Insider-Trading Streak Ends With Rajaratnam Acquittal

Rengan Rajaratnam will not suffer the same fate as his younger brother, Galleon Group founder Raj Rajaratnam. A federal jury recently cleared him of insider- trading charges.

The trial loss brings U.S. Attorney Preet Bharara’s five-year winning streak to an end. He was 81-0 in securing insider-trading convictions over the past four years. Bharara’s high-profile victories include Raj Rajaratnam, former Goldman Sachs director,McKinsey managing director Rajat Gupta, and SAC Capital’s Mathew Martoma.

In many ways, the most recent Rajaratnam case was doomed from the start. The only charge that made it to the jury was conspiracy to engage in insider trading. Rengan Rajaratnam initially faced six counts of securities fraud. However, prosecutors dropped four of the charges prior to trial, and the judge dismissed the remaining fraud charges at the close of the government’s case..

While acquitted of criminal insider-trading charges, Rajaratnam still faces an enforcement action by the Securities and Exchange Commission (SEC). However, the agency is having insider-trading troubles of its own.

Earlier this year, the SEC suffered a much-publicized trial loss in its case against Dallas Mavericks owner Mark Cuban. The agency alleged that Cuban sold his shares in Momma.com soon after being told by the company’s CEO that his shares would be diluted through a stock offering. However, the jury ultimately concluded that prosecutors failed to prove that Cuban violated any duty not to trade on the information. More recently, juries also found in favor of defendants in two additional insider trading cases brought by the agency.

The recent trial losses suggest that both the SEC and federal prosecutors may be overreaching in their zest to crackdown on insider trading. While both have been successful in the past, insider-trading cases are difficult to prove, particularly given the frequent need to rely on circumstantial evidence and the recent Second Circuit ruling that requires proof of knowledge by the person purportedly trading on inside information that the informer benefitted from the disclosure (see my July 8, 2014  blog “Will There Be a New Loophole for Insider Trading.”) One can expect defendants hereafter to gear up and focus their defense on the tipper’s lack of benefit, where the facts allow. In any event, it appears that, as a result of these recent developments, future defendants in insider trading cases may seek better terms in plea bargaining or elect to take their chances in the courtroom.

If you have any questions about this post or would like to discuss insider-trading violations, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work.