The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

Mr. Rajaratnam, enjoy your last weekend at home. Watch some football, enjoy your favorite foods and make sure to hug your kids. Because come Monday it's federal prison in Massachusetts – ouchhh.

Despite the arguments of your eloquent and powerful attorney, Patricia Millett, the trial judge and a panel of judges from the second circuit court of appeals feared you would opt for your native Sri Lanka (presumably fleeing surreptitiously in the baggage hold of someone’s private jet – since surely your passport has been seized) instead of lovely western Massachusetts.

But fear not Raj fans, I would not be shocked if on appeal his conviction is overturned. As I’ve written before, the prosecution team obtained its evidence using tactics that were aggressive and arguably crossed the line. Raj and his team argue that prosecutors conveniently failed to disclose key facts from prior SEC investigations when applying for wiretap warrants.  Judge Howell was surely troubled but decided it was prudent to allow the case to proceed to the jury.

Now on appeal, Raj has put his fate in Patricia Millett, a rising star in the rarified world of Supreme Court Attorneys. As an attorney in the Solicitor General’s Office she argued 25 times before the Supreme Court. She is known as a persuasive oral advocate and strong writer. Unlike Raj’s trial counsel (John Dowd), she is in the prime of her career.    Overturning this conviction would catapult her to the highest level of appellate lawyers and who knows, the Attorney General’s Office or maybe even a black robe, driver and a key to the Supreme Court’s basketball court. You can be sure she is motivated to do well in this very high profile matter.

Prosecutors cannot breathe a sigh of relief just yet.   They will have their work cut out defending this conviction.

Raj, you won’t be home for Christmas, but maybe next year.

• Print
• Comments
• Trackbacks
• Share Link

As the old proverb goes, "the fish rots from the head down."  How can we expect mid-level managers and the like to act lawfully and ethically when they see Mr. Gupta walking away with a slap on the wrist?

A product of the finest schools (the Indian Institute of Technology and Harvard Business School); the smarts to reach the pantheon of international business circles (Proctor and Gamble, American Airlines); entrusted to direct perhaps the most powerful financial company in the world (Goldman Sachs); and here he is blatantly passing what he had to know was inside information (to Raj Rajaratnam) from the hallway outside of Goldman's Board Room.  If it was a novel or movie, surely reviewers would say, "well-acted, but an implausible premise."

For a time it looked like the government was going to be satisfied with civil charges.  But U.S. attorney Preet Bharara and his team have made the right decision.  The strength of our financial system is grounded in trust and credibility.  No better way to protect that system than aggressively enforcing the law without fear or favor.  Directors of Goldman Sachs are not—cannot be—exempt.  Captains of industry must be treated no differently than the corner drug dealer.  As the old proverb goes, "the fish rots from the head down."  How can we expect mid-level managers and the like to act lawfully and ethically when they see Mr. Gupta walking away with a slap on the wrist?

We applaud Mr. Bharara for charging Mr. Gupta and look forward to seeing the evidence as it unfolds.

• Print
• Comments
• Trackbacks
• Share Link

Judge Richard H. Howell sentenced Raj to 11 years in prison this morning following his August conviction for securities fraud and conspiracy.  According to the New York Times, the 11 year sentence is the longest ever for insider trading, surpassing the 10 year sentence of Zvi Goffer, also a former Galleon trader (and just short of my prediction of a 15 year sentence back in August).

Deterrence matters. As a former Federal Prosecutor, I’ve seen the power that a stiff sentence and a prominent presence on the front pages can have on lowering crime rates.  Haynes & Boone white collar defense attorney, David Siegal expressed a similar sentiment: “One legacy of this case that Wall Street will be more careful about what they say on telephones than they used to be.”  Good.  We should hope that vigilance on the phone will spill over into vigilance when walking the line between aggressive fact gathering and insider trading.

The SEC can celebrate a job well done, but not for too long.  We need these investigators – who, for the first time in history, placed wiretaps on suspected insider traders – back out there catching bad guys.  Stay on the hunt. Stay on the front pages.  Rajaratnam made profits of more than $60M from insider trading…who is making $70M, $100M?

