NEW YORK (Reuters) - Hedge fund founder Raj Rajaratnam was found guilty on all 14 counts of insider trading in a sweeping victory for the government and a vindication of its aggressive use of phone taps to pursue Wall Street crimes.
Rajaratnam, at the center of the biggest insider trading investigation in decades, sat expressionless as the judge's deputy read the jury's verdict in a hushed New York courtroom. The Galleon Group founder could face at least 15 years in prison when he is sentenced on July 29.
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 government's unprecedented use of extensive phone tapping in an insider trading case, which is more often deployed in organized crime and drug trafficking probes, may have marked a turning point in the prosecution of white collar crimes.
"It's an historic verdict," said Bill Singer, securities lawyer with Gusrae, Kaplan, Bruno & Nusbaum.
"It will likely set the stage for a dramatic change not only in the way that the Wall Street insider-trader activities are investigated and prosecuted, but most likely this will have a chilling effect on individuals and companies that trade."
Over the course of the two-month trial, the voices of Rajaratnam and his friends and business associates rumbled over courtroom loudspeakers in 46 digital audio recordings at the heart of the government's case. The conversations were occasionally laced with profanity.
In these calls and from trial testimony, the jury learned how Rajaratnam worked his mobile phone even when he was on holiday on a beach in Miami or in Europe, making arrangements to deposit money into accounts for friends who had provided him tips.
The tipsters included executives at major blue chip companies such as Intel Corp, and Rajat Gupta, who was once head of elite management consultancy McKinsey & Co and a former Goldman Sachs Group Inc board member.
Gupta's involvement as an unindicted co-conspirator prompted the government to make the unusual move of calling Lloyd Blankfein, the investment bank's chief executive, to testify at the trial. In a fleeting moment during a break in his testimony, Blankfein shook Rajaratnam's hand.
What began in October 2009 with Rajaratnam being arrested and frog-marched by FBI agents, and prosecutors warning hedge fund traders of more arrests to come, ended mid-morning Wednesday with jurors slowly filing into the courtroom for the announcement of their verdict.
The jurors, whose jobs include everything from food services to computer graphics, reached their unanimous decision on the 12th day of deliberations -- convicting Rajaratnam of five counts of conspiracy and nine counts of securities fraud.
Under federal sentencing rules that are not binding on the judge, Rajaratnam faces between 15 -1/2 years and 19 -1/2 years in prison, prosecutors said. Securities fraud and conspiracy carry a combined maximum penalty of 25 years imprisonment.
Chief defense lawyer John Dowd said Rajaratnam, 53, will appeal the case. In particular, he is expected to challenge the use of secret recordings.
"This is only round one ... We'll see you in the 2nd circuit," Dowd said, referring to the appeals court in New York.
After the jury was dismissed, Rajaratnam was released until his sentencing by presiding U.S. District Judge Richard Holwell. He is free under a $100 million bail package that will now include an electronic monitoring device and house arrest in his Manhattan apartment.
Rajaratnam's lawyers had stuck consistently to their main theme that his trades were guided by a trove 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.
Galleon had $7 billion under management at its peak in early 2008. It was wound down without losses to investors after the October 16, 2009 arrest of Rajaratnam, a longtime U.S. citizen and the richest Sri Lankan-born person.
The case was the first Wall Street insider trading trial to draw such wide attention since the mid-1980s scandal involving speculator Ivan Boesky and junk bond financier Michael Milken.
Prosecutors said Rajaratnam traded illegally on at least 15 stocks, many of them technology companies such as chipmakers Advanced Micro Devices Inc and ATI Technologies Inc, and search engine Google Inc.
New York's top federal prosecutor Preet Bharara, who has made insider trading cases a priority, said in a statement that Rajaratnam "let greed and corruption cause his undoing" -- echoing a theme pressed by trial prosecutors in their statements to the jury.
"We will continue to pursue and prosecute those who believe they are both above the law and too smart to get caught," Bharara said.
The jurors declined to be interviewed. One alternate juror, who heard all of the trial evidence but did not take part in the deliberations, said he was not surprised by the time the jurors took to decide.
"I didn't think it was going to be so open and shut," said Philip Wedo, 35, an unemployed writer and editor, when contacted by phone. "I didn't think they would get him on all 14 counts."
Meanwhile, across the country in Las Vegas where one of the hedge fund industry's biggest conferences was getting under way, managers and investors buzzed with the news. "Did you hear? Guilty on all charges," one attendee whispered.
Litigation experts said the phone taps strengthened insider trading charges, which historically have been difficult to prove because they rely on circumstantial evidence.
Besides wire taps, prosecutors were armed with testimony of three former friends and associates of Rajaratnam -- former McKinsey & Co partner Anil Kumar, former Intel treasury group executive Rajiv Goel and former Galleon employee, Adam Smith.
All three pleaded guilty to criminal charges and agreed to cooperate with the government in the hopes of lighter sentences.
But the recordings provided the prosecutors' best evidence. In potentially one of the most damning exchanges, Rajaratnam was heard discussing information he received from Gupta about Goldman Sachs, including the first quarterly loss in its history in 2008.
"I just heard from somebody who's on the board of Goldman Sachs, they are gonna lose 2 dollars per share," Rajaratnam was heard telling a colleague on one call. "So what he was telling me was that, uh, Goldman, the quarter's pretty bad."
Rajaratnam is the only one out of 26 people charged in the broad Galleon case to go on trial so far. Twenty-one pleaded guilty and one defendant is at large.
A second trial of three former securities traders, one of them a former Galleon hedge fund employee, is scheduled to start on Monday in New York with phone tap evidence also key to the prosecution evidence.
The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.
Additional reporting by Jonathan Stempel, Dan Levine, Scot Paltrow, Andrew Longstreth, Svea Herbst-Bayliss, editing by Dave Zimmerman, Martin Howell