Insider-trading case goes to jury; it may turn on wiretaps

By Tom Hays and Larry Neumeister
Associated Press / April 26, 2011

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NEW YORK — Jurors yesterday considered the fate of a hedge fund founder accused of making tens of millions of dollars through insider trading after a judge reminded them they can rehear any of the dozens of taped conversations between the defendant and his friends.

The trial of Raj Rajaratnam entered its eighth week yesterday. Before jurors began to deliberate, they were instructed on the law by US District Judge Richard J. Holwell, who said they could choose to listen to the secretly taped conversations, which prosecutors say represented the first extensive use of wiretaps in an insider-trading case.

The conversations have given jurors a colorful dose of Wall Street’s go-big-or-go-home mentality, including at the offices where Rajaratnam made his name and enough money to be listed for a time among the world’s richest billionaires.

Now the jury must determine whether the conduct caught on tape was criminal. Regardless of its decision, the audio evidence seems certain to make an impression on high-stakes financiers and how they do business.

The wiretaps should “scare the hell out of anyone thinking about doing insider trading,’’ said Ed Novak, a veteran white-collar defense attorney in Phoenix.

Federal prosecutors played nearly 50 tapes of conversations between the defendant and fellow portfolio managers, analysts, and executives at public companies, including some who have pleaded guilty to charges that they tipped him off.

Prosecutors accuse Rajaratnam of making at least $68 million by trading illegally after he started his now-defunct family of hedge funds, Galleon Group, more than a decade ago.

Assistant US Attorney Jonathan Streeter said the defense wanted the jury to defy logic, reality, and common sense and to ignore wiretaps, cooperating witnesses, and a pattern of trading securities that points to guilt.

Defense attorney John Dowd told jurors last week that what they hear on the tapes is nothing more than his client discussing stock outlooks that were widely known among traders.

The defense focused on the intricacies of what constitutes material and immaterial or public and nonpublic information and on when Rajaratnam received guidance from an in-house analyst versus one of the people prosecutors say was a tipster.

Those details are “going right past most jurors,’’ Novak said. He predicted jurors were “going to immediately talk about those tape recordings, and that’s where the case is going to be decided.’’

Prosecutors alleged Rajaratnam was motivated by money and a desire to “conquer the stock market at the expense of the law.’’

The gunslinger mindset of the Galleon chief and others, the government says, was demonstrated in a July 2008 conversation with admitted conspirator Danielle Chiesi in which they gloat over a blockbuster inside trade.

“But it’s a conquest, right?’’ Rajaratnam says. “It’s a conquest,’’ she says. “It’s mentally fabulous for me. . . . You’re a warrior. I’m a warrior.’’

Prosecutors say Rajaratnam taught Chiesi to cover her tracks when she was trading on secrets by moving money in and out of companies to imitate an innocent investment pattern.

The sometimes brazen tone of the tapes shows that Rajaratnam and others — while cautious in e-mail and instant messages — were uninhibited on phone calls. In another call, Chiesi muses that she might be under investigation and tells Rajaratnam she’s “glad that we talk on a secure line’’ — a segment that drew muffled chuckles in the courtroom.

The Galleon investigation has led to more than two dozen arrests and 20 guilty pleas. It has already led firms where employees have access to secrets about public companies to tighten policies, said Latour “L.T.’’ Lafferty, a former federal prosecutor.