The Rise and Fall of Raj Rajaratnam – Part II- The modern face of illegal insider training
Posted on July 26th, 2016

By A Special Correspondent Courtesy The Island

” Rajaratnam inquired as to whether the Cisco Executive might be “interested in the money business.” Rajaratnam sketched out how the new fund could make “60 million dollars a year,” and require no more than three or four people.

(Continued from yesterday)

US District Attorney for the Southern District of New York Preet Bharara did not mince his words when he summed up the case against Raj Rajaratnam in the District Court. He began by saying, “Raj Rajaratnam’s criminal conduct was brazen, arrogant, harmful, and pervasive. He corrupted old friends. He corrupted subordinates. He corrupted entire markets. Day after day, month after month, year after year, Rajaratnam operated as a billion-dollar force of deception and corruption on Wall Street.” What follows are verbatim extracts from the District Attorney’s summing up.

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Rajaratnam repeatedly leveraged the power of money and his position as the head of a 7-billion dollar hedge fund to induce friends, employees, and associates to participate in his criminal activities. Although already rich, Rajaratnam did this to drive up his personal wealth through profitable trading in his hedge fund. He did it to make sure that investors did not pull their money out of Galleon and to attract new money to his fund. And he did it because of his egomaniacal desire to triumph over his competitors on Wall Street. That was what he cared about: money and success. What he did not care about, at all, was the extensive harm that he left in his wake: harm to the capital markets; harm to the average, ordinary investors who played by the rules; harm to the companies whose secret information was misappropriated; and harm to the lives of those he corrupted. Although particular investors on the other side of Rajaratnam’s illegal trades are not easily identifiable, there should be no question that ordinary investors paid the price for Rajaratnam’s crimes and that public companies were harmed by Rajaratnam’s repeated theft of corporate secrets.

Rajaratnam arrogantly believed that he would never be caught, and he rigorously followed a system to ensure that he would not be. He paid off insiders indirectly. He left cover emails in Galleon’s files. He obtained and disseminated inside information by phone and in person, avoiding any written record of his illicit communications. He bought and sold stock to show a pattern of legitimate trading when, in fact, he was trading based on inside information. He believed (wrongly) that his dishonest system enabled him to practice unfair insider trading with impunity. He had no respect for the law, and has not accepted responsibility for his crimes. He is arguably the most egregious violator of the laws against insider trading ever to be caught. He is the modern face of illegal insider trading.

Conspiracy with Anil Kumar of McKinsey & Company, Inc.

Rajaratnam’s criminal conspiracy with Kumar started shortly after Rajaratnam agreed to pay Kumar approximately 500,000 a year for information. Knowing that McKinsey did not permit Kumar to reveal corporate secrets or receive outside consulting money, Rajaratnam concocted a plan pursuant to which Rajaratnam would wire the money offshore to an account in someone’s name other than Kumar, and Kumar would re-invest that money back into Galleon in the name of Kumar’s housekeeper. As a result, Rajaratnam wired hundreds of thousands of dollars out of Galleon to offshore accounts in the name of Pecos Trading, and the money came back to Galleon in the name of Manju Das and later Ambit Ltd.

In return, Kumar repeatedly provided Rajaratnam confidential information about his clients, including information relating to earnings, strategic plans, and mergers and acquisitions. Wiretapped recordings in 2008 captured Rajaratnam’s illegal scheme at work. For example, during a March 24, 2008 conversation, Rajaratnam asked about corporate secrets relating to AMD, and Kumar provided the information. Similarly, during a May 2, 2008 conversation, Kumar told Rajaratnam about a potential acquisition of Spansion. Rajaratnam, in turn, informed his employees, Kris Chellam and Krish Panu, and directed them to create a cover ‘email trail’ so that they could justify any future trades in Spansion should regulators ask any questions. Subsequent wiretap recordings showed that Kumar tipped Rajaratnam repeatedly about corporate secrets relating to a multi-billion dollar investment in AMD. They also showed that Kumar tipped Rajaratnam about massive layoffs to be announced by eBay.

The evidence at trial also demonstrated that Kumar tipped Rajaratnam over and over again about AMD’s acquisition of ANTI, and that Rajaratnam traded based on that information and reaped millions of dollars in profits.

