Image: Raj Rajaratnam
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Raj Rajaratnam was convicted on all 14 counts — five conspiracy counts and nine securities fraud charges.
By John W. Schoen Senior producer
updated 5/11/2011 8:09:13 PM ET 2011-05-12T00:09:13

In an era of heightened public cynicism about ethics on Wall Street, the government’s insider trading conviction of hedge fund manager Raj Rajaratnam is a small step toward restoring investors’ confidence in the financial markets.

Much will depend on the outcome of similar cases that are working their way through the courts. The government's triumph, with its creative use of wiretaps, could encourage prosecutors and regulators to become more aggressive after years of failed cases and phyrric victories.

"This is a reaffirmation that there will be punishment for misdeeds in the industry," said Jason Pride, director of investment strategy at Glenmede Trust Co. "That's something that the market and the average investor needed to hear."

Story: Hedge fund chief Rajaratnam found guilty on all counts

Rajaratnam was convicted on all 14 counts — five conspiracy counts and nine securities fraud charges — after prosecutors alleged the 53-year-old hedge fund manager generated profits and avoided losses totaling more than $60 million from information that average investors were not privy to.

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The government claimed that his Galleon Group funds racked up successful trades by relying on an illegal network of "expert" company insiders who tipped him in advance of pending news about earnings or mergers and acquisitions.

The high-profile victory for prosecutors followed months of attention to the wide-ranging case, which has already resulted in dozens of arrests and convictions. The guilty verdict will reinforce the sense on Wall Street that the government is ready and able to crack down on illegal trades.

Vote: Does the verdict give you more confidence about investing?

"We're already reaching out to clients and people who are taking insider trading much more seriously," said Steven Feldman, a New York defense lawyer who specializes in white-collar crime. "We're giving training classes. The industry does understand this is a big deal, and they've reacted."

That reaction has been amplified by prosecutors' heavy reliance on wiretaps to make their case. Jurors listened to some 45 tapes during the course of the trial, one of the most extensive uses of wiretapping in a white-collar case. Rajaratnam's attorneys had fought vigorously to block the use of those tapes, arguing that the FBI obtained it with a faulty warrant.

The government's strategy of tapping Wall Street's phone calls, e-mails and text messages is a "game changer" in insider trading cases, according to Andrew Stoltmann, a Chicago attorney who specializes in securities law.

"Insider trading cases historically have been hard to win," he said. "But in this case, the wiretaps are likely the reason why Mr. Rajaratnam will likely spend the next 15 years in prison. Few things jurors find more persuasive than the defendant's own voice."

Insider trading cases can be complex, murky and difficult to unravel. They can also be hard to prosecute because insider trading can be tricky to define. The law says you can't buy or sell a stock based on "material, non-public information." Digging up public information about a company that others have overlooked is well within the law. Trading on a tip from a company official of a pending merger is not.

By convicting on all counts, the jury, which began deliberating April 25, ruled that Rajaratnam had crossed that line. On one phone call, Rajaratnam was heard talking to a former Goldman Sachs board member, Rajat Gupta, about a pending acquisitions. Goldman Sach's chairman Lloyd Blankfein testified at the trial that the phone call violated the investment bank's confidentiality policies. Gupta, who has not been charged, has denied any wrongdoing.

The verdict will also likely encourage the government to push ahead with other pending cases. Stoltman said that following not guilty verdicts in the November 2009 trials against two Bear Stearns hedge fund managers, "prosecutors went into a shell and didn’t bring any other Wall Street indictments. This verdict should be enough to embolden prosecutors to indict additional Wall Street executives and hedge fund managers. "

Powerwall: The man who put Rajaratnam away

"This is not over," said Feldman. "We're in the middle of cases being built. We've seen search warrants carried out in hedge funds, but we haven't seen all the traders charged yet. So I think there are definitely more shoes to drop here."

Rajaratnam, whose attorney said he will appeal Wednesday's verdict, is scheduled to be sentenced July 29. He faces a lengthy prison term between 15-1/2 to 19-1/2 years, according to criminal defense attorney John Fahy. The law allows up to 25 years.

"This was a pretty strong case against him," Fahy said. "I think the reason he went to trial is the U.S. Attorney's office didn't give him a break. If they wanted to give him a break, would he have pled guilty to 15 years? So he wanted to roll the dice hoping that he would win the case."

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Video: Rajaratnam guilty on all counts


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