NEW YORK The acquittal on Tuesday of the younger brother of convicted hedge fund titan Raj Rajaratnam suggests prosecutors will have a tougher time pursuing people accused of trading on inside information they received indirectly.
Roughly a third of the insider trader defendants charged by Manhattan U.S. Attorney Preet Bharara since 2009 are alleged so-called "remote tippees". According to prosecutors, in such cases the defendant, or "tippee," never directly talks to the insider, instead getting information from an intermediary.
After the case of former Galleon Group fund manager Rengan Rajaratnam, prosecutors may reevaluate how they build similar cases, said James Cox, a law professor at Duke University.
Prosecutors said Rengan Rajaratnam, a fund manager at his brother's Galleon, engaged in insider trading, receiving tips from Raj Rajaratnam who was speaking to insiders on two deals.
But jurors and the judge acquitted the younger brother, ending an 81 conviction streak by Bharara's office that included Raj Rajaratnam's own guilty verdict in 2011.
"This case probably just didn't have enough of the i's dotted and t's crossed to make the connections," Cox said.
Of the 88 people charged over insider trading by Bharara since 2009, 31 were at least one step removed from the initial tipper, including at least three of the office's six outstanding cases, according to Reuters' analysis.
BURDEN OF PROOF
The burden of proof required to convict remote tippees has gained attention recently thanks to an appeal in a separate case involving Todd Newman, a former Diamondback Capital Management portfolio manager, and Anthony Chiasson, co-founder of Level Global Investors, who were convicted in 2012 of insider trading despite not being in contact with the insiders.
On appeal, they argued to the 2nd U.S. Circuit Court of Appeals in April that U.S. District Judge Richard Sullivan should have required that jurors find the defendants knew the insider benefited from disclosing information.
No decision has been issued. But during oral arguments in April, judges on the panel appeared sympathetic to the defense's argument.
Before the appellate judges expressed skepticism in the Newman-Chiasson case, Bharara's office was expected to seek jury instructions in the Rengan Rajaratnam trial that the defendant could be convicted without proof he knew the tipsters who gave information to his brother benefited.
After the appellate arguments, the government dropped an objection to requiring knowledge of a personal benefit to the insiders, in "an excess of caution."
U.S. District Judge Naomi Reice Buchwald later dismissed two securities fraud charges against Rajaratnam, citing a lack of evidence the defendant knew of a benefit to the insiders, as well as other holes in the case.
That left a single charge of conspiring to engage in insider trading in technology companies Clearwire and Advanced Micro Devices Inc. After just four hours of deliberating, jurors found Rajaratnam not guilty.
The case against the younger Rajaratnam was never considered easy; most of the evidence at trial focused on how the older brother received tips.
"We felt like a lot of the trial was about Raj," said one juror, Catherine Wolcott. "We were waiting to hear more about Rengan, who was the actual person on trial. By the end, we were all like, 'Where's the evidence?'"
A final ruling for Newman and Chiasson in the appeals case could undermine at least one of the previous insider trading convictions by Bharara.
Michael Steinberg, a portfolio manager at SAC Capital Advisors who was steps removed from the insiders, is expected to make similar arguments in his appeal of a December insider trading conviction.
While such cases will not disappear, a more cautious approach could be coming in light of the Rajaratnam verdict and the appellate case, said Todd Harrison, a defense lawyer at McDermott Will & Emery.
"If I was the government I would be very hesitant going forward," without rock-solid evidence, Harrison said.
(Reporting by Nate Raymond in New York; Editing by Noeleen Walder and Peter Henderson.)