Conspiracy with Rajiv Goel of Intel

Rajaratnam’s criminal conspiracy with Rajiv Goel crystallized when Goel provided Rajaratnam with material, non public information about Intel in April 2007. Rajaratnam corrupted Goel through ‘charitable’ gifts to Goel and through profitable trades in Goel’s brokerage account. The evidence at trial showed that Goel was not even close to Rajaratnam’s criminal league. Like Kumar, Goel had lived a life free of crime until he started providing Rajaratnam with inside information. A Rajaratnam loan to Goel in 2005 and a cash gift in 2006 laid the foundation for Rajaratnam’s subsequent pressure on Goel to provide him with inside information. And indeed, by April 2007, Goel was violating his duties to Intel by providing Rajaratnam secret information about Intel’s earnings. Goel took these criminal steps because he felt indebted to Rajaratnam. Later, as demonstrated at trial, Rajaratnam manipulated Goel into providing still more inside information and then berated Goel in 2009 for failing to continue to provide him with inside information.

Wiretapped recordings showed Goel revealing secret information to Rajaratnam in 2008 and Rajaratnam repaying Goel by trading in Goal’s brokerage account with secret information about another public company, People Support. Specifically, multiple recordings between Rajaratnam and Goel, and then Rajaratnam and Rengan (Rajaratnam’s brother) demonstrated that Rajaratnam received inside information from Goel about the multi-million dollar investment in Clearwire in 2008, and that Rajaratnam and Rengan then traded based on that information. Two additional recordings in 2008 proved that Rajaratnam informed Goel that Rajaratnam was making trades in Goel’s brokerage account based on inside information about People Support that Rajaratnam learned through Galleon’s seat on the board of directors of that public company.

Goel also testified about his repeated tips to Rajaratnam concerning Intel’s earnings in April 2007. Normally, Goel did not have access to specific earnings information prior to Intel’s public announcement. Such information was kept in the hands of an extremely small group of executives and individuals in Intel’s investor relations department. However, in April 2007, Goel obtained this highly secretive earnings information from one of his friends in Intel’s investor relations department. At first, Goel learned negative information about Intel’s performance. He passed it along to Rajaratnam, who shorted Intel stock based on that information. Later, Goel obtained new, positive information about Intel’s outlook and updated Rajaratnam. Based on Goel’s new information, Rajaratnam reversed his short position and purchased two million shares of Intel, reaping over two million dollars in profits.

Rajaratnam’s Leadership of the Galleon Conspiracy

Through wiretap recordings emails, trading records, and Adam Smith’s testimony, evidence at trial proved Rajaratnam’s leadership of an insider trading conspiracy involving numerous Galleon employees. The evidence at trial showed that Rajaratnam, as the head of Galleon, encouraged and promoted the use of inside information, rewarded those who obtained it for him, and caused countless securities trades to be executed at Galleon based on inside information. The evidence at trial also demonstrated that Galleon executives Rengan Rajaratnam, Kris Chellam, Krish Panu, Adam Smith, and Joe Liu committed overt acts in furtherance of the conspiracy on Rajaratnam’s direction. The evidence further showed that Smith obtained inside information from the Morgan Stanley investment banker Kamal Ahmed with Rajaratnam’s encouragement and support, and that Rajaratnam shared with others the inside information he had obtained from Rajat Gupta, Danielle Chiesi, Anil Kumar, Rajiv Goel, and Roomy Khan.

Finally, the evidence showed that Rajaratnam and others at Galleon traded based on information coming from ultimate inside sources of information including, among others, Kieran Taylor (Akamai), Robert Moffat (IBM), Hector Ruiz (AMD), Deep Shah (Moodys), Shammara Hussain (Market Street Partners), and Sunil Bhalla (Polycom).

On wiretap recordings, Rajaratnam discussed how to corrupt another McKinsey consultant like Kumar and directed others to create paper trails to conceal potential trades based on inside information. For example, during three recordings, Rajaratnam and Rengan discussed Rengan’s efforts to corrupt another McKinsey consultant, and became giddy about the fact that, in their view, everybody was a “scumbag,” willing to “play ball,” and provide them with inside information. On another recording, Rajaratnam directed Chellam and Panu to create a false paper trail for any potential trades of Spansion based on Kumar’s inside information. The latter recording corroborated Smith’s testimony that he received similar instructions from Rajaratnam relating to other securities.

