According to everyone we’ve spoken to, the market is expecting Raj Rajaratnam to get convicted of insider trading.
(Background: Rajaratnam has been on trial for insider trading for over 2 months. We hear that hedge funds haven’t been trading as much, and that trading volume on the whole is down. Of course the market might not care about the Raj trial at all. But what the outcome of the Raj trial means for the other insider trading investigations and trials that will follow is significant, and everyone is watching his trial.)
But hold on. I’m still not 100% convinced that Raj will get convicted. And I think there’s good news for Raj hidden in the fact that Steve Cohen’s trades at SAC are now being examined.
Having been at the Raj trial, I can tell you — it is not going well for the government. The jury is taking forever to convict Raj. If this were the open and shut case that everyone thought it would be, it would be over by now. And it’s not even close! No matter what, this is great news for hedge fund managers.
Like our boss Henry says, if Raj can’t get convicted, no one can. The government has some evidence on Raj that looks terribly incriminating. It’s really terrible. Raj is heard saying keep this radio silent, this is highly confidential, I have a guy on the board — I mean, if that’s not insider trading… what is?
It’s true that the big picture of the government’s case looks great. There’s this guy, Raj, with all these inside connections, who has a huge advantage over the average day trader, and a sizable advantage over prop traders at banks, etc.But the government hasn’t proven the minutiae. There is nothing I’ve seen (and I haven’t been there every day, but I’ve been there a good portion of the trial) that says to me, “Whoa. Every single one of these trades was clearly result of that tip Raj got from [insert names of his various tipsters].”
And I think the government knows that. That’s why the prosecutors shoved 14 counts against Raj. Probability-wise, he’s likely to get convicted on at least a few. That’s also why the prosecution wants the jury to have transcripts of the wiretapped conversations in the deliberation room, so that the jury can see in black and white the lines where Raj says, for example, “what’s the date?”
The judge, Judge Holwell, isn’t allowing the transcripts back there. Instead, the jury has to listen to the entire call if they want to hear that one line again. It could be a 30-second call, or it could be a call that is 40 minutes long. The longer the call, the more the jury gets to see what Raj is like. On the calls, you hear how much he thinks about the market, you hear his concern about executive leadership at the companies he’s invested in, how much work he does, you hear his plans to fly from place to place to meet with people.
The prosecution is DYING to get the paper transcripts back there. Obviously. Because no matter how much the prosecution calls him “Mr. Rajaratnam” or “the defendant” or doesn’t show his picture, the guy the jury hears on the wiretaps is a jolly ol’ Raj. He’s funny! He’s cool. His friends really like him. And I bet the jury likes him too, this guy named Raj who they’ve seen in court every day for over 2 months.
(If the security guards downstairs provide any indication, they’ve started calling him, “The Raj.”)
If he were a rich old white guy, the personification of the public’s idea of the men who caused the crisis, the story might be different. But during the crisis, Raj wasn’t talking to his friends like, I knew this would happen. Or worse, like, Yes! My evil plan to short the subprime crisis worked! He was freaking out during the crisis and the jury can hear that on the wiretaps.
And Raj (allegedly) insider traded Goldman Sachs stock; he stuck it to the old rich white guy stock, the stock of the company the government basically blames for the crisis. He says, “The street has [Goldman] making $2.50… I’m looking for $1.05. [The share price] is at $99 now. So if it gets to $105, I’m gonna whack it.”
Not only does the wiretap of that call show that Raj’s Goldman short was based on Raj knowing about Goldman’s ICBC losses, but it shows that he didn’t just short it right after he got the insider tip. He seems to have done some research and thought about the tip as one piece of the puzzle, which fits with the mosaic theory defence.
Of course there are a lot of semantics involved. Like, was the insider tip a factor in Raj’s decision to trade the stock? If that definition (the prosecution’s definition) of insider trading stuck in the jury’s mind, it’s great for the government. But by the real definition (the judge’s), each juror has to find Raj guilty of 4 things in order to convict him of the substantive charges.
And the thing is, Raj is a really nice guy that you want to sympathize with. He’s always either smiling awkwardly for the camera (which the jury probably doesn’t see) or he’s sitting there looking serious and kind of sad (which the jury does see). And a lot of the information Raj got was just part of a 20 minute call with a friend. I think those facts are more likely to stick in the jury’s mind.
Raj’s lawyer, John Dowd told the jury, “If you gave Rajiv Goel $5, would you trust him to pay it back? If the answer is no, you can’t convict Raj.”
I think a lot of them would say no. And I think the implied follow-up question Dowd asked them is, “would you trust Raj to give your $5 back?”
Raj is a very like-able guy in court. He’s losing weight, and a gross-sounding infection hurt his foot the other day, which makes you feel bad for him. It’s something that would happen to a regular guy on the street more than a billionaire. There’s even a rumour that it was because of gout or diabetes. The jury can totally relate to that. Almost all of them are overweight. (Sorry, I know that’s not nice, but it’s true.) And Raj braved through it and walked back into court within a couple of days.
Also helping Raj is that the testimonies from Raj’s friends against him make Raj look like a nice guy, if not a guy who got thrown under the bus for no good reason. I think the jury would say “yes, I trust Raj to give my $5 back,” and I think that’s a big reason why Raj won’t get convicted on many, if any, of the charges.
Plus, there’s the woman who just got taken off the jury for some odd reason that no one is aware of. The case is supposed to be totally open to the public, but there is one piece of evidence that no one has seen, note #11 from the jury. Apparently it contains a name, and that’s why we can’t see it.
But for an entire day, there was an information vacuum at the Raj trial, the lawyers and the judge were in a secret meeting in the back room for over an hour, no one knew what was going on, and suspicions peaked. A later note said that she was excused for a medical issue. Who knows what really happened.
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The important thing is who replaced her on the jury: A leather-wearing, middle-aged, government-employed African American who is studying to be a minister. The man screams “Raj is innocent” to me. Clearly he doesn’t like his boss – the government, which is prosecuting Raj – so he’s studying to be a minister so he can quit. And his new boss, God, is all about forgiveness. Plus, he wore leather frequently to the trial. To me, that says he’s a bit of a risk taker. And all throughout the trial, the prosecution has been hammering this down the jury’s throat: Raj did it for the conquest; he did it for the thrill. The leather-wearing minister seems like a guy who can relate to that.So, back to Steve Cohen and why the examination of his trades is good news. It might mean that the government is seriously worried that Raj will get off so they (ahem, Bahara) had to bring another big investigation (technically, it’s being called an “examination“) against a big name.
I know if I had a lot of money to play with, I would keep a big chunk riding on Raj getting off.
* (Obviously there are tons of other reasons why volume is down, too. It’s also because prop desks were shut down and because hedge funds and everyone needs to or is preparing to meet higher capital requirements and because they have to deal with other regulations and what Bernanke will do…you get the idea.)