Why Rengan Rajaratnam Got Off on Insider Trading Charges

Rengan Rajaratnam
Rengan Rajaratnam embraces his lawyer Daniel Gitner after being cleared of insider trading charges. Brendan McDermid/Reuters

One thing Manhattan's U.S. Attorney Preet Bharara did not count on: racking up so many insider-trading convictions that one, mid-appeal, would trip him up.

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On the heels of an impressive 80 consecutive insider-trading wins, one of Bharara's earlier victories is now coming back to haunt him – and played a key role in the acquittal Tuesday of accused insider trader Rengan Rajaratnam, the younger brother of Raj Rajaratnam, the billionaire co-founder of Galleon Group convicted of insider trading in 2011.

In a statement Tuesday, Bharara acknowledged his first-ever insider-trading defeat since ascending to the post of U.S. Attorney five years ago.

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"While we are disappointed with the verdict on the sole count that the jury was permitted to consider, we respect the jury trial system whatever the outcome and we thank the jury for their service."

Of course, there is more to this story. Aside from there just not being enough evidence to convict, according to sources familiar with the situation who spoke with Newsweek Tuesday evening, the real reason for the gradual erosion of the seven criminal charges leveled against the younger Rajaratnam—including two insider-trading charges and a charge of conspiring to commit insider-trading with his older brother—was the progress of a separate insider-trading case spearheaded by Bharara that is working its way through appeal.

That case, which is being heard by the U.S. Court of Appeals for the Second Circuit, is significant because it appears likely to boost the burden of proof for prosecutors seeking to crack down on insider trading—both now and in the future—and, crucially, has caught the attention of U.S. judges who must instruct juries how to decide whether a person is guilty of insider trading, according to the sources who spoke with Newsweek.

In April, during oral arguments, a three-judge panel sitting on the U.S. Court of Appeals for the Second Circuit appeared receptive to the notion that how a judge instructs a jury might be very critical to the success of an insider-trading conviction. In this case, the defendants hoping to overturn their convictions are two former hedge funds managers, Anthony Chiasson of Level Global and Todd Newman of Diamondback Capital.

Because there is no specific statute that defines insider trading and, over the years, determinations have largely developed based on court interpretations, the higher court is looking at how much a trader knows about the source of his or her insider information, whether the information can be considered strictly confidential and whether an accused insider trader must have "knowledge of personal benefit"—in other words, does the trader know the tip is valuable to somebody and may have even been exchanged for something of value?

Cases in the future may increasingly hinge on these questions, experts say.

While the appeal court's decision is unlikely to be known for months or more, it appears it may already be tipping the scales for traders such as Rengan Rajaratnam—and possible more traders to come, according to those close to the situation.

In the case of Rajaratnam the younger, those familiar with the Rajaratnam's acquittal said that Judge Naomi Reice Buchwald of the Federal District Court in Manhattan undoubtedly increased the burden of proof in her instructions to the jury, taking into account views of the three-judge panel to Chiasson and Newman's pending appeal.

The federal jury weighing the fate of the younger Rajaratnam—which consisted of eight women and four men – came back after only several hours of deliberation.

Rajaratnam's older brother was sentenced in a separate action to 11 years in prison.

Buchwald, reached in her chambers late Tuesday by Newsweek, declined to comment on Rajaratnam's case, but those familiar with the situation said this may mark the end of Bharara's long winning streak with tougher insider-trading standards on the horizon.

The gradual chipping away of Rajaratnam's case actually started with the prosecution, which dropped the first four charges, followed by Buchwald two weeks ago—who threw out the most serious securities fraud charges and left one charge, conspiracy to commit insider trading, which led to the acquittal.

Whether Rengan Rajaratnam, who was born in Sri Lanka, will return to his current home of Brazil is unclear. He did not answer phone calls Tuesday.

His lawyer, Daniel Gitner of New York law firm Lankler Siffert & Wohl, issued a simple statement Tuesday: "Today is the day Rengan has been waiting for. We thank the jury for its attention. Rengan looks forward to moving on."

Reached in his office Tuesday night, Gitner told Newsweek Rajaratnam had nothing to add and was eager to call it a day. "I am going home now to play with my kids."