly this kind of illegal conduct. What mechanisms should hedge funds have in place so that they dont end up in the same situation as Barai Capital?

Hedge funds should ensure that the information they gather is legitimate. Executives can enable compliance by setting up a robust compliance group empowered by the senior management. The group should set clear guidelines that inform traders what constitutes legitimate information gathering, and take proactive steps to prevent illegal information gathering. This could include instituting chaperoned conversations, whereby compliance officials 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 network firm, with which the hedge fund does business, and prohibit conversations with an expert who is an employee of a public company. Compliance personnel should also have the ability to ask traders hard questions concerning suspiciously well-timed, profitable trades. These measures, among others, 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 firms and their consulting arrangements with those who provide information and the traders who pay to receive this information. The expert networks 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 entities charged by the SEC include corporate employees who stole and sold confidential information, directly or indirectly through an expert network firms employees. The SEC has also charged a hedge fund and several hedge fund employees who arranged cash payments to receive this stolen information and trade profitably using that information. The corporate employees, the tippers, lined their pockets with tens of thousands of dollars in consulting fees while the hedge fund tippees made millions of dollars in illicit gains from trading on the information. The information itself was detailed, company-specific information about earnings, 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 expert networking firms or the consultants who are associated with them. That said, the SECs investigation 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 mistakes 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 common mistakes made by the defendant but rather on the totality of the facts gathered in the investigation. SEC investigations are fact-finding investigations, meaning that the staff seeks to learn the facts through witness testimony, document production and other means. The staff expects truthful and complete responses to its testimony questions and its requests for documents, and anything less raises red flags for the staff. It is also important to note that the agency is mindful of the impact that an SEC action can have on a defendants reputation and future livelihood, and its processes are designed to ensure that any charges recommended by the staff and any defenses available to the defendant receive close and careful 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 the SEC can you share with SEBI to prevent fund managers from obtaining non-public information?

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 regarding generally accepted industry practices, and to take action aimed at curbing conduct that undermines that vision. In the U.S., such a relationship exists between the SEC and the securities industry. The SECs recent enforcement actions, apart from having their own deterrent effect, have underscored the need for investment advisers to have policies and procedures reasonably designed to prevent insider trading. To that end, senior SEC staff members have publicly articulated appropriate front-end and back-end controls that could be built around information obtained from expert networks that would minimise the risk arising from consulting with such firms.

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 gasped when the news flashed on TV screens that Raj Rajaratnam had been convicted on all 14 counts of insider 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 industrys most 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 Rajaratnams attorney is mad and it shows! Soon after Raj Rajaratnam was found guilty of insider trading, his attorney, John Dowd was approached by a CNBC team for his reaction. His response was pretty distinctive. Watch. The role of Starbucks in the case A lot of the action in the case unfolded in Starbucks outlets. Wonder why? The Wall Street Journals Law Blog reports: Starbucks offers the kind of bustling environment that can provide cover for individuals during their interactions, lawyers say. The WSJ notes, for example, that Anna Chapman, the Russian who admitted to working as spy in the U.S., also used a Manhattan Starbucks for covert communications with a consular official from Russia. Says lawyer Ira Lee Sorkin: The Oak Room at the Plaza is now pass. Its now lattes at Starbucks the government should be focussing on. Jury verdict transcripts If 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.

The trial was a drama worthy of Hollywood The case featured friends-turned government witnesses, a blonde trader fluent in locker-room language, and the disclosure of secrets from the highest levels of the corporate world, reports the Financial Times. Details here. A victory for the phone-tapping Lawyers say the verdict opens the door to more widespread use of phone-tapping in insider-trading probes. More here.

