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Crackdown on Insider Trading

Friday, May 13, 2011

Hedge fund founder Raj Rajaratnam was found guilty on five counts of conspiracy and nine counts of securities fraud involving insider trading. This is a big victory for the government and a vindication of their aggressive use of phone taps to fight Wall Street crimes.

The prosecution based its case on evidence that Rajaratnam ran a web of highly-placed insiders to leak valuable corporate secrets between 2003 and March 2009, earning an illicit $63.8 million from trading on the information. The insiders included executives at major blue chip companies such as Intel Corp, and Rajat Gupta, who was once head of elite management consultancy at McKinsey & Co and a former Goldman Sachs Group Inc. board member.

Rajaratnam’s lawyers had stuck their main defense that his trades were guided by a wealth of research and public information. Last November, they lost a bid to suppress the wiretaps after arguing that investigators misled the judges who approved the surveillance. The government’s unprecedented use of phone tapping in an insider trading case may have marked a turning point in the prosecution of white collar crimes. This will probably mark the beginning of a new way to detect insider-trader activities.

After the jury was dismissed, Rajaratnam was released until his sentencing. Rajaratnam, could face at least 15 years in prison when he is sentenced on July 29. He is free under a $100 million bail package that will now include an electronic monitoring device and house arrest in his Manhattan apartment.

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