NEW YORK (Reuters) – Two men have been charged with insider trading based on information stolen from three of the most prominent U.S. law firms specializing in mergers and acquisitions, federal prosecutors said.
Prosecutors said the information was stolen from the law firms Wilson Sonsini Goodrich Rosati; Cravath Swaine Moore LLP, and Skadden, Arps, Slate, Meagher Flom LLP, all of which had employed the defendant Matthew Kluger, a lawyer.
Kluger and co-defendant Garrett Bauer, a trader, reaped more than $32.2 million of profit from their 17-year conspiracy to invest in a variety of stocks, such as technology companies McAfee Inc, Sun Microsystems Inc and 3Com Inc, according to a complaint filed with the federal court in Newark, New Jersey.
Prosecutors said Kluger regularly stole information about anticipated corporate mergers and acquisitions from his law firms. They said he would then pass the information to an unnamed co-conspirator, who would then give it to Bauer with instructions on how many shares to buy for the three of them.
The pair invested more than $109 million in the scheme, which ran from 1994 through this March, the complaint said.
The news follows dozens of arrests since October 2009 relating to federal allegations of insider trading focused on hedge funds. One-time billionaire Raj Rajaratnam, who founded the hedge fund firm Galleon Group, is on trial in Manhattan in Wall Street’s biggest insider trading case in two decades.
Prosecutors said Bauer worked at a variety of trading firms, most recently at Lighthouse Financial Group from about June 2009 through roughly August 2010.
Lighthouse also once employed the broker Michael Kimelman, who was arrested in 2009 in connection with the hedge fund insider trading probe. Kimelman has been represented in that case by lawyers at Wilson Sonsini, court records show.
Kluger lives in Oakton, Virginia, and Bauer in New York. It is unclear whether they have lawyers for their defense.
Kluger did not immediately return a call to his home seeking comment. Bauer could not immediately be reached for comment. Wilson Sonsini did not immediately return a request for comment. Representatives of Cravath and Skadden had no immediate comment.
17 COUNTS
Prosecutors charged Kluger and Bauer with 17 counts, including 11 counts of insider trading, four counts of obstruction of justice, conspiracy to commit insider trading, and conspiracy to commit money laundering.
The case was built in part on phone wiretaps that prosecutors said show the defendants’ conspiracy.
Prosecutors said that in recent years, Kluger, Bauer and the co-conspirator would try to avoid detection by using pay phones and prepaid cellphones that they would later throw out.
They also said Bauer in late 2009 spent more than $7 million of proceeds from the scheme to buy two homes: a $6.65 million condominium on Manhattan’s Upper East Side, and an $875,000 home in Boca Raton, Florida.
According to the complaint, Kluger worked from December 2005 until this March 11 as a senior associate in Wilson Sonsini’s office in Washington, D.C., where his annual salary was about $290,000. Kluger worked at Cravath from 1994 to 1997, and at Skadden from 1998 to 2001, the complaint said.
U.S. Attorney Paul Fishman in New Jersey, and officials from the FBI and the U.S. Securities and Exchange Commission are expected to hold a press conference on the arrests later Wednesday.
The case is U.S. v. Bauer et al, U.S. District Court, District of New Jersey, No. 11-mag-03536.
(Reporting by Jonathan Stempel in New York; Additional reporting by Dena Aubin; editing by Dave Zimmerman)
NEW YORK (AFP) – Goldman Sachs boss Lloyd Blankfein took to the stand Wednesday, telling jurors at a high-profile insider trading trial that one of the storied bank’s ex-directors leaked sensitive company secrets.
Blankfein admitted former Goldman director Rajat Gupta broke the firm’s confidentiality rules by giving on-trial hedge fund manager Raj Rajaratnam an inside take on the bank’s possible acquisitions.
Rajaratnam, who worked for the Galleon Group, is accused by the government of creating a corrupt network of informants to rack up millions of dollars in fraudulent profits.
Blankfein appeared in a somber dark suit and blue tie before the New York court, where he heard a recording of Gupta and Rajaratnam discussing rumors that Goldman’s board “might be about to buy a commercial bank.”
“This was a big discussion at the board meeting,” Gupta said during a 2008 call, which was secretly taped.
“It was a divided discussion,” he said, adding that he would be “extremely surprised if anything is imminent.”
After being played the recording, Blankfein was asked if Gupta had broken the company’s confidentiality policies.
“Yes,” Blankfein replied.
Rajaratnam’s lawyers argued their client was just doing his job, trying to clarify information that was already circulating in the press.
Blankfein’s appearance in court as a government witness provided jurors with a rare look inside one of Wall Street’s most secretive firms.