Chapter 4

The South Asia Angle

Raj Rajaratnam: A contest between conflicting narratives

N S Ramnath May 12, 2011
ast month, Janet Malcolm, a New Yorker journalist, published her latest book: Iphigenia in Forest Hills: Anatomy of a Murder Trial. The trial in question is of a young doctor, Mazoltuv Borukhova, accused of hiring a hitman to kill her estranged husband. She was found guilty and sentenced to life. In the book, Malcolm uses the trial to raise some serious questions about the process of the trial itself. Malcolm has done that before. Her most famous book, at least among us reporters, is The Journalist and the Murderer. It starts with this explosive paragraph: Every journalist who is not too stupid or too full of himself to notice what is going on knows that what he does is morally indefensible. He is a kind of confidence man, preying on peoples vanity, ignorance or loneliness, gaining their trust and betraying them without remorse. Like the credulous widow who wakes up one day to find the charming young man and all her savings gone, so the consenting subject of a piece of nonfiction learns when the article or book appears his hard lesson. Journalists justify their treachery in various ways according to their temperaments. The more pompous talk about freedom of speech and the publics right to know; the least talented talk about Art; the seemliest murmur about earning a living. The Journalist and the Murderer is also based on a trial of a doctor accused of killing his wife, and a journalist who wrote a book about that. Its a short book, and like many short books, it leaves a deep impact. It made me think about my profession as no other book on journalism did. In Iphigenia in Forest Hill, Malcolm turns her attention to the judicial process. I have read only the shorter form that appeared in New Yorker around the same time last year. I was reminded of it when I read about the jury verdict of Raj Rajaratnam, who was accused of insider trading. The jury found him guilty. He could end up in jail for upto 25 years. The parallels between the two cases are obvious. Both trials got a lot of media attention, and both were defended by highly capable lawyers. That aside, the defendants were, in many ways, outsiders. 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 as outsiders 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

ties with other South Asians. Interestingly, both trials used secretly taped conversations. For reason known only to her, Borukhova had secretly taped conversations she had with the assassin. One of those turned out to be evidence against her. In both cases, few had little doubt about the guilt of the accused. Janet Malcolm, who sometimes comes out as very sympathetic to Borukhova, says at one point she struggled with the enigma of the case: She couldnt have done it, and she must have done 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 the judicial process itself. The broad sense one gets out of reading Iphigenia in Forest Hill is that the trial is not so much about the truth as it is about the most consistent and convincing narrative. A trial is a contest between conflicting narratives. Rajaratnams narrative was in many ways strong and credible. His team did spend a lot of time and effort on research. They were consistent with his mosaic theory of investment. Some of the information he got from his tippers was already in the public domain, in various newspaper articles. And as one of the professors who testified for Rajaratnam showed, he could have made the same gains by just using the publicly available information. What really weakened his case was the wiretap evidence. Perhaps that was the single most important factor that turned the verdict against Rajaratnam. During the deliberations, the jury had often turned to these wiretaps for clarification. Imagine, if the prosecution didnt have those wiretaps, or was not allowed to use the wiretaps. That would have meant the prosecution turning to circumstantial evidence, which would in turn have meant a weaker narrative, and a different verdict. Thats evidently what Rajaratnam also believes. According to a Reuters report, Rajaratnam will appeal the case. In particular, he is expected to challenge the use of secret recordings tactics historically deployed in organized crime and drug trafficking cases, not white-collar probes. This is the first time they have used wiretaps for insider trading. (Some have argued that insider trading should 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 a great novel always raises questions about the truth.

Whats so wrong about Wall Street desi boys club?

