Rajaratnam Lawyers Argue For Restrictive Definition Of Insider Trading

Feb 7 2011 | 10:07am ET

The pretrial skirmishing between Galleon Group founder Raj Rajaratnam's defense team and prosecutors continues, as both sides give clues as to how they plan to attack the other when the trial beings on Feb. 28.

The two sides last week offered their proposals for jury instructions in the case. Unsurprisingly, they don't see eye-to-eye on the insider-trading laws that prosecutors say Rajaratnam broke.

Rajaratnam's lawyers want jurors to be told that the hedge fund manager was merely a stock analyst doing his job when he spoke to corporate insiders. They also want the jury instructed not to convict if their client's alleged tipsters merely claimed to have material inside information, or if Rajaratnam thought their information wasn't material or nonpublic.

According to them, Rajaratnam did not break the law unless the person passing on the information had a confidential relationship with a company, violated it and "personally benefitted in some way" from doing so.

"A skilled analyst like Mr. Rajaratnam may extract information which, like pieces of a jigsaw puzzle, would not be significant to the ordinary investor," the defense's proposed jury instruction reads. "This kind of activity is lawful and is not tantamount to possession of material information."

"The law is not violated if the defendant acted in good faith and held an honest belief that his actions were proper."

"The law permits analysts and investment advisers to speak with corporate insiders," the defense added, since Rajaratnam's job, "as the steward of his investors' money" to "ferret out and analyze information."

Prosecutors, by contrast, wish to emphasize who insider trading hurts "the investing public."

"Congress recognized that the purchase of a stock is different from the purchase of a vegetable bought in a grocery store," the government's proposed charge reads.

U.S. District Judge Richard Holwell, who is overseeing the trial, will now consider both requests. He may also write instructions of his own.

Separately, one possible witness for the prosecution, Richard Choo-Beng Lee, is fighting a subpoena issued by Rajaratnam's lawyers. Lee asked Holwell to block part of that document request, which seeks all communications between him and any Galleon employee.

Lee, a SAC Capital Advisors veteran, ran hedge fund Spherix Capital. Lee has pleaded guilty and is cooperating in the case.

Meanwhile, Rajaratnam's team moved to block evidence of trading in four companies, alleging that prosecutors "attempted to add four entirely new stocks to the case." Previous efforts by the defense to keep out trading evidence has been rejected by Holwell.


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