The case is being eagerly watched by traders, as much for its personality theater as for new guidelines on what constitutes insider trading.
Earlier in the proceedings, US assistant attorney Jonathan Streeter said Rajaratnam “cheated” to benefit from illegal insider tips even as the US financial sector was in meltdown in 2008.
But defense attorney John Dowd countered that the Sri Lankan-born 53-year-old was nothing more than a brilliant entrepreneur whose Galleon hedge fund used legal, public information and “the best research in the business.”
The government case rests largely on wire-tap conversations allegedly showing Rajaratnam cultivating illegal information, and the testimony of former associates and colleagues who have already been convicted and are cooperating with the government.
Gupta, who was also a Procter Gamble director, is accused by the Securities and Exchange Commission of giving Rajaratnam “information about the quarterly earnings at both firms, as well as an impending $5 billion investment by Berkshire Hathaway in Goldman.”
The watchdog described Gupta as “a friend and business associate of Rajaratnam.”
Gupta, a Connecticut-based business consultant and former managing director of global consulting firm McKinsey Company, was also accused of being a direct or indirect investor in at least some of Rajaratnam’s Galleon hedge funds.
NEW YORK (Reuters) – Galleon hedge fund founder Raj Rajaratnam, the central figure in the biggest U.S. insider trading case in a generation, went to trial on Tuesday in a showdown with prosecutors that will feature wiretap evidence and the testimony of former friends and associates.
Onetime billionaire Rajaratnam, 53, was mobbed by photographers and TV crews when he stepped from a black suburban SUV and walked into Manhattan federal court. Dressed in a brown coat and a suit, he was escorted by one of his lawyers.
He sipped black coffee in the courthouse cafeteria, declining to comment to reporters. He then went to the courtroom where about 150 potential jurors were to be questioned by U.S. District Judge Richard Holwell.
Opening statements will start once the 12-member panel is in place for a trial expected to last up to two months.
Rajaratnam is the former head of Galleon Group, which once managed $7 billion. He could face a 20-year prison sentence if convicted on the most serious charge of securities fraud.
Since arresting Rajaratnam in October 2009 and announcing criminal charges against 26 former traders, executives and lawyers, the U.S. government has pressed ahead with what it calls the biggest probe of insider trading in the $1.9 trillion hedge fund industry.
Prosecutors allege Sri Lankan-born Rajaratnam made $45 million in illicit profits through tips from former friends and associates. Nineteen people have pleaded guilty in the case, which stands apart from past insider trading probes because of the government’s wide-scale use of phone taps.
A questionnaire asks potential jurors more than 50 questions aimed at weeding out potential bias against the financial industry and concerns about the economic crisis.
The case “does not have anything to do with the recession or who is to blame for the financial problems we face,” the questionnaire reads.
It goes on to ask, “Does the fact that the case involves the financial industry, Wall Street executives, hedge funds, mutual funds and the like, make it difficult for anyone to render a verdict?”
It is not known whether Rajaratnam will testify in his own defense after the jury has heard hours of tapes and testimony from as many as six cooperating witnesses. Prosecutors say they could present up to 173 recordings of telephone conversations.
Among those who could be called by the government to testify is Lloyd Blankfein, chief of Goldman Sachs Group Inc., according to published reports.
Prosecutors and regulators have accused former Goldman board member Rajat Gupta of leaking information about the bank to his friend Rajaratnam, but Gupta has not been criminally charged.
Rajaratnam’s chief defense lawyer, John Dowd, has fought hard for his wealthy client, arguing that prosecutors have broadened the definition of insider trading. A money manager’s liberty should not be at risk because he trades on a stock while knowing something about the company, Dowd argues.
He also fought, unsuccessfully, to suppress the FBI’s secretly recorded phone conversations from trial.
The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.
(Additional reporting by Basil Katz)
(Reporting by Grant McCool, editing by Dave Zimmerman)
NEW YORK — The lawyer for a wealthy investment manager accused in the biggest insider-trading scandal ever to hit the hedge-fund world engaged in a combative verbal battle Tuesday with a top government witness, trying to cast his client’s one-time friend as a man facing a long prison term who is desperate to win his freedom.
Former financial consultant Anil Kumar grew increasingly impatient and defensive with attorney John Dowd as he explained his encounters with Galleon Group founder Raj Rajaratnam, a one-time billionaire whose family of hedge funds was forced to shut down after his October 2009 arrest.
Under earlier questioning from a prosecutor over three days, Kumar said Rajaratnam paid hundreds of thousands of dollars into overseas accounts in return for inside information.
