A Wharton School MBA was convicted today (May 11) on all 14 counts in a highly prominent insider trading case on Wall Street. Billionaire hedge fund manager Raj Rajaratnam was found guilty of fraud and conspiracy by a federal jury in New York.
Convicted of masterminding one of the biggest insider trading scandals since Martha Stewart and Ivan Boesky, Rajaratnam now faces up to 25 years in prison when he is sentenced. He is expected to appeal the verdict.
The conviction is a sad ending to what had been a remarkable success story. Rajaratnam came to the U.S. from his native Sri Lanka in 1981 to get an MBA from the Wharton School. Armed with the degree, he first joined a small investment bank, Needham & Co., working his way up until founding his own hedge fund, Galleon Group, in 1997. At its peak, Galleon managed more than $7 billion in assets, and Forbes magazine estimated Rajaratnam’s wealth at $1.3 billion.
Another Wharton alum, Anil Kumar, who had met Rajaratnam when they were both first-year MBAs, pleaded guilty to securities fraud charges last year and testified against his old classmate in hopes of leniency at sentencing. During the trial, Kumar testified that eight years ago, when Kumar worked for McKinsey & Co., he agreed to accept half a million dollars annually from Rajaratnam to dish inside information on public companies. And a third Wharton classmate, Rajiv Goel, a former Intel mid-level executive, also has pleaded guilty to giving illegal stock tips with Rajaratnam.
The federal investigation that has led to Rajaratnam’s conviction has not only become something of an embarrassment to Wharton—but also to other highly prominent business schools whose graduates have either been accused of wrongdoing or who have already plead guilty to insider trading. Already ensnared in the mess are three Harvard Business School MBAs, including one of HBS’ most famous alums, Rajat Gupta, the former managing director of McKinsey & Co., and Adam Smith, a former Morgan Stanley banker and Galleon employee, who pleaded guilty earlier this year and testified against Rajaratnam. In a report for his Harvard Business School Class of 1999, Smith once wrote that Galleon was “the first job I’ve truly loved, and I find the challenge of the stock market exhilarating.”
Three of the world’s most prominent business schools have been dragged into the scandal by either alumni or board members: Besides Harvard and Wharton, there is also the Indian School of Business, where Gupta and Kumar were both on the board. Gupta resigned his position as chairman of ISB in March. All told, the case has led to insider trading charges against 25 defendants—21 of whom have pleaded guilty.
In convicting Rajaratnam, the federal jurors agreed with the prosecution that the Galleon chief made more than $63.8 million in illegal profits from trades based on insider tips on public companies including Hilton, Google and Intel. Until he is sentenced on July 29th, the Wharton alum is free on $100 million bail.