The jury that returned a guilty verdict to all charges against a one-time billionaire hedge fund founder proved to have a voracious appetite for the audiotapes of him talking to fellow traders and friends at public companies about stocks he wanted to trade.
Before they returned the verdict Wednesday against Raj Rajaratnam, jurors listened to 66 taped conversations over 12 days. They heard some of the 45 conversations played during the trial multiple times, enabling prosecutors to declare their maiden effort to use wiretaps to prosecute insider trading cases a huge success. Legal observers agreed.
The office of U.S. Attorney Preet Bharara "took wiretaps for a test drive, and I'd say it was a resounding success," said Stephen Miller, a former federal prosecutor in private practice in Philadelphia.
The tapes were "a gold mine," said Steven Scholes, an attorney in private practice in Chicago who formerly worked in the Securities and Exchange Commission Division of Enforcement. "There's an old saying that you can't cross-examine a tape," he said.
Kenneth Herzinger, another former attorney in the SEC enforcement division, predicted prosecutors will expand the use of wiretaps to other white-collar prosecutions.
"I view the use of wiretaps as a game changer and something that certainly the defense bar has taken notice of and I think that Wall Street has taken notice of," said Herzinger, now a San Francisco attorney in private practice.
But the success of the wiretaps might make some insider trading cases that lack them harder to prosecute, said Rita Glavin, a former federal prosecutor now in private practice.
"It's powerful evidence; you can't deny your words on tape," she said. "Jurors may expect in the future for all insider trading cases to hear wiretaps. If you don't have wiretaps, the government now is going to be at a disadvantage."
The jury convicted Rajaratnam of all 14 counts: five of conspiracy and nine of securities fraud, after relying on the tapes, where the Sri Lankan-born 53-year-old could be heard wheeling and dealing with corrupt executives and consultants — in one case demanding "radio silence" on information that could affect a stock price.
The tapes spelled the demise of a defendant who "was among the best and the brightest, one of the most educated, successful and privileged professionals in the country," Bharara said in a statement. "Yet, like so many others, he let greed and corruption cause his undoing."
Authorities have said the recordings represent the most extensive use to date of wiretaps in a white-collar case. The defense had fought hard in pretrial hearings to keep the evidence out of the trial by arguing that the FBI obtained it with a faulty warrant.
Once a judge allowed the recordings in, prosecutors put them to maximum use by repeatedly playing them for jurors.
Prosecutors had alleged that illegal tips allowed Rajaratnam to make profits and avoid losses totaling more than $60 million. His Galleon Group funds, they said, became a multibillion-dollar success at the expense of ordinary stock investors who didn't have the advance notice he enjoyed of mergers, acquisitions and earnings reports.
On Wednesday, Rajaratnam sat at the defense table, a rarity for him at the trial, and stayed motionless as the verdict was read. Most days, he took an uncustomary position on a bench behind his lawyers.
U.S. District Judge Richard Holwell ruled that Rajaratnam could remain free on $100 million bail as long as he was placed under house arrest at his Manhattan home to await sentencing July 29. Prosecutors said he faces a possible prison term of roughly 16 to 19 years under federal sentencing guidelines. Financial penalties have yet to be determined.
Outside court, with Rajaratnam at his side, defense attorney John Dowd said an appeal will be filed.
The verdict followed seven weeks of testimony. Some of the people who were recorded talking to Rajaratnam pleaded guilty and testified against him.
The defense had argued that the tapes revealed nothing more than that Rajaratnam was doing his duty by asking questions about information already circulating in the "real world" of high finance.
"That happens every day on Wall Street," Dowd told the jury. "There's nothing wrong with it."
In one July 29, 2008, call, Rajaratnam could be heard grilling former Goldman Sachs board member Rajat Gupta about whether the board had discussed acquiring a commercial bank or an insurance company.
"Have you heard anything along that line?" Rajaratnam asked Gupta.
"Yeah," Gupta responded. "This was a big discussion at the board meeting."
Prosecutors sought to maximize the impact of the Gupta tape by calling Goldman Sachs chairman Lloyd Blankfein to testify that the phone call violated the investment bank's confidentiality policies. Gupta, who has not been charged, has denied wrongdoing.
The government also played tapes it said proved Rajaratnam was trading secrets and orchestrating cover-ups with fellow hedge fund manager Danielle Chiesi, who pleaded guilty in the case.
"This stock could go up $10, you know? But we got to keep this radio silence," Rajaratnam said in one tape.
"Oh, please. That is my pleasure," Chiesi responded.
"Not even to your little boyfriends, you know?"
"No, believe me, I don't have friends," she replied.
Rajaratnam advised Chiesi to buy 1 million shares of a tech stock on an inside tip, then sell 500,000 of those shares — a tactic prosecutors say was used to throw regulators off the trail. In another instance, about 30 minutes of calls with an Intel tipster scored Rajaratnam a $2 million windfall on the computer chip-maker's stock, prosecutors said.
Former financial consultant Anil Kumar testified that he and Rajaratnam — his former classmate at the University of Pennsylvania's prestigious Wharton School — broke the law by speaking regularly about the negotiations over the acquisition of ATI Technologies Inc. by Kumar's client, Advanced Micro Devices Inc., before the deal was announced.
"I told him that this was 'red hot' and shouldn't be discussed," Kumar said. Later, he said he cautioned the defendant, "This is going to be a complete shock to the industry ... so treat this with the strictest of confidence."
Prosecutors say Rajaratnam raked in $20 million by trading on his advance notice of the ATI-AMD deal. Afterward, he called Kumar at home and said, "You're a star," Kumar told the jury.
When Rajaratnam later informed Kumar that he would be rewarded with a $1 million kickback, "I almost fell off my chair," the witness said.
Rajaratnam was charged in October 2009, days before Galleon, which had up to $7 billion in assets under management, announced that it was shutting down its hedge funds.
The Galleon probe has resulted in more than two dozen arrests and 21 guilty pleas. It also has led to a second investigation aimed at consultants in the securities industry who pass off inside information as the product of legitimate research.
Only Rajaratnam has gone to trial, where he relived conversations that the insiders never suspected were being monitored. On one tape, Rajaratnam sounded sheepish when one particularly effusive tipster praised him for being a star in the hedge fund universe.
"The myth," Rajaratnam said, "is larger than the reality."
Follow Larry Neumeister at http://twitter.com/Lneumeister