Welcome to the Raj Rajaratnam Show

March 9, 2011, 7:49 PM UTC

19 people have already pled guilty in the vast, ongoing insider trading bust. Can Raj Rajaratnam’s lawyers make a strong enough case for the hedge fund manager at its center?

Raj Rajaratnam heads to court.

Opening statements are expected to begin Wednesday in the insider trading trial of hedge fund manager Raj Rajaratnam, kicking off a courtroom drama expected to last more than two months. Jury selection began on Tuesday.

No insider trading case has attracted this much attention since the 2002 Martha Stewart trial. And not since Ivan Boesky’s trial 25 years ago has a financier been accused of commanding so vast a ring of informants. The case has ensnared employees at companies including IBM (IBM) and McKinsey, and most recently a former Goldman Sachs (GS) board member.

Rajaratnam is accused of making $45 million thanks to insider trading, and he could get up to 20 years in prison if convicted.

Rajaratnam, 53, was well known as one of the hedge fund world’s most successful traders. Before the government began handing out subpoenas in 2009, Galleon had more than $7 billion in assets under management and was considered the smart money in tech and health care investing. His funds were successful, even though Galleon lived through its share of problems, including dramatic swings in assets and a $2 billion settlement with the SEC in 2005 after the government had accused Galleon of illegal shortselling. The firm neither admitted nor denied wrongdoing.

Despite some bumps in the road, the hedge fund manager with the Bollywood star hair had fared just fine. His net worth was valued at $1.5 billion, according to Forbes, and he was known for throwing lavish parties, declaring himself the “king of kings,” and engaging in chest-pounding and pranksterism (stories of which are helpfully collected here).

The Rajaratnam case has generated a flood of press leading up to the trial, including detailed stories about the presiding judge, Richard J. Holwell, who is expected to be a tough, but fair, arbiter. Holwell dealt the defense a major blow when he rejected a request to throw out the government’s wiretap evidence, which includes 173 taped conversations. 19 have already pled guilty in the case, some of whom will testify on behalf of the government.

All eyes will also be on one particular witness, Goldman Sachs CEO Lloyd Blankfein, if he indeed gets called to the stand. Blankfein agreed to testify about his conversations with former Goldman board member Rajat Gupta, who the government says then shared insider information with Rajaratnam.

Insider trading cases are notoriously hard to prove because it boils down to whether or not prosecutors can prove a person’s intent, beyond the shadow of a doubt. Martha Stewart, for example, went to jail for lying, not for insider trading. But this time the government is feeling pretty confident about its case.

“A client of mine is a former Galleon employee accused of no wrongdoing who was witness to significant statements made by Raj,” says Stuart Meissner, a Manhattan attorney who often represents whistleblowers. “We informed the U.S. Attorney’s office that he was willing to testify, but they said they don’t think they need him. I’m surprised by that as a former prosecutor. You don’t know where a trial will go so you want more witnesses, not less. They must be very confident.”

While the government relies on wiretaps, the defense will say that Rajaratnam was simply using what the New York Times describes as a mosaic investing style, i.e. gathering together disparate available data to form a mosaic, a bigger picture of a company that could give the investor an edge. As part of this defense, Rajaratnam will have to prove he didn’t know that the nuggets dropped at his feet were confidential, market-moving tips from company executives and other informants who had provided the information illegally.

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