Goldman’s CEO to Testify Against Rajaratnam

Raj Rajaratnam

Lloyd Blankfein is not your ordinary witness for the prosecution. Goldman Sach’s CEO will testify against Galleon Group founder Raj Rajaratnam in the sensational insider-trading trial beginning on Tuesday.

The prosecution narrative is that Rajat Gupta, a Goldman board member and former head of the McKinsey consulting firm, gave inside information about earnings to Rajaratnam in 2008. Gupta allegedly passed the information to Rajaratnam immediately after Blankfein concluded a conference call on the topic with Goldman’s directors. Blankfein, not accused of any wrongdoing, could testify that the call was the source of the information.

Profitable Tip

The tip was lucrative, to the tune of $1 million in trading profits for Galleon Group. The leak has prompted the Securities and Exchange Commission to file a lawsuit against Gupta. Rajaratnam’s lawyers argue that the Gupta lawsuit jeopardizes their own case, in which Gupta was to be called by the defense. The lawyers also complained about pre-trial publicity polluting the jury pool – not an unusual tactic in high-profile trials.

"It is simply inexplicable that they did not act to stop this pollution of this jury pool," lead defense lawyer John Dowd said of prosecutors. "One is left to conclude this was a deliberate attempt to pollute this jury pool and deny Mr. Rajaratnam his right to an impartial jury."

Gupta Claims Innocence

Gupta has denied wrongdoing in a recent email. "There are no tapes or any other direct evidence of me tipping Mr. Rajaratnam," Gupta wrote. "I did not trade any of the securities involved, nor did I share in any of Mr. Rajaratnam's profits."

The trial is expected to last two months.

Eric Bank, Freelance Writer

Judge Revokes Bail of Insider-Trading Tipster

Winifred Jiau

Winifred Jiau will be the government’s guest for the foreseeable future, as she cools her heels in the big house for allegedly passing inside information. She’s been there since December after having pleaded not guilty to charges of securities fraud. Yesterday, the judge revoked her $500,000 bail as details of a bizarre plot to flee the country surfaced.

Jiau, who had been a consultant for Primary Global Research, is charged with passing inside information to two separate hedge funds. Jiau was done in by a friend after she hinted to the friend – in Chinese – that she had plans to flee the country once bail was posted. Jiau’s friend was one of several thought to be raising bail for Jiau. 

Prosecutors claim that the friend was told on January 13 that Jiau had moved assets to mainland China in October. Jiau has dual citizenship in the U.S. and Taiwan. Jiau also had failed to disclose the $20,000 stash at her residence in California or the fact that she had withdrawn $100,000 from a bank account. Whether or not Jiau is ultimately convicted, she appears to be guilty of being unhelpful, at the very least.

UPDATE - 10Mar2011

Jiau, along with former SAC Capital Advisors portfolio manager Donald Longueuil, have entered new not guilty pleas in Manhattan federal court. New charges against Jiau accuse her of tipping off former SAC manager Noah Freeman and another, as yet unidentified hedge fund manager. The unidentified individual is said to be Samir Barai, of Barai Capital Management, who was also charged in the case. Freeman has pleaded guilty and is turning evidence against other defendants.


Eric Bank, Freelance Writer

Baystar and its Founder Charged with Wire Fraud

Lawrence Goldfarb

Lawrence Goldfarb, the founder of hedge fund Baystar Capital Management, was charged along with his firm for siphoning money from side-pocket accounts into his own pocket. Goldfarb struck a deal to defer prosecution – if he plays ball with the prosecutors and makes full restitution of $12 million, the charges will be dropped. Nice deal! Still, it’s better to repay the stolen money than to fight charges endlessly.

Baystar Capital had $100 million under management, of which $12 million was segregated in a “side pocket” – a special investment fund.  And this one was indeed special to Mr. Goldfarb, who pushed fund money into an unauthorized real-estate fund and a record company. Of course, some of the money went to personal and charitable expenditures – once you start dipping into the cookie jar, it’s so hard to stop!

"Goldfarb betrayed the trust of his hedge fund's investors, keeping them in the dark about their investment profits so he could use their money as his own," said Marc Fagel, head of the Security and Exchange Commission's office in San Francisco. Ya think?

Eric Bank, Freelance Writer

A Busy Topic

This is my new blog about the latest developments in the fascinating world of hedge fund crime, lawsuits and investigations. There will be no shortage of stories. I will post short updates as they become available, as well as the occasional background piece that goes into a criminal case in depth.

Eric Bank, Freelance Writer