Insider trading affords the well-connected on Wall Street an unfair advantage over the average yet diligent investor on Main Street.  That, my friends, is unacceptable.  The regulatory agencies must remain on the watch, making sure the game remains fair – for everyone.

Assisted by Zachary Kady

Update (10/14/2011): Please enjoy the Newsy video coverage below.

• Print
• Comments
• Trackbacks
• Share Link

While hardly a long shot, we predicted this result way back in March:

Mr. Dowd and his cast of subordinates (when you represent a billionaire facing prison you can’t possibly bill enough hours) will try mightily to argue the technicalities of what constitutes criminal insider trading -- but my money is on the government and its young team of prosecutors.

Raj was just a bit too greedy, a bit too brazen, and in the end a bit too careless. While his was a clear case of insider trading (as noted by Juror Lauren, “there was just a lot of evidence”), many who walk the rarified halls of Wall Street are behaving in ways that are not too dissimilar. Where precisely is the line between aggressive fact gathering and illegal insider trading? It’s difficult to determine because in many cases it is a matter of degree not substance. The advent of social networking tools will only complicate matters.

As a former Federal Prosecutor, I can tell you though -- deterrence matters. Long jail sentences have a chilling effect. The threat of jail will change behavior. Prosecutors need to keep at it. Stay on the front pages, bring more cases and demonstrate that while there are shades of gray around corporate conduct -- there is a line that if crossed means you too may be on your way to jail; and when that line is blurry you best stay well to the
legal side.

• Print
• Comments
• Trackbacks
• Share Link

In an effort to illustrate that the “inside information” obtained by Mr. Rajaratnam was largely irrelevant, the defense called to the witness stand University of Rochester Business School Professor, Gregg A. Jarrell, a frequent expert witness (for both prosecutors and the defense).  Professor Jarrell testified in detail on how trades executed by Mr. Rajaratnam could have instead been based on publicly available research.  Developed at great expense, to be sure, the overarching purpose for the testimony was to create for the jury "reasonable doubt".

As we all know from experience or the movies, the prosecution must prove guilt beyond a reasonable doubt.  What that means is one of the most difficult questions in criminal law.  Somewhat illuminating is a standard jury instruction that as I recall states in part that reasonable doubt is "a doubt for which you can supply a reason." In other words, if a juror is faithful to the court's instructions, they cannot say... "Oh I have a doubt, I just do.  I have no reason to support my doubt though. "

In this trial that reason is Professor Jarrell's testimony and his fancy powerpoint -- at least that is the hope of John Dowd and his team.  Although unlikely given the weight of the government's case, a lone juror (it only takes one) could say, my reason for having a reasonable doubt is the testimony of Professor Jarrell.  He told us that there is another explanation and I have a reasonable doubt based on his testimony -- that's all it is.

In my view, the jurors will not so easily be diverted from the mountain of evidence submitted by the government, much presented by Rajaratnam himself in audiotape recordings.  Although polished and professorial, Professor Jarrell cannot defeat a very strong government case.

But the defense had to do something.

• Print
• Comments
• Trackbacks
• Share Link

Real reform wont 't come about until the banks are slapped as well.

Loan Servicing: It looks like a deal is near between the servicing companies and state attorney generals. Let's hope it cuts out the outrageous (excuse the hyperbole) abuses in this area. Forged signatures and phony documents have become commonplace. This is the soft underbelly of the securitization market. But real reform wont 't come about until the banks are slapped as well. They turned a blind eye to rampant abuse. They should have demanded better.

Insider Trading: An attorney with a top drawer resume (Cravath, Skadden and Wilson Sonsini — it doesn't get much fancier than that) has been accused of insider trading. According to the indictment he got himself into the firm's computer system in order to gather information on upcoming mergers. He then passed that information on to a confederate who purchased millions of shares. What are these people thinking? An attorney with that resume is good for a salary in hugh six-figures. Greed, greed, greed.

Shutting Down the Government: Why does this have to happen? Why does the Congress have to take us to the brink, year in and year out? All it does is reduce our faith in the government. Folks figure it out.

