Prosecutors Face New Hurdles in Insider-Trading Trial

Posted by Chris Morales on Wed, Jul 02, 2014 @ 01:00 PM

The Morales Law Firm would like to share this article: Appeals-Court View Overhang Rengan Rajaratnam Case published by the Wall Street Journal. 

Appeals-Court Views Overhang Rengan Rajaratnam Case

By: CHRISTOPHER M. MATTHEWS

Prosecutors will face a new test in their insider-trading push when the trial of Raj Rajaratnam's brother starts Tuesday.

The trial marks the first insider case for Manhattan federal prosecutors following signals from a federal appeals court that they may have taken too broad a view of insider trading.

Rengan Rajaratnam, who worked at his older brother's hedge fund Galleon Group, is accused of trading on confidential information related to wireless broadband company Clearwire Corp. and chip maker Advanced Micro Devices Inc. AMD +2.84% in 2008 after being tipped by his brother. The alleged scheme reaped about $800,000 in profits.

In recent months, the judge presiding over the case called some of the charges "inconsistent," and prosecutors have whittled down the case against Mr. Rajaratnam from seven insider-trading-related counts filed in an indictment last year to two counts of securities fraud and one count of conspiracy—without explaining why.

The move to narrow the case follows a hearing in April before the U.S. Court of Appeals for the Second Circuit during which a three-judge panel signaled it had doubts about some of the legal underpinnings of prosecutors' near-perfect record in insider-trading cases, raising the prospect that a handful of convictions won in the yearslong government crackdown could be overturned. That appeal is pending.

"Even if [prosecutors] think there's as chance they're going to win the appeal, it would still be smart to hedge their bets," said Thomas Lee Hazen, a professor at the University of North Carolina School of Law. "It simply means you have to get your ducks in a row and be careful."

In the months since the appeals-court hearing, prosecutors have recalibrated their case against 43-year-old Mr. Rajaratnam, dropping four counts, filing a superseding indictment and seeking to introduce new evidence.

A spokesman for the Manhattan U.S. attorney's office declined to comment.

Mr. Rajaratnam's trial begins with jury selection on Tuesday in federal court in Manhattan, the courthouse where his brother was convicted in 2011. Mr. Rajaratnam denies he committed insider trading and has said he never realized any of the tips his brother passed him were illegal. Earlier this month, prosecutors disclosed at a court hearing that he had rejected a plea deal.

Raj Rajaratnam is serving a sentence of more than 11 years in federal prison after he was convicted of conspiracy and multiple counts of securities fraud. On wiretaps played during his trial, the Rajaratnam brothers were heard discussing their attempts to get information about stocks. Those conversations could loom large in Rengan Rajaratnam's trial.

Prosecutors have indicated in recent weeks they want to play 11 recordings they say demonstrate Rengan Rajaratnam's "knowledge and intent regarding the manipulation of corporate insiders," according to court documents.

The calls aren't related to Clearwire or ADM, but prosecutors said in court papers that the tapes more broadly show the brothers' "shared desire to exploit certain insiders at publicly traded companies." In one call, prosecutors said, Raj Rajaratnam relayed how he was "working" his contacts at Cisco Systems Inc.CSCO +0.56%

"So, you know, I sort of said, 'Do you wanna come and work at Galleon and all of this?'" Raj Rajaratnam said to his brother in one of the calls described by prosecutors. "[A]lso I told him, when you're done with Cisco, this is the place you know?"

Rengan Rajaratnam's lawyer, Daniel Gitner, has objected to the calls, because many of them aren't related to the company shares his client is charged with illegally trading. He declined to comment for this article.

U.S. District Judge Naomi Reice Buchwald, who will preside over the trial, has yet to rule on the tapes but indicated at a hearing this month she would likely allow prosecutors to play them.

Such recordings could buttress prosecutors against the issues raised by the appeals court. At issue in that appeal is whether a trader, to be guilty of insider trading, must have known a tip was illegally disclosed in exchange for a reward.

Prosecutors have argued they need only show that people who used confidential information knew it had been disclosed in breach of a fiduciary duty.

But the appeals court indicated in April that that may not be enough. The appeal, which is being pursued by Todd Newman and Anthony Chiasson, two portfolio managers convicted in 2012 of insider trading, could be decided some time this year.

They argued that the judge who presided over their trial incorrectly instructed the jury, when he said that the two men could be convicted of insider trading if they knew there had been a breach of duty, but didn't instruct jurors that the defendants had to have known that the person who leaked the information had done so in return for a "personal benefit."

A successful appeal wouldn't affect most of the 81 convictions or guilty pleas for insider trading won by Manhattan federal prosecutors over the past five years.

But it would narrow the definition of what constitutes insider trading, threaten a handful of marquee convictions and put a greater burden on prosecutors.

Mr. Gitner has argued that Rengan Rajaratnam wasn't aware the insiders were getting any benefit and there was nothing wrong with his client cultivating sources.

According to Mr. Hazen, prosecutors and defense lawyers will likely fight over what instructions Judge Buchwald gives the jury on this issue. But jurors may ultimately be more concerned with the evidence, he said, than with a nuanced legal issue.

"The defense is going to say 'look, this is what fund managers do,'" he said. "They try to get up as close to the line as possible without crossing it. The jury will decide if the line was crossed."

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Tags: fraud, trial, prosecutors, indictment, counts, charges