Coverage: Setback for insider trading investigations?

Prosecutors suffered a setback on the insider trading front when Rengan Rajaratnam, younger brother to Raj, was acquitted of charges on Tuesday. The big question is what does this mean for insider trading cases going forward.

Christopher M. Matthews had this story for The Wall Street Journal:

Federal prosecutors suffered the first defeat in their half-decade-long crackdown on insider trading Tuesday with the acquittal of Raj Rajaratnam‘s younger brother, a bracing reversal after a string of 81 convictions.

The loss in some ways represented prosecutors’ efforts coming full-circle: The original investigation into Rengan Rajaratnam’s trading years ago kick-started a probe into his older sibling that ultimately uncovered a network of hedge-fund managers and analysts sharing confidential tips and produced convictions that shook Wall Street.

It took a federal jury less than four hours to find Rengan Rajaratnam, 43 years old, not guilty of taking part in that conspiracy. The acquittal followed a rebuke of parts of the government’s case by the judge who presided over the three-week trial, and comes as an appeals court is weighing a decision in a separate case that could raise the bar for prosecutors pursuing such crimes.

The New York Times story by Matthew Goldstein and Rachel Abrams pointed out that the verdict might hurt other prosecutions going forward:

In a statement, Mr. Bharara said, “While we are disappointed with the verdict on the sole count that the jury was permitted to consider, we respect the jury trial system whatever the outcome, and we thank the jury for their service.”

The verdict by a federal jury of eight women and four men in Lower Manhattan shows the limits of how far prosecutors can go in pursuing cases of illegal trading on Wall Street, although the broader significance of the verdict is not clear. A number of criminal defense lawyers, who did not want to be identified because they have cases pending before Mr. Bharara’s office, said the evidence against Mr. Rajaratnam was not strong.

Last week Judge Naomi Reice Buchwald of Federal District Court in Manhattan dismissed the two insider trading charges against him, leaving the jury to consider simply whether he had conspired with his older brother to commit insider trading. Judge Buchwald dismissed the more serious security fraud charges after determining that no reasonable jury would be able to convict Mr. Rajaratnam of using inside information to make trades in shares of Clearwire in 2008.

Larry Neumeister of the Associated Press (via US News & World Report) offered this background about the insider-trading crackdown:

The defendant’s brother, Raj Rajaratnam — founder of the Galleon Group of hedge funds — is serving an 11-year sentence after the government said he earned up to $75 million illegally by trading on secrets provided by corrupt employees of public companies and a network of analysts and portfolio managers who also obtained inside information.

Two dozen other defendants have pleaded guilty or were convicted in the case. In all, prosecutors have obtained guilty pleas or jury verdicts against 81 individuals in insider trading cases in the last six years.

The probe, initially focused on hedge fund portfolio managers, analysts and employees of public companies, eventually was extended to include research professionals at networking companies.

Nate Raymond and Joseph Ax wrote for Reuters that the jury thought Rengan was trying to impress his brother:

Prosecutors said in August 2008 Raj Rajaratnam told his brother of a “handshake” deal between AMD and an Abu Dhabi state-owned company he learned about from Anil Kumar, a McKinsey & Co partner.

In a wire tapped recording of a call that same day, Rengan Rajaratnam told his brother he had talked with another McKinsey partner, David Palecek, who “spilled his beans” and encouraged him to buy AMD.

Despite trading on the tip, Galleon sold AMD for a loss due to market declines, prosecutors said. Rengan Rajaratnam, meanwhile, earned $40,000 personally trading AMD, prosecutors said.

Kumar pleaded guilty in 2010 and was later sentenced to two years of probation. Palecek died in 2010.

Rengan Rajaratnam’s attorney, Daniel Gitner, said his client was simply seeking investment advice from Palecek. Gitner said Tuesday his client “looks forward to getting on with his life.”

“Today is the day Rengan has been waiting for,” he said.

Wolcott, the juror, said she did not think Rengan Rajaratnam intended to engage in any illicit trading.

“He was probably just trying to impress his brother,” she said. “Raj kept his cards close to the vest. Rengan was sort of a puppy playing in the field, trying to get his attention.”

The big question is if judges will consider this a precedent or a one-off. Many people have been looking for a case that will counter all the convictions, but what is unclear is if this is the one. What is sure, is that is just got a bit harder to prove insider trading, and that can’t be great for prosecutors looking to reign in traders.