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 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."
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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.)
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