Sandip Roy Apr 26, 2011

Desis in North America are finally making news for something other than Pulitzers, spelling bees
or plum positions in the White House. Hedge fund billionaire Raj Rajaratnams trial is heading to jury, the biggest insider trading trial in years. Gary Weiss in The Daily Beast has cottoned on to the fact that the trial is not just shining a light on the murky dealings in the world of high finance. Its also a symbol of a changing Wall Street. Wall Street is no longer a white mans preserve, he writes. So far so good. But then the article goes on to talk about the insularity of Indians, Pakistanis, Bengalis and Sri Lankans. Rajaratnams college buddy Anil Kumar, a former McKinsey executive pleaded guilty to getting $2 million from Rajaratnam for inside information. Rajiv Goel, Rengan Rajaratnam, Rajat Gupta are all desis involved in the scandal. (Even the prosecutor Preet Bharara is India-born!) Weiss says outsiders cant help but note this ethnic clubbiness, although for South Aisans its merely an extension of a style of business working a network of friends and acquaintances thats played out for centuries on the subcontinent, only applied, in this case, for allegedly criminal ends. Hmmm. That sounds like exactly the way everyone else does business. Presidents of the United States go back to their college buddies and early work days when they appoint staff members. Corporate CEOs and heads of non-profits go through their rolodexes when making key hires. In that case its just called networking, not a strange exotic ethnic-specific hawala style of business. Weiss admits that Wall Street for its first 200 years remained a WASP preserve. The old boys club shut everyone else out but no one talks about its ethnic clubbiness. White is always regarded as the absence of ethnicity. In fact, while Rajaratnam will be judged for his alleged financial shenanigans by the courts, he should be congratulated on one count. Desis can be insular but not in the way Weiss imagines. In the US, the proliferation of Telegu Associations and Bengali Associations suggests that desis abroad cling to caste and clan with even greater fervour than they did back home. The grand gathering of Bengalis every year in the Banga Sammelan is all about the glory of the Bengali language. But even amidst the dulcet tones of Rabindrasangeet, 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 itself a sign of progress. He didnt just benefit the Sri Lankan Tamils and their temple associations. Perhaps the organisers of SAARC should take note.

South Asians uncomfortable in glare of Rajaratnam verdict

Uttara Choudhury May 12, 2011

A group of South Asian bankers in spiffy dark suits working next door at Goldman Sachs had

slipped 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 trading and prying illegal information from a cluster of Indian tipsters. Will the guilty verdict tarnish the growing number of South Asians working on Wall Street?

Its a big embarrassment, muttered the Indian banker at the World Financial Center before dashing back to the tall, fortress-like Goldman Sachs headquarters on Vesey Street. Others feel the only cultural significance of the largest insider trading case involving hedge funds is as a signal that South Asians have risen high enough in finance to be entangled in a multimillion-dollar fiasco. Call it the law of large numbers or probability. When there are so many South Asians on Wall Street 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 Columbia University and author of the bestselling book, India: the Emerging Giant told Firstpost. During Wall Streets halcyon days, the second annual Asians in Wall Street networking event hosted by Merrill Lynch saw hundreds of Indians fill a 500-seat auditorium. The organiers had to turn away 700 bankers at the door because the venue was filled to bursting. Next year, they wisely pulled rank and invited only middle-level and senior bankers. According to the industry, there are more Indians and Chinese in bulge bracket investment banks like Goldman Sachs, JP Morgan Chase, Deutsche Bank and Credit Suisse than any other minority community. Undoubtedly, the insider trading scandal has shocked all the Indian American overachievers. Its an 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 over the South Asian community, said financial 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 galaxy of star witnesses, there are South Asian fingerprints all over the sordid Rajaratnam saga. It has

diminished the reputation of former McKinsey global head Rajat Gupta who retired in 2007 after becoming the first Indian-born CEO of a big transnational company. After his 34 years at McKinsey, Gupta won a seat on Goldman Sachs. But prosecutors sought to maximise 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 investment banks confidentiality policies. In a July 2008 call, Gupta dishes the dirt on confidential board-privileged M&A discussions regarding Goldmans interest in acquiring Wachovia or AIG. Anil Kumar, another former McKinsey consultant who has been a trial witness for the government, has testified that he violated client confidentiality. He leaked secrets about chipmaker Advanced Micro Devices. Eyebrows are now being raised about the ethnic clubbiness of desis on Wall Street but that is a tad unfair as Wall Street is rife with countless cliques that trade tips. It shouldnt come as a surprise 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 the hedge fund industry and the pressures to get an edge in the business. I dont think it has anything to do with whether you come from the East, West or the middle, Amit Bhatiani, a partner at private equity firm 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 the backfoot rather than South Asians. The hedge fund industry has to be more cautious about how it gets information.

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