July 19 (Bloomberg) -- When former hedge-fund consultant Danielle Chiesi appears at her sentencing for insider trading tomorrow, one lawyer who helped build the case against her and Galleon Group LLC co-founder Raj Rajaratnam won’t be there.
Joshua Klein left the Manhattan U.S. Attorney’s Office on Jan. 19, 2010, exactly one year before Chiesi pleaded guilty to three counts of conspiracy to commit securities fraud. Wiretaps and other evidence Klein helped gather led to Chiesi’s guilty plea and Rajaratnam’s conviction following a trial.
“I won’t be in the courtroom, but I’ll be watching,” Klein, 43, said in an interview from Petrillo Klein LLP, the Manhattan law firm he co-founded last year with former prosecutor Guy Petrillo. “When you live with a case for a long time, you cannot completely separate yourself from it.”
Rajaratnam, 54, will be sentenced on Sept. 27. A Manhattan federal jury convicted him in May of 14 counts of insider trading for using inside tips to make $63.8 million. He faces 15 1/2 years to 19 1/2 years in prison, prosecutors said at the time of his conviction.
Chiesi, who worked at New Castle Funds LLC, admitted in January that she passed Rajaratnam illegal tips that she got from sources including Robert Moffat, a former International Business Machines Corp. executive who has also pleaded guilty. Chiesi, 45, faces as long as 46 months behind bars under U.S. guidelines. She agreed this month to pay $540,000 to settle related allegations by the U.S. Securities and Exchange Commission.
Since August 2009, federal prosecutors in New York have charged 49 people with insider-trading crimes. Of those, 44 have been convicted, according to the government. No one has won a dismissal or acquittal. Five cases are pending.
The Galleon case was a “wide, sweeping one” that splintered off into many directions, said William Johnson, who supervised Klein in the Manhattan federal white-collar crime unit. Klein took control of the Rajaratnam investigation in the fall of 2008 while other prosecutors oversaw probes into other traders and hedge-fund consultants, he said.
“The case was in good hands with Josh,” Johnson said. “He’s very strategic.”
After Klein went into private practice, the Galleon prosecution was handled by Reed Brodsky, Jonathan Streeter and Andrew Michaelson, whose faces graced newspaper pages after the Rajaratnam jury returned the guilty verdicts.
It was Klein and Lauren Goldberg, another prosecutor at the time, who helped build a criminal case that began as early as 2003 as a civil investigation by the SEC. They took the novel step of using wiretaps to catch their targets in the act of sharing inside information.
Hit a Wall
By March 2008, the government had “hit a bit of a wall” and needed wiretaps to proceed, Goldberg testified at a hearing last year. After a judge approved wiretapping, investigators recorded about 2,400 conversations of Rajaratnam, Chiesi and others. Prosecutors played about four dozen of the recordings at Rajaratnam’s trial, including chats between the hedge-fund tycoon and Chiesi.
Klein began working on Galleon after winning a trial conviction in 2008 of fund manager Alberto Vilar for stealing money from investors. He took control of the Galleon probe after Goldberg moved on to other cases.
Klein “was the guy putting it together,” lawyer Jeffrey Bornstein said in an interview. Bornstein represents portfolio manager Richard Choo-Beng Lee, who pleaded guilty in 2009 and provided evidence against Rajaratnam. “He was a very formidable, strong-willed advocate for the government.”
Also in 2008, Klein won a 10-year prison sentence for former Credit Suisse Group banker Hafiz Muhammad Zubair Naseem, who was convicted in an unrelated insider-trading case. That sentence was the longest in any insider trading case in Manhattan since at least 2003.
With Michaelson sharing what he learned as an SEC lawyer about Galleon’s stock trading, Klein tapped almost a decade of prosecutorial experience handling narcotics and white-collar crime cases. He began monitoring wiretaps, holding plea negotiations with cooperating witnesses and making tactical decisions.
One key concern was ensuring that the probe stayed “narrow” and didn’t veer into unwarranted directions, Klein said. He also wanted to ensure that investigators didn’t make legal mistakes defense attorneys would later attack.
Neither Klein, a graduate of the University of Michigan and Harvard Law School, nor Goldberg, now general counsel to cosmetics maker Revlon Inc., would discuss how they built the Galleon cases. Other prosecutors including Andrew Fish, who on June 13 won a conviction at the insider-trading trial of ex- Galleon trader Zvi Goffer, were also mapping strategy in the expanding investigation.
After Rajaratnam’s arrest on Oct. 16, 2009, the judge set bail at $100 million, later reduced. Klein initially argued against bail, citing “overwhelming” evidence that included wiretaps “very clearly” depicting insider trading, a characterization with which jurors agreed 17 months later.
“There was so much going on” the day of the Rajaratnam and Chiesi arrests, Klein said. “We had accomplished the task of putting together the case.”
By the time Klein left the prosecutor’s office, eight defendants had pleaded guilty and other pleas were in the works. Klein said he would have “loved” to try the Rajaratnam case. Still, he doesn’t regret leaving government service.
‘You Never Know’
“You never know if a case would go to trial,” said Klein, who didn’t attend any of Rajaratnam’s trial. “I would read about the case, I would monitor what was going on, but I was juggling a lot of things trying to build a law firm.”
Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment. Alan Kaufman, the lawyer for Chiesi, and Jim McCarthy, a spokeswoman for Rajaratnam, declined to comment.
Klein said he felt a sense of “closure” with the Rajaratnam verdict.
“I congratulated the trial team,” he said. “I definitely did feel a sense of having achieved certain goals, and of having had an input in making a dent in combating a certain type of activity that has proven difficult to identify and prosecute.”
The case is U.S. v. Rajaratnam, 1:09-cr-1184, U.S. District Court, Southern District of New York (Manhattan).
--Editors: Andrew Dunn, Mary Romano
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