With the U.S. government soon to rest its criminal insider trading case against Galleon Group co-founder Raj Rajaratnam, the hedge-fund mogul has a lot of explaining to do. Jurors in Manhattan federal court have spent the last three-and-a-half weeks listening to wiretap recordings of phone conversations implicating the 53-year-old in what the government says is the largest hedge fund insider-trading scheme ever prosecuted.

"We know because, ah, one of our guys is on the board," Rajaratnam told his friend Rajiv Goel in a call taped by prosecutors on Oct. 7, 2008, about the soon-to-be-announced acquisition of PeopleSupport at $12.25 a share. In another recorded call, Rajaratnam asked his friend Anil Kumar, "Should I buy a million?" after Kumar, then a managing director at McKinsey, told him about a transaction involving Advanced Micro Devices (AMD), a McKinsey client. "You cannot go wrong," Kumar replied.

"The wiretaps seem devastating," says Stephen Miller, a former federal prosecutor who is now a partner with the law firm Cozen O'Connor. "And they don't seem to give much room to argue that the tips didn't occur."

Lawyers who have defended insider-trading cases say Rajaratnam must explain his reasons for the trades if he hopes for an acquittal. "Insider-trading charges are among the most difficult charges to beat," says Frank Razzano, a partner at Pepper Hamilton in Washington who won an acquittal for a client in a 2005 case in Ohio. "The only way to do it is if there's an equally plausible explanation" from the defense for why stocks were traded.

The defense team has tried that approach as Rajaratnam battles charges he earned $45 million by trading on inside information in more than a dozen stocks over six years. He faces more than 20 years in prison if convicted. In painstaking cross-examinations of government witnesses including Goel, Kumar, and ex-Galleon trader Adam Smith—who have all pleaded guilty and are seeking leniency in exchange for their testimony—defense attorney John Dowd and his team have sought to prove that Rajaratnam's trades were based on Galleon research or news already circulating in the marketplace.

Now, with the government expected to rest its case as early as the week of Apr. 4, Patricia Pileggi, a partner at Schiff Hardin in New York, says Rajaratnam must further explain why he traded shares of Goldman Sachs (GS), on whose board his business associate, Rajat Gupta, sat. In an administrative action, the Securities and Exchange Commission has accused Gupta of leaking inside information to Rajaratnam. Gupta has denied wrongdoing.

Rajaratnam's best chance may be to argue that none of the tips he received were significant by themselves in his decision to buy or sell stock, Miller says. Instead, Rajaratnam may claim that the tips were parts of a "mosaic" that included public and nonpublic information.

Anthony Sabino, a professor at the Tobin School of Business at St. John's University in New York, says prosecutors will likely belittle any claim that Rajaratnam didn't know he was trafficking in inside information: "They will say, 'You were in charge of a large hedge fund, you didn't really know that you were crossing the line?'"

The bottom line: With wiretap evidence that Rajaratnam got tips, his defense will have to provide alternate explanations for his trades.

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