"The Rajaratnam Case - Will Government Overreach?"

Sydney M. Williams

Thought of the Day

“The Rajaratnam Case – Will Government Overreach?”

May 16, 2011

From what I have read and have heard, it appears that the jury had no other choice than to offer a verdict of guilty in the case against Raj Rajaratnam. Justice, as our President might say, has been served – or will be, assuming the 2nd Court of Appeals upholds the Manhattan Federal Court.

Corruption in any field is wrong and should be punished. I find it particularly (and personally) offensive when it surfaces in the business in which I chose to work forty-four years ago. It is a business that pays especially generously; its participants, for the most part, recognize the good fortune that found them with careers on Wall Street. However, there always will be a few for whom a lot is not enough. “Greed,” as Preet Bharara, United States attorney for the Southern District of New York, said in March, “sometimes is not good.” In fact, I would say greed is never good. Some of you will recall Alexander Pushkin’s story, The Tale of the Fisherman and the Fish, in which the fish, in exchange for his freedom, promised to fulfill any wish the fisherman chose. The fisherman, greed in his eye, released the fish that promptly swam off. The moral is: greed, minus common sense leads to disappointment or worse.

Aspiration, in contrast to greed, is a positive characteristic and a necessary ingredient for success in any endeavor. There are times when the line between the two is difficult to discern. In the unusually competitive world of investment management, quick and accurate information is often the difference between success and failure. There is speculation that the prosecution, fresh from this success, will aggressively go after other hedge funds and so-called expert network firms. While there certainly may be other examples of sources knowingly passing on illicit information, the government (and the press) must keep in mind that Wall Street is all about networking. Analysts are paid handsomely for the information they uncover, for their judgment and for their ability to bring managements to their investing clients.

Reed Brodsky, the attorney who prosecuted the government’s case was quoted in Thursday’s New York Times: “Wall Street is supposed to be an even playing field.” However, it never will be. Small investors will always be disadvantaged relative to their institutional counterparts. Investing is about information and judgment; institutional investors have more access to better information. Jailing thousands of professional investors will not even the odds. In any case, the difficulty of investing is manifested in the underperformance by so many; ergo, the attractiveness of indexing.

The success of the Rajaratnam case was based almost solely on wiretaps allowed by Judge Richard J. Holwell. The FBI taped phone calls into and out of Mr. Rajaratnam’s office over a nine month period in 2008. The judge’s decision last December to admit those wiretaps spelt the doom for the defense. Wiretaps under the Racketeer Influenced Corrupt Organization Act have typically been used against the Mafia, money laundering or narcotics cases. The Rajaratnam case was the first insider trader case that permitted the jury to listen to secretly recorded telephone conversations. In this instance, according to a report on Reuters, the FBI were granted the ability to use wiretaps, as initially they were investigating Galleon Group for wire fraud and money laundering. In the process they ran across evidence of improper trading. According to the same Reuters report, in getting the green light for the wiretaps, the FBI failed to mention that the SEC had been investigating Mr. Rajaratnam for years – an omission the judge called “glaring.” That is likely to be grounds for appeal.

Successful government prosecutors often develop oversized egos and decide to leverage their victories into bigger political opportunities. Rudy Giuliani, as U.S. attorney for the Southern District of New York in the 1980s, became infamous for cuffing his accused and walking them out of their offices in so-called “perp walks.” Among his victims was Richard Wigton of Kidder Peabody; he later was found innocent. Giuliani’s perp walks gave him fame and glory, but deeply harmed the lives of dozens of innocent people like Mr. Wigton. Similarly, in the mid 2000s, N.Y Attorney General Eliot Spitzer went on a spree indiscriminately charging victims, the best known of whom was Maurice “Hank” Greenberg of AIG. Most of those charged, including Mr. Greenberg, were later found innocent. Nevertheless, off of destroyed reputations, Mr. Spitzer catapulted himself into the governor’s seat where he perched, until being hoisted on his own petard.

Preet Bharara appears to be taking a more discrete path. In March, he was quoted as saying that there was “nothing wrong or bad about hedge funds or expert networking firms or aggressive market research for that matter.” His ego seems to be less than that of either Mr. Giuliani or Mr. Spitzer. However, wearing the crown of being Mayor or Governor can be an alluring siren.

Last Thursday, the New York Times wrote about the case: “It is an important step toward restoring trust as a prerequisite of America’s financial markets.” I wish I could agree. Far more relevant, in my opinion, to restoring confidence would be prosecutorial success in addressing the issues that caused the credit collapse in 2008, and, as important, explanations for the “flash crash” last May. The problem, of course, is that any investigation of those two instances will lead, at least in part, directly back to Congress and the regulatory bodies they oversee.

Congress, unfortunately, remains above investigation, but not necessarily above stupidity or corruption, as seems increasingly obvious as more information is uncovered dealing with the events leading up to the credit crisis of 2007-2008. Mark Twain, with his rapier-like wit, often characterized that august body. In his biography, he wrote: “Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.” In “Pudd’nhead Wilson’s New Calendar,” he added: “It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress.”

Winston Churchill once said, “A democracy is the worst from of government except all the others that have been tried.” He also added, sounding somewhat like the elder Mr. Clements, that “…the biggest argument against democracy is a five minute conversation with the average voter.” Democracies are notoriously inefficient. In a world seemingly embalmed in a mist of attention deficit disorder, the wheels of justice grind slowly. But they do grind, and the truth usually outs.

Intelligent and educated, but ethically-challenged money managers, like Raj Rajaratnam, were once described by John Kenneth Galbraith as men “whose genius and imagination are unconstrained by integrity.” In the end, they are simply crooks, deserving of punishment, not for inflicting harm on any particular person (though that may have been a consequence,) but for not playing by the rules that apply to all those who live and compete in civilized society. However, we must also be careful, in our desire and haste to prosecute those whom we believe have broken our laws, that spurious means do not delegitimize the ends.