Raj Rajaratnam was found guilty on all fourteen counts
of conspiracy and insider trading. U.S. v. Rajaratnam, Case No.
1:09-cr-0118 (S.D.N.Y.). The fact that the founder of the Galleon hedge fund
was found guilty despite a valiant effort by the defense team should not be a
huge surprise to anyone who followed the case or defended one of these actions.
By all accounts the Manhattan U.S. Attorney assembled
more than a formidable case. During the weeks of trial the jury undoubtedly saw
and heard about page after page of trading records and other documents. More
importantly, the jurors heard from co-conspirators who pleaded guilty and
testified against Mr. Rajaratnam. Now the credibility of witnesses who have
plea bargained for a "get of jail" pass or at least a "get out of jail sooner"
pass is clearly suspect. In this case however there was not just one or two but
four who made deals with the government. At some point the credibility
challenges by the best cross-examiner are overwhelmed.
The government's case against Mr. Rajaratnam did not
hinge on the credibility of such witnesses however. Rather, it was based on the
testimony of Mr. Rajaratnam. While he never took the witness stand in his
defense the jury repeatedly heard from the defendant during the government's
case. On tape after tape the jury listened to the tips and discussions about
trades and sources of information. In this case the jury did not have to
evaluate if the testimony of the defendant about what happened long ago was
truthful. Instead, as the prosecution presented its case, the jurors listened
to Mr. Rajaratnam and others talking about the trading as it was being planned
and executed. As they deliberated the jurors had portions of the tapes and Mr.
Rajaratnam's conversations replayed. The verdict says that the jury found those
conversations credible, believable and defining of what happened.
There can be no doubt that this was a "bet the company
case" for the government. It was billed as the biggest insider trading case in
years if not of all time. Much had been made of the extensive use of "blue
collar" tactics such as wire taps and wired informants, employed in the
investigation here on a scale not typically seen in white collar cases. The
Manhattan U.S. Attorney has made it clear that he has declared war on insider
trading. The government could ill-afford a loss as in the Bear Stearns case.
The verdict undoubtedly means that the investigations which lead to the conviction
of Mr. Rajaratnam and the related expert network inquires will continue and
expand. That verdict will also likely spur the continued use of blue collar
At the same time the verdict does not reflect a
redefining of insider trading law as many had suggested as the case unfolded.
The government made it clear in its case that the charges here were predicated
on the kind of stuff that everyone would recognize as insider trading: Tips of
about to be announced earnings information, unannounced merger negotiations and
similar matters. The defense went to great lengths to try and establish that
the trading was the product of the mosaic theory. Stacks of research reports
and other information coupled with expert testimony were presented. The government
maintained its focus. The tapes appear to confirm its claims. The jury agreed.
This is not to say that law enforcement is not pushing
the edges and perhaps redefining insider trading. Lost in all of the discussion
of blue collar tactics and the war on insider trading are the cases the SEC has
been filing which do not track the Manhattan U.S. Attorney. Actions such as SEC
v. Steffes, Case No. 1:10-cv-06266 (N.D. Ill. Filed Sept. 20, 2010) and SEC
v. Carroll, Case No. 3:11-cv-00165 (W.D. Ky. Filed March 17, 2011) are
pushing if not redefining the edges of the mosaic theory. These cases charge
insider trading based on what an employee observed as his place of employment
such as a plant tour by executives guessed to be interested in an acquisition
and other similar events. Not the kind of information on the tapes. No blue
collar tactics. Yet these cases may well expand the definition of insider
The case against Mr. Rajaratnam is perhaps the largest
insider trading case in years. It is cases like Steffes and Carroll
however which are poised to have a significant long term impact on the law of
insider trading and ultimately the way companies handle information.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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