• Print
• Comments
• Trackbacks
• Share Link

Behind the scenes at the Raj Rajaratnam trial is the story of the wiretaps.  In a recent thoughtful article on the New York Times' Dealbook, Law Professor Peter Henning highlights the raging battle between prosecutors and the defense team over the admission into evidence of hundreds of hours of wiretaps.  Those fuzzy but telling recordings show Raj himself, in effect testifying about the acts that… well… constitute his guilt.  It is his voice, his demeanor, his personality chiding and prodding along a massive fraud, and all that in the first person.  But as Professor Henning points out, this all-important evidence was challenged and nearly disallowed by Judge Holwell.  He was particularly troubled by the government's omission of facts in its application for the warrant to obtain the wiretaps:

"The court is at a loss to understand how the government could have ever believed that Judge Lynch could determine whether a wiretap was necessary to this investigation without knowing about the most important part of that investigation — the millions of documents, witness interviews, and the actual deposition of Rajaratnam himself, all of which it was receiving on a real time basis and all of which was being acquired through the use of conventional investigative techniques."

Prosecutors may have gotten just a bit too greedy in this one.  They need to be conservative and beyond reproach.  Their job is not to win cases, but it is to a higher calling.  As the Supreme Court famously said over a generation ago, they are empowered to do justice.  In some cases that might mean walking away from even the strongest of evidence.  The Constitution and the system demand no less.

So as the trial plugs along for several more weeks, remember that Raj Rajaratnam’s best hope for freedom may rest with an appellate court, years after the trial has completed.  By then, the hundreds of hours of wiretaps will be silent and stored in some dusty, cavernous government warehouse.

• Print
• Comments
• Trackbacks
• Share Link

I wonder what the jury was thinking?

In his testimony, Mr. Blankfein at one point provoked laughter from the gallery when a prosecutor asked him why it was unusual that the company was losing money in the middle of the fourth quarter of 2008.

"We generally make money," he said, with a big grin.

-          Wall Street Journal, March 24, 2011

Here is Lloyd Blankfein on the stand grinning about making money, to the approval of the gallery.  I fear my comments yesterday, doubting the wisdom of using such a high-profile witness unnecessarily, may be proven correct.  Sure, the jury was listening; he’s the CEO of the most successful bank on Wall Street.  He reportedly received a $100 million dollar bonus this past year.  But the prosecutors’ job is to keep the focus on convicting Raj Rajaratnam’s of insider trading, and not divert that attention with celebrity witnesses.

And who could blame the jury?  Sure they have all those “secret tape recordings” to wade through, but in walks an all-star of Wall Street.  One of the most influential—and apparently personable—CEOs of the financial world is mere feet away in the courtroom; it is hard to imagine focusing solely on the issues at hand.  If Cal Ripken Jr. testifies at the Barry Bonds perjury trial, will the jury’s focus really be on what he says, rather than who he is and what he accomplished?

It is only natural for the jury to be distracted.  Mr. Blankfein’s presence overshadows the courtroom dynamic of prosecution versus defense.  Although I was not in the courtroom, it also seems as if the jury could take away the conclusion that this is all about making money and Raj, Lloyd and Mr. Gupta are all just trying to get their piece of the pie.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

Presumably, the prosecution reasons that it is powerful evidence to hear Goldman’s CEO confirm that the phone call “violate[s] Goldman Sachs’ confidentiality policy.”  Bad decision.

Today federal prosecutors called Goldman Sachs CEO Lloyd Blankfein to the stand to testify against Raj Rajaratnam, in what is being called the insider trading case of the century.  As a former federal prosecutor, I have previously commented on the outlook of the case, the government’s strategy for prosecution, and the first round of testimony.  Today, I express my doubts about the wisdom of calling Goldman’s CEO to the stand.

What you want the jury focused on is the substance and atmosphere of the taped conversation between Gupta and Rajaratnam.  The chronology is right out of the movies.  Gupta, a respected Goldman Board member, immediately upon leaving the Board Room, passes along highly confidential knowledge of Goldman’s acquisition plans to Raj.  Federal prosecutors use Blankfein’s testimony to confirm that the information in the call was confidential, and thus was illegally communicated and obtained by Rajaratnam.  Presumably, the prosecution reasons that it is powerful evidence to hear Goldman’s CEO confirm that the phone call “violate[s] Goldman Sachs’ confidentiality policy.”

