An epic trial in the making



If Oliver Stone is considering a third instalment of his gritty and glitzy Wall Street movie franchise, he might be tempted to visit a Manhattan courtroom in New York this week.

Sitting in the dock will be Raj Rajaratnam, the one-time billionaire and former head of the Galleon Group hedge fund, in what the US media is billing as the biggest insider trading trial in a generation.

During the next few months, a graphic picture of the seamier side of Wall Street is expected to take shape as prosecutors play secretly taped telephone conversations to try to prove that the Sri-Lankan born financier conspired to earn almost US$50 million (Dh183.6m) illegally. Mr Rajaratnam has denied the charge.

Still, fact is likely to prove stranger than fiction, and may illustrate that Mr Stone's charismatic and cash-hungry creation Gordon Gekko is not just confined to the silver screen and the two Wall Street films.

"This is the largest hedge fund insider trading case in history," the federal prosecutor in New York said. It is also the biggest insider trading trial since the 1980s.

Mr Rajaratnam, who is free on $100m bail, will plead his innocence and, in a highly unusual move, is expected to testify in his own defence rather than let his legal team do all the talking.

Jury selection started yesterday and the trial may last two months. It will also feature evidence from 2,400 secretly taped telephone conversations with 130 people, involving alleged inside tips on 37 companies, including Goldman Sachs, Google, Hilton Hotels and Advanced Micro Devices.

Since the arrest of Mr Rajaratnam, who managed a fund worth $7 billion in October 2009, 26 former traders, executives and lawyers have been charged. The US government has also pressed ahead with what it calls the biggest investigation of insider trading in the $1.9 trillion hedge fund industry.

Prosecutors allege Mr Rajaratnam made up to $50m 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 investigations because of the government's wide-scale use of secretly recorded telephone conversations.

Yesterday, the selection of the 12-strong jury was the first opportunity for prosecutors and defence lawyers to score points after 16 months of jousting over "telephone taps" and other evidence. Opening statements will start once the jury is in place.

Evidence gathered for the case has led to a separate investigation into those who peddle inside information as the product of legitimate research. That has resulted in nine arrests, with probably more to come, said Preet Bharara, the US attorney for the southern district of New York.

"When sophisticated business people begin to adopt the methods of common criminals, we have no choice but to treat them as such," Mr Bharara said.

"To use tough tactics in these circumstances is not being heavy-handed; it is being even-handed. … It is not clear to me why alleged financial fraudsters deserve a milder approach just because they wear a white collar."

As for Mr Rajaratnam, he has maintained his innocence from the start, saying any trades he made were based on publicly available information.

Born in Sri Lanka, he was ranked among the world's top 600 wealthiest billionaires in 2009 by Forbes magazine with a net worth of $1.3bn. His lawyers say he is no longer a billionaire.

"The Raj trial and the FBI raids have definitely raised awareness among investors and hedge funds about the whole insider-trading issue," said Donald Steinbrugge, a managing member of Agecroft Partners, which helps hedge funds raise assets.

Regardless of the outcome of the trial, Mr Bharara wants to send a tough message to Wall Street that federal officers might be listening the next time secrets about public companies are passed around.

In October, he said insider trading was "rampant and may even be on the rise". Since then, two separate judges have upheld the use of secretly recorded telephone conversations in white collar cases. "[This has a] deterrent effect on those who have too long thought that law enforcement doesn't bother to eavesdrop on them," Mr Bharara said.

Among those who could be called by the government to testify is Lloyd Blankfein, the chief of Goldman Sachs Group. Prosecutors and financial regulators have accused Rajat Gupta, a former Goldman board member, of leaking information about the bank to his friend Mr Rajaratnam.

John Dowd, the lead defence lawyer for Mr Rajaratnam, has fought hard for his wealthy client, arguing 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, Mr Dowd has argued.

He also fought, unsuccessfully, to suppress the use at the trial of the FBI's secretly recorded telephone conversations.

"In some ways it sounds like a classic insider trading case," said Sam Buell, a professor of law at Duke University in North Carolina, who is not involved in the case.

"But we can expect some kind of twist here in the nature of defence arguments about this is a different realm of trading and information sharing."

* with Agence France-Presse, Reuters and Bloomberg

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