The two men met at the University of Pennsylvania’s Wharton School in the early 1980s. Kumar is testifying under a plea agreement that can win him leniency if he answers questions honestly. He has admitted feeding inside information to Rajaratnam.
The testy exchanges between Kumar and Dowd came on the same day that the government played an audiotape of a phone call in which a former Goldman Sachs board member could be heard telling Rajaratnam that Goldman was discussing whether it was wise to acquire a bank such as Wachovia Bank or an insurance company like American International Group.
The government had said it would introduce evidence at trial that Rajaratnam was aided by his relationship with the ex-board member, who is not criminally charged.
But it was the exchanges between Dowd and Kumar that highlighted the day, with both men engaging in lengthy verbal sparring.
“You provided services to Mr. Rajaratnam?” Dowd asked Kumar, who worked for McKinsey Co. for more than 23 years before his 2009 arrest.
“Illegal services,” Kumar responded.
“Nevertheless services, correct?” Dowd asked.
“Yes,” Kumar said. He paused before again adding: “illegal services.”
Repeatedly, Dowd tried to restrict what Kumar said by warning that he had asked a yes-or-no question and it should be answered accordingly.
It was the first sample jurors got to Dowd’s manner of questioning after he delivered an opening statement last week that took twice as long as the initial description of the evidence in the case presented by Assistant U.S. Attorney Jonathan Streeter.
Dowd, best known for preparing a report that led Pete Rose to accept a lifetime ban from baseball in 1989, opened his cross examination of Kumar by talking about securities-fraud charges Kumar pleaded guilty to a year ago that could bring a prison term of up to 25 years.
“You might not go to jail at all, correct?” Dowd asked, dismissively.
“Yes,” Kumar responded.
“It’s important to make Mr. Streeter happy, correct?” Dowd asked.
“Wrong,” Kumar immediately answered.
“And his goal is to convict Mr. Rajaratnam, correct?” the defense lawyer continued.
“Wrong,” came the reply again.
Kumar is considered key to the government case against the 53-year-old Rajaratnam, who was charged along with more than two dozen other hedge-fund employees and workers for public companies.
The government has said Rajaratnam’s illegal profits may have topped $50 million while Dowd has maintained that Rajaratnam only made trades based on information that was already public. After his arrest, Kumar quickly cooperated, which gave Dowd another line of attack that he did not pass up.
“When you got caught, you pinned it all on Raj didn’t you, ’cause that’s what you needed to do to stay out of jail?” Dowd asked.
Throughout the U.S. government’s ongoing insider trading investigation, much of the outrage has centered on rich and powerful investors using improperly-obtained information to gain an edge on the mom-and-pop investor. Tuesday’s SEC charges against former Goldman Sachs board member Rajat Gupta, which allege the director shared non-public information with hedge fund manager Raj Rajnaratnam, just adds to the perception that the financial markets are not a level playing field.
Mark Rifkin, a partner at law firm Wolf Haldenstein Adler Freeman Herz specializing in securities and shareholder rights litigation, said Tuesday’s charges against Gupta “reinforced the suspicion that big-money guys are in better position to profit, but not because they are smarter or better investors.”
Gupta stepped down from the board at Goldman last spring, around the same time the Wall Street Journal reported the former McKinsey executive was linked to the insider trading investigation into Galleon.
Perhaps the worst part of the actions, which Gupta is denying through his lawyer, is the betrayal of trust that comes when an outside director – who is voted onto a board with the explicit mandate to protect shareholders and keep management accountable – uses his position to profiteer, or help his friends profiteer, says Rifkin.
SEC Division of Enforcement Director Robert Khuzami said “Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets. Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions.”
“It’s a breakdown in the system, says Rifkin. And what happens, he wonders, the next time Blankfein has to share sensitive information with his board ahead of its public release?
“The bigger issue is whether it is one rogue director or if it represents something about the culture,” says Rifkin. “Gupta was on the governance committee! Talk about the fox in the henhouse.”
Goldman Sachs declined to comment on the charges against Gupta Wednesday. The director is also alleged to have passed Rajnaratnam pre-release earnings figures from Procter Gamble, where he was also on the board. The consumer products maker confirmed that Gupta stepped down from its board Tuesday. American Airlines parent AMR, where Gupta is also a director, declined to comment on the matter, as did Buffett’s Berkshire Hathaway.
The SEC’s allegations are totally baseless. Mr. Gupta’s 40-year record of ethical conduct, integrity, and commitment to guarding his clients’ confidences is beyond reproach. Mr. Gupta has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder. There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo. In fact, Mr. Gupta had lost his entire $10 million investment in the GB Voyager Fund managed by Rajaratnam at the time of these events, negating any motive to deviate from a lifetime of honesty and integrity.
