Was Rajaratnam Just Smart or Inside Trader? Decision Time Nears

NEW YORK -- Was former billionaire Raj Rajaratnam just a smart trader who based his deals on a "mosaic" of public information or were his profits based on insider tips?

Rajaratnam's defense made the case for the former this week, as the largest hedge fund insider-trading case in U.S. history moved toward closing arguments next week.

The government has accused Galleon Group founder Rajaratnam of making more than $63 million in illegal profits by trading on insider tips.

On Friday, Gregg A. Jarrell, a professor of finance and economics at the University of Rochester, and defense lawyer Terence Lynam systematically debunked the accusations.

The prosecution alleged that Rajaratnam avoided more than $3 million in losses on an insider tip from Rajiv Gupta, a former Goldman Sachs' board member, about the firm's earnings in the fourth quarter of 2008.

Jarrell, who previously served as the Securities and Exchange Commission's chief economist, produced press clippings and analyst reports showing that because of the financial crisis, Goldman Sachs was performing badly and its stock price was expected to drop.

The expert witness said the prosecution's allegation was incorrect because it was based on the assumption that "but for the alleged tip," Rajaratnam would not have sold his Goldman Sachs stock, even though the firm was suffering at the time.

"I think that is an exaggeration over what would be reasonable," Jarrell said. "The market in the U.S. is falling, the market in China is falling and this is dragging down Goldman with it."

Since Goldman stock fell by almost $5 when the alleged tip suggested $2, Jarrell said it "was quickly rendered stale by intervening events in the market place."

Backed by slides and charts, Jarrell made a similar case, opposing the prosecution's allegations on Rajaratnam's reasons for trading on several companies, including Hilton Hotels and Google.

In March, government lawyers played secretly recorded phone conversations in which Rajaratnam and his alleged sources appeared to exchange confidential information about companies including Goldman Sachs, Akamai Technologies, Google, and Advanced Micro Devices Inc.

The prosecution countered by showing the jury other news and analyst reports offering the opposite market trends -- also available in the public domain -- thereby suggesting the trades actually were based on insider information.

After the lunch break on Friday, Manhattan Assistant U.S. Attorney Jonathan Streeter told Jarrell he showed the jury one-sided reports.

The witness responded that his objective was to show that the content of the alleged tips was in the public domain, but it was for the jury to decide what formed the basis for the defendant's trading. "I'm not going to waste the time of the jury with all that information in the market," Jarrell said.

The prosecution's case, which spanned four weeks, included wiretapped conversations between Wall Street players about deals being planned in company boardrooms.

The government called high-profile witness Lloyd Blankfein, CEO of Goldman Sachs. Also called were Rajaratnam's former classmates from the Wharton School of the University of Pennsylvania, who had already pleaded guilty.

The defense's case featured testimony from Geoffrey Canada, president of Harlem Children's Zone. Canada was featured in the film "Waiting for Superman," which won the best documentary award at the 2010 Sundance Film Festival.

Canada told the jury that Rajaratnam was his "dear friend" who "had a genuine concern for children."

"Raj's wish was that we could level the playing field for children," Canada said.

Several times this week, the prosecution and defense sparred over the admissibility of evidence.

The prosecution also tried to block Canada's testimony by claiming it irrelevant to the case, but Judge Richard Holwell said that since the government had portrayed Rajaratnam as greedy, the defense could build his character as generous.

"I never had to convince Raj. ... He volunteered the support," Canada said.

Rajaratnam, who is charged with 14 counts of conspiracy and securities fraud, has denied any wrongdoing. If convicted, he could face up to 20 years in prison.

Out the 26 people arrested in the case, 19 have pleaded guilty.