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Insider trading can turn a close friendship into a serious liability.

Rajiv Goel, a 1983 Wharton MBA recipient who was implicated in an insider trading case involving fellow 1983 Wharton MBA recipient Raj Rajaratnam, was sentenced yesterday. Goel, who testified against his classmate, received two years on probation, $266,000 in forfeiture and a $10,000 fine. Goel had previously been fined $254,000 by the U.S. Securities and Exchange Commission.

In 2010, he pled guilty to counts of conspiracy and securities fraud. Goel could have served a sentence of up to 25 years in prison and over $5 million in forfeiture and fines.

But the lack of prison time wasn’t surprising, according to Court Golumbic, an adjunct professor at the Law School and former assistant U.S. attorney in the U.S. Attorney’s Office for the Southern District of New York, where Goel was sentenced.

Golumbic pointed out that Goel had no prior criminal history and was unlikely to reengage in insider trading in the future. Moreover, he said the lenient sentence “reflects the strength of his testimony against Rajaratnam.”

Earlier this month, prosecutor Preet Bharara sent a letter to the judge stating that “Goel’s cooperation with the Government was essential in one of the most important insider trading trials in history.” Six of the 14 insider trading related charges brought against Rajaratnam were based in part on Goel’s testimony.

1983 Wharton MBA recipient Anil Kumar and Adam Smith have also received probation sentences, and Thomas Hardin, a 1999 Wharton graduate, is awaiting sentence on similar charges.

Early Wharton days

Goel and Rajaratnam met at Wharton, where they were part of a small circle of South Asian students, according to Anita Raghavan, a 1986 College graduate and former Daily Pennsylvanian news editor who is writing a book about the Rajaratnam case.

Still, the two were very different. Rajaratnam came from Sri Lanka, and was wealthy and well-traveled. Goel, who grew up in a small apartment in Mumbai, left India for the first time to attend Wharton in 1982.

At Wharton, Goel looked up to Rajaratnam, Raghavan said. “Raj was a very forceful personality at Penn, he was a leader,” she said, whereas “Goel was one of a handful of followers.”

Already, “Raj had this amazing knack of getting people to do things for him.… Raj was always very clever in sensing each individual’s Achilles’ heel.” When Rajaratnam skipped class, Goel would lend him notes, she said. “Rajaratnam called the shots, and Rajiv Goel took orders and followed them.”

‘A good friend’

Eventually, Rajaratnam would convince Goel to provide him with nonpublic information he could profit from.

“It was this friendship that would ultimately lead Mr. Goel — an otherwise hardworking and ethical man — to violate his duties to his employer and lose nearly everything that he had worked so hard to build,” Goel’s attorney wrote in a letter to the judge.

After graduating, Goel went back and forth between India and the United States.

When he returned to the United States in 2000 to work for Intel, the dot-com bubble was reaching its peak. Rajaratnam had succeeded in the financial world — he was head of the hedge fund management firm Galleon Group and was valued at $1.5 billion in the 2009 Forbes 400 ranking.

This only served to increase Goel’s admiration for his friend. “Raj was very clever. He was always an astute reader of people. Some people are book smart, Raj was people smart. I think he sensed that Rajiv Goel had missed the boat,” Raghavan said.

Over the years, Rajaratnam was generous with his old classmate. He loaned him $100,000 to help him buy a house, and even gave him $500,000 to help him purchase his father’s apartment.

Goel also entrusted Rajaratnam with his Charles Schwab brokerage account, with which Rajaratnam traded from 2005 to 2009, making $700,000 to $800,000.

These gifts happened before Rajaratnam asked for insider information. “At the time, Mr. Goel believed that Mr. Rajaratnam was simply acting as a good friend, who had the resources to support him in a time of crisis,” the defense letter said.

“This was a true friendship, from Rajiv Goel’s standpoint,” Raghavan said. When Rajaratnam asked him for insider information, he agreed to share his knowledge on Intel earnings and investment plans. “He didn’t want to disappoint one of his closest friends,” she added.

Operation Perfect Hedge

Goel agreed to testify and cooperate in the investigation because the government had powerful evidence to leverage against him. It was the first time the government had gathered such a large amount of evidence on insider trading through wiretaps.

In “Operation Perfect Hedge,” the government has charged over 60 individuals working in the financial sector. “It’s never happened on this kind of scale,” Golumbic said.

Rajaratnam was found guilty in May 2011 and fined $10 million and forced to relinquish $53.8 million in profits.

“I think it sends a powerful message to would-be white collar criminals that … number one, it’s clear that the government is listening or trying to listen. Second, you never know that down the road the person with whom you’re conspiring may decide to turn against you,” Golumbic said.

This article was revised to reflect that Golumbic is a former assistant U.S. attorney, not a former district attorney.

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