Raj Rajaratnam wants jurors at his insider-trading trial told that he was a professional stock analyst who broke no laws by speaking to corporate insiders as he worked to “ferret out” information.
With jury selection three weeks away, John Dowd, the lead defense lawyer for the Galleon Group LLC hedge fund co-founder, gave the judge a proposal for instructing jurors on the law, offering the most detailed insight yet into his defense strategy.
“As the steward of his investors’ money, Mr. Rajaratnam had a fiduciary duty to trade in securities that he thought had attractive investment potential,” Dowd said in a Feb. 2 court filing on the proposed language. “The law permits analysts and investment advisers to speak with corporate insiders” and it’s common “for analysts to ferret out and analyze information.”
Rajaratnam, 53, goes on trial Feb. 28 in Manhattan federal court in what prosecutors said is the biggest U.S. crackdown on insider trading by hedge funds. The Sri Lanka native is accused of making more than $40 million in illegal trades dating back to 2003 at his New York-based fund and faces as many as 20 years in prison if convicted of the most serious charges. He denies wrongdoing.
At least a half-dozen traders are cooperating with the government, and more than 30 people have been accused in alleged conspiracies tied to the case, the first to make extensive use of phone taps to detect Wall Street insider- trading.
In the more than 15 months since Rajaratnam was charged, the probe has expanded to other hedge funds, banks, technology companies and so-called expert networking firms. Six defendants were sued by the Securities and Exchange Commission on Feb. 3.
Rajaratnam is accused of using secret tips from hedge fund executives, corporate officials and other insiders to trade in more than a dozen stocks, including Intel Corp., International Business Machines Corp., Akamai Technologies Inc., Google Inc. and Advanced Micro Devices Inc.
His defense remains something of a mystery, the government has said. Jessie Erwin, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined to comment.
“The defendant has gone to great lengths to keep from the government the witnesses he intends to call and the defense theories he intends to present,” Assistant U.S. Attorney Jonathan Streeter wrote in court papers Jan. 26.
Dowd has chided prosecutors for trying to “smoke out” details before the trial begins.
‘Doing My Job’
The proposed jury instructions indicate Rajaratnam is planning to argue he was “just doing my job” by amassing company news, said Barry Pollack, a white-collar defense lawyer at Miller & Chevalier in Washington who isn’t involved in the case.
Unable to challenge government evidence that Rajaratnam had frequent communications about stocks and public companies, the defense will put an innocent explanation on his remarks and show that Rajaratnam never intended to break the law, Pollack said.
“The defense clearly wants the jury to understand that there’s nothing improper with talking to sources,” Pollack said in a telephone interview. “They’re saying, ‘What you are paying an investment adviser for is to go out and gather intelligence. In fact, he would be derelict if he wasn’t.’”
His proposed jury instructions must be approved by U.S. District Judge Richard Holwell, who will also weigh a competing request from prosecutors and may use instructions of his own.
The government’s proposal differs from Dowd’s and suggests, for instance, that Holwell tell jurors that one aim of U.S. securities law is to protect “the investing public.”
Stock, Not Vegetables
“Congress recognized that the purchase of a stock is different from the purchase of a vegetable bought in the grocery store,” prosecutors urged Holwell to tell jurors in their proposed jury instruction, or “charge.”
Rajaratnam’s spokesman, Jim McCarthy, declined to comment.
Five of 14 counts against Rajaratnam accuse him of joining separate insider conspiracies. In the defense proposal, Dowd asked Holwell to tell jurors that Rajaratnam can’t be convicted of conspiracy if his alleged accomplices had merely feigned an intention to break the law or if Rajaratnam didn’t knowingly join their schemes.
To Pollack, the proposal indicates that Rajaratnam may argue that conversations jurors hear on the wiretaps are embellishments by the parties.
“That fact that somebody tells me they’re giving me an inside scoop doesn’t mean they believe that’s the case - - or that I believed that,” he said.
The defense may also be preparing to argue that Rajaratnam was too removed from the source of the leaks to be guilty of insider trading, said Robert Mintz, a lawyer at McCarter & English LLP in Newark, New Jersey. Dowd wants jurors to be told that Rajaratnam can’t be convicted unless the “company source” knew and agreed to Rajaratnam’s receipt of inside information.
The defense wants jurors to know that Rajaratnam can’t be a “tippee” -- that is, the recipient of inside information --unless prosecutors prove that he knew the leaker had violated a confidential relationship with the company and had “personally benefitted in some way.”
“It appears the overarching defense will be that Mr. Rajaratnam was far removed in the chain of inside information,” Mintz, who isn’t involved in the case, said in a telephone interview. “There were many layers between the source of the leak before it reached him.”
It’s becoming apparent that Rajaratnam will argue that some of the information he received wasn’t “material” to the “ordinary investor” and not covered by insider- trading laws, said Richard Scheff, the chairman of Montgomery, McCracken, Walker & Rhoads LLP, a Philadelphia- based law firm. The defense proposal tells jurors not to convict if tips were “vague,” “obvious hyperbole,” “general information already known to the market,” or “minor, meaningless or unimportant.”
“They’re going to try to demonstrate that it really didn’t matter to the decision to invest or sell,” Scheff said in a telephone interview.
“A skilled analyst like Mr. Rajaratnam may extract information which, like pieces of a jigsaw puzzle, would not be significant to the ordinary investor,” Dowd writes in his jury proposal. “This kind of activity is lawful and is not tantamount to possession of material information.”
Dowd wrote that he wants jurors to be told Rajaratnam can’t be convicted if the information at issue has already been disclosed by a company or if there’s no evidence that Galleon traded on the specific tips.
In the proposed instructions, defense lawyers said Dowd is laying the groundwork for a traditional defense tactic --undermining the credibility of cooperating government witnesses by portraying them as liars who made up testimony to win leniency.
One possible government witness, Richard Choo-Beng Lee, asked a judge yesterday to block part of a subpoena issued to him by Rajaratnam. Rajaratnam’s subpoena seeks all communications between Lee, who ran the Spherix Capital LLC hedge fund, and any Galleon employee.
Lee doesn’t say in the document why Rajaratnam is seeking the information from him. Lee pleaded guilty in the case and is cooperating with prosecutors in exchange for leniency. He said in the filing that the subpoena, which also seeks tax returns and other information, is too broad and violates his privacy.
Also yesterday, Rajaratnam asked the judge to exclude evidence of trades in the stocks of Procter & Gamble Co. and three other companies that he says the government seeks to introduce at trial. Prosecutors “attempt to add four entirely new stocks to the case,” including Nvidia Corp., Intersil Corp. and Vishay Intertechnology Inc., in letters dated Dec. 2, 2010, and Jan. 20, according to the filing.
Rajaratnam’s lawyers may be planning to argue that their client tried hard to stay within the confines of the law.
“The law is not violated if the defendant acted in good faith and held an honest belief that his actions were proper,” reads one of the proposed jury instructions.
To show he acted in good faith, Rajaratnam has “got to get on the stand,” Scheff said. “That’s not the only way to establish that, but the clearest and most direct way to establish that is to look the jury straight in the eye and tell them.”
Prosecutors are likely scrutinizing Dowd’s document for insight into the defense, he added. Dowd, however, isn’t revealing everything. In a section of his filing where he proposes instructions for the defense “theory of the case,” he wrote, “to be submitted at the end of trial.”
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