Conspiracy with Danielle Chiesi

Rajaratnam criminal conspiracy with Chiesi was frequently caught on the wiretaps in 2008. During numerous recordings introduced at trial, Rajaratnam and Chiesi exchanged inside information relating to AMD, Akamai, and other securities. They discussed how Chiesi was fearful of going to prison for her criminal conduct and Rajaratnam provided advice on avoiding detection by trading in and out of stock.

Conspiracy With Roomy Khan

Evidence about Rajaratnam’s conspiracy with Roomy Khan to exchange inside information came from multiple witnesses, trading records, phone records, instant messages, Kumar’s testimony, and Goel’s testimony. The evidence demonstrated that Khan repeatedly obtained inside information from insiders with access to material, non public information; Khan traded based on that information; Khan communicated it to Rajaratnam; and Rajaratnam executed timely trades on the basis of Khan’s information.

Thus, on Polycom, the evidence showed that on January 9, 2006, Khan instructed Rajaratnam by instant message not to buy Polycom stock. From this statement, Rajaratnam knew that Khan was able to and going to obtain non public information about Polycom’s guidance so that she and Rajaratnam could trade on it. That same day, Sunil Bhalla, a Polycom executive, attended a meeting during which Bhalla learned positive information regarding Polycom’s outlook. Bhalla’s telephone contact with Khan, and the fact that Bhalla authorized Khan to trade in his brokerage account, showed the close relationship between Khan and Bhalla and Bhalla’s incentive to provide inside information to Khan. From the timing of the communications between and the trades by Rajaratnam and Khan the following day, the evidence showed that Khan had obtained confidential information from Bhalla, that Khan immediately traded on that information, that Khan passed that information to Rajaratnam, and that Rajaratnam traded on it.

Khan also tipped Rajaratnam about the acquisition of Hilton. On the afternoon of July 2, 2007, Deep Shah learned through his work at Moodys that Hilton would be acquired. At 3:06 pm, Shah started calling Khan repeatedly. At exactly 3:14 p.m., when Khan and Shah were on the phone together, Khan bought Hilton options. Less than an hour after Shah tipped Khan, Khan called Rajaratnam, but it was after the market had closed. Within minutes of the opening of the market on the next day. Rajaratnam began to purchase 400,000 shares of Hilton stock at an average price of $35 per share, for a total value of approximately $14 million. Significantly, this was the first time that year that Rajaratnam had purchased Hilton stock. Hours later, Hilton announced the acquisition, and Rajaratnam made millions.

Finally, Roomy Khan tipped Rajaratnam about Google’s negative earnings. On July 11 and 12, 2007, Khan communicated on numerous occasions with Shammara Hussain, who had access to Google’s confidential earnings information through her work at Market Street Partners, including that Google was about to announce unexpectedly poor financial results. On both of those days, Khan bought Google put options. On July 13, Khan called Rajaratnam and spoke with him for 22 minutes from 1:17 p.m. to 1:39 p.m. At the outset of that call, Rajaratnam had a long position of approximately 135,000 shares of Google stock, with a value of approximately $74 million. The minute his call with Khan ended, however, Rajaratnam instructed his trader to sell all of his Google stock, and Rajaratnam then took a short position worth approximately $25 million. As a result of Khan’s call, Rajaratnam reversed course and changed his position by $100 million. That evidence demonstrated that Rajaratnam not only traded based on Khan’s inside information from Hussain but knew that Khan’s information was non public and significant. The next week, Google announced earnings that missed expectations, and Rajaratnam, again, made millions.

The evidence at trial showed that Rajaratnam used and instructed others to use numerous methods to cover up their criminal activities. Rajaratnam left false email and instant message trails in Galleon’s files, and instructed others to do the same. Rajaratnam told two Galleon colleagues that the “best way to do these things”—referring to trading on inside information —was to create an email trail containing an alternative justification for a trade that was in fact based on inside information. Adam Smith also testified about this practice. Rajaratnam instructed Danielle Chiesi and Adam Smith to buy and sell stock when in possession of inside information, showing a pattern of trading to create the false impression of not having inside information.

