How Strong Is The Evidence in the Galleon Insider-Trading Case?

[WSJ_law_blog]

We’ve had a few days to let the mammoth insider trading case against six hedge-fund and business executives sink in. Now comes the parsing and analysis.

The criminal complaints don’t give us all the evidence, of course, especially the information that might help the defendants, most of whom have publicly stated their innocence. And many former prosecutors have told other news outlets that criminal insider-trading cases can be tough to win because the line between buying legitimate research and illegally buying market-moving information can be complicated.

Steven Feldman, a former prosecutor who is now at Herrick Feinstein, told the Law Blog that the government may have a weaker case against individuals who didn’t have direct contact with the main cooperating witness in the case. “Even with recorded conversations, you want a narrator” who can explain the context surrounding the calls, he says.

In addition, he says, prosecutors don’t reference the recorded calls that may hurt their case. “Maybe someone said, ‘Look, I’ll give you this in confidence but you have to promise me you won’t trade on this.’”

However, several former prosecutors the Law Blog has spoken to, including Anthony Barkow, say, at least until we learn more, the case against the main defendants, including hedge-fund manager Raj Rajaratnam (pictured), founder of the Galleon Group, looks strong.

“This is a very powerful case” with “extremely incriminating” evidence, Barkow told the Law Blog. “The prosecutors have a combination of very strong types of evidence, like cooperator testimony involving a cooperator who has agreed to plead guilty and testify about conversations, both recorded and not recorded. There is also powerful timing evidence, meaning that the trading by the defendants came after phone calls.”

The complaint also establishes what Barkow, who is executive director of the Center on the Administration of Criminal Law at New York University’s law school, calls evidence of the defendants’ “consciousness of guilt,” or knowledge that they understood what they were doing was illegal.

Examples:

• “I don’t like talking over cell phone on this.” — defendant Rajiv Goel to defendant Rajaratnam.
• Defendant Danielle Chiesi told Rajaratnam she was afraid that if a certain stock rose too high, she “would make so much money that [her] trading might attract the attention of regulators.”
• “You put me in jail if you talk,” and “I’ll be like Martha…Stewart.” — Chiesi to an alleged co-conspirator.

Barkow says some of the defendants made “powerful, unambiguous statements that don’t need to be spun by the government” to prove their allegation. “They’re simply incriminating statements,” he says.

Examples:

• Rajaratnam allegedly told Chiesi he wouldn’t have touched a particular stock “with a…10-foot pole” it not for the two of them being, as Chiesi put it, “close to the company.”
• “Unless you were on the phone with [the AMD Executive] and had [Robert Moffat, the IBM executive who is also a defendant] at your house last night, who…would be buying it, honestly?” — defendant Chiesi to defendant Mark Kurland

Some of these defendants clearly “sought out” the inside information and that it “didn’t fall in their lap,” Barkow says. “They’re explicit about how information is money, and that they’re reaching out to people for information in order to trade on that information.”

Prosecutors also won’t have trouble proving that the hedge-fund managers knew the sources of inside information were “breaching” their duty to the companies, he says.

Chiesi and Rajaratnam, through their attorneys, have denied wrongdoing.