Bad decision.  The glare of the jury’s scrutiny and hopefully its wrath must remain on Raj.  A high-profile witness, however, has the potential to distract and confuse the jury.  Never underestimate the imagination of a jury, particularly one involved in a long trial.  They will ponder the littlest of details and conjure up all kinds of theories.  You don’t want that, particularly in a case this important.  Sure, it looks powerful to call the CEO of Goldman to the stand, but isn’t that using a sledgehammer to crack a nut?  Any senior executive or compliance officer could have made the same point.  Drawing attention to the content of the illegal conversation rather than the person giving the testimony should have been priority one.

Put it this way: if Goldman Internal Compliance Officer John Doe had testified instead of CEO Blankfein, the New York Times’ headline could have been: Secret Tape Records Gupta’s Guilty Call; instead it was: Blankfein: Gupta Broke Confidentiality.  Doesn’t the first suggestion focus a bit more on the point?  Yet with the company CEO testifying you can bet the jury’s mind was in the same place as the Times’. Who knows what they will make of it, and if the defense is smart they will try to exploit the Blankfein appearance with seeds of conspiracy and anything that may divert the jury from the acts of Raj.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

Win over the jury early.

The government is off to a fast start.  No need to wait or to call a bunch of technical witnesses to lay a foundation for your claims.  The time to win over a jury is early; the sooner the better.  If you wait until week 8, for example, many of the jurors will have already tuned out or made up their mind (right or wrong) and they are unlikely to consider new testimony.  Their heels are dug in.  They figure that if the government waited two months to present the evidence, it can’t be that important.

Following that strategy, batting lead-off, instead of at number three or four, is Raj’s friend from the Wharton School of business, Mr. Anul Kumar.  (Technically, the government’s first witness was a Special Agent for the FBI who authenticated the audio tapes that lay at the heart of this case).  Mr. Kumar dispassionately explained how the defendant offered him $500,000 per year for inside information.  Moreover, Mr. Kumar explained how the defendant advised him to open a Swiss Bank account so those funds could be hidden from regulatory scrutiny and his employer.

Cross examination of Mr. Kumar by the defense will begin next week, but don’t expect some television-like reversal of his testimony.  He is no doubt a very smart man who has been well prepared by the prosecutors.  And worse for Mr. Rajaratnam, the jury has the weekend to let the testimony of this important witness sink in.

• Print
• Comments
• Trackbacks
• Share Link

For too long, Wall Street insiders have made fortunes based on who they know. Perhaps that’s just the way business works, but it is critical for financial markets to be better...Expand this investigation. Push it to the limit.

Federal prosecutors accused hedge fund manager Raj Rajaratnam and five others of using insider information to accumulate more than $20 million in profits. 

Sadly, this latest news comes as no surprise. For too long, Wall Street insiders have made fortunes based on who they know. Perhaps that’s just the way business works, but it is critical for financial markets to be better. To increase stability and fund growth, they must operate with the utmost integrity. The arrest of Raj Rajaratnam, particularly with his A list of confederates (from Intel, McKenzie and former Bear Stearns employees) make us question that integrity. Indeed, many on Wall Street have had a few sleepless nights since Mr. Rajaratnam’s arrest. And that’s a good thing.

Our financial markets to a large degree operate on faith and trust. Without that trust, Main Street investors (and worse yet, the Chinese) would likely flee for the exits. Why would you want to put your money in a market rigged to profit the rich and connected at the expense of the average investor? The US markets are still the safest in the world and they must stay that way. Everyone needs to play by the same rules. Surely we are not naïve. Insiders of one kind or another will always have an advantage—but that advantage must be constantly challenged.

Let’s applaud the SEC and law enforcement officials. But their hard work must continue. Expand this investigation, push it to the limit. Federal prosecution and the potential threat of jail time make for powerful deterrents. If the SEC and other government officials can keep up the pressure, Main Street should sleep easier.

Assisted by Jess Begen

• Print
• Comments
• Trackbacks
• Share Link