Corrupting a Cisco Executive

In the summer of 2008, the Government intercepted Rajaratnam attempting to corrupt an executive at Cisco Systems, Inc. by probing for inside information about a possible acquisition while dangling a lucrative job offer with Galleon. In late July 2008, there were rumors that Cisco might acquire EMC Corporation. Rajaratnam set about trying to determine whether these rumors were true. On July 21, 2008, Rajaratnam called Kumar and asked, “Did you find out about the EMC thing?” Kumar told Rajaratnam that he left a message for his guy in Boston (where EMC is headquartered). Around this time, Rajaratnam began buying EMC stock in Galleon accounts. On July 23, 2008, Kumar told Rajaratnam that he “finally got through to my partner … his view is he knows absolutely nothing about it.”

On this occasion Kumar was not able to provide Rajaratnam with confirmation through his work at McKinsey. So Rajaratnam promptly set about corrupting a Cisco executive who, like Kumar and Goel, had been Rajaratnam’s classmate at business school. On July 30, 2008, Rajaratnam spoke with the Cisco Executive by phone. Rajaratnam told him that he was travelling to California, and they arranged to meet. Toward the end of the call, Rajaratnam brought up the “rumour” that Cisco might acquire EMC. Rajaratnam described why it might make sense; the Cisco Executive did not offer up any details. That call was cut off, and then the Cisco Executive immediately called Rajaratnam back. That was when Rajaratnam made the Cisco Executive a lucrative offer: Rajaratnam told the Cisco Executive that “We might be raising a fund to go in and buy, troubled companies.” Rajaratnam inquired as to whether the Cisco Executive might be “interested in the money business.” Rajaratnam sketched out how the new fund could make “60 million dollars a year,” and require no more than three or four people.

Later that day, Rajaratnam received a call from Rengan. Rajaratnam brought up the Cisco-EMC rumors. Rajaratnam described how he called the Cisco Executive and offered him a job at Galleon. Rajaratnam and Rengan discussed that Rajaratnam was going to travel to California to meet in person. Rengan said that a different Cisco executive (Cisco executive 2) would know about the deal. Rajaratnam told Rengan that he didn’t want to call that person, but would rather meet him in person. Rajaratnam said, “I want to just get the other Cisco Executive all, you know, nice and prime…. I’ll own Cisco Executive 2 don’t worry.” Rengan told Rajaratnam that he was going to go to California, too, to meet with a certain individual in person. Rengan said that travelling to see that person was “well worth it because, when I was with him in person, he gave me all the dirt.” Rajaratnam replied, “And that’s what you gotta do…”

These calls… do not evidence a consummated inside trade. What they do evidence, however, is that Rajaratnam was constantly attempting to corrupt new sources of inside information. Rajaratnam stable of inside sources may have been plentiful, but it was never enough.

The evidence at trial showed that Rajaratnam’s insider trading activities spanned more than five years. Despite the number of years during which Rajaratnam committed insider trading crimes and the number of individuals involved in those crimes, a significant part of the evidence admitted at trial covered a portion of just one year-2008—when the Government had a wiretap on Rajaratnam’s cellphone. Even then, however, the recordings over Rajaratnam’s cellphone provided only a limited window into Rajaratnam’s business activities that year because Rajaratnam used many phones for business purposes in Manhattan and elsewhere, including his office phone in Galleon’s headquarters. Common sense dictates that the Government’s wiretap only caught a fraction of Rajaratnam’s crimes.

Nevertheless, despite its limitations, the wiretap over Rajaratnam’s cellphone provides the best view of Rajaratnam’s conduct that the Government was able to obtain. And what it saw through this window, however limited, was that Rajaratnam’s insider trading was extensive. It was a routine part of his business. It was what he spent his time doing. Just as Jeffrey Skilling and Bernard Ebbers represent the worst of accounting frauds and Bernard Madoff represents the worst of Ponzi schemes, Rajaratnam represents the worst of illegal insider trading.

To be continued tomorrow: Rajaratnam’s alleged LTTE connections

One Response to “The Rise and Fall of Raj Rajaratnam – Part II- The modern face of illegal insider training”

  1. Christie Says:

    A crooks is a crook. From the day born to the day of death.

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