Galleon Conviction Likely to Embolden Prosecutors

On May 11th Mr Rajaratnam lost the battle he was fighting against government prosecutors. He was convicted on 14 counts of securities fraud and conspiracy, and faces up to 205 years in prison when he is sentenced in July. A New York jury found that Mr Rajaratnam made nearly $64m from trading based on tips he ferreted out from a network of corporate executives and traders about firms like Goldman Sachs, Google and Intel. He rewarded them generously for confidential information. He paid Anil Kumar, then an executive at McKinsey, $500,000 a year for tips about the firm’s clients, for example.

In the past 18 months alone, the U.S. has criminally charged 47 hedge-fund managers and others with insider trading; Galleon Group's Mr. Rajaratnam is the 35th defendant to be convicted or to plead guilty.

With the Rajaratnam trial over, prosecutors are readying a new wave of charges against hedge funds, research firms and corporate executives it believes traded on inside information. Next month marks the start of another insider-trading trial, this one for defendants in an alleged insider-trading ring that was connected to Galleon.

"This is a landmark case in that it is the first time prosecutors used wiretap evidence in an insider-trading case," says former federal prosecutor Robert Mintz. "This conviction will undoubtedly embolden prosecutors, and we can expect more of these cases in the future.

Judge Richard J. Holwell ordered home detention and electronic monitoring for Mr. Rajaratnam while he awaits his sentencing set for July 29.

John Dowd, a lawyer for Mr. Rajaratnam, said his client would appeal.

Jurors, who reached their decision on the 12th day of deliberations, did not respond to requests for comment.

Over a nine-month stretch in 2008, agents from the Federal Bureau of Investigation taped Mr. Rajaratnam’s telephone conversations. They listened in as he matter-of-factly swapped illegal stock tips with corporate insiders and fellow traders.

“I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” Mr. Rajaratnam said to one of his employees in advance of the bank’s earnings announcement.

It is not just hedge funds that will feel the fallout from Galleon. The case ensnared executives and board members at companies like McKinsey, Intel, Goldman Sachs, Moody’s and IBM. This will lead companies to rethink their insider-trading and compliance policies. The biggest fish to be caught up in the mess so far is Rajat Gupta, a former board member of Goldman Sachs and ex-boss of McKinsey, who has been charged by the SEC in an administrative proceeding for allegedly passing tips to Mr Rajaratnam. Mr Gupta has sued the SEC and is asking to stand trial in front of a jury. He may reconsider now that he has seen Mr Rajaratnam’s fate.