The strong case against Raj Rajaratnam
Wiretaps are not common in insider trading cases, but the government may have scored a rare hit against the billionaire hedge fund manager.
NEW YORK (Fortune) -- Insider trading cases are notoriously hard for the government to prove, but the use of a wiretap gives the prosecution a very strong hand against Raj Rajaratnam, the billionaire hedge fund manager accused of trading on illegal information obtained by a web of informants including executives at IBM and McKinsey, according to several experts.
According to newspaper reports, an informant named Roomy Khan allowed the government to wiretap conversations between she and Rajaratnam as part of her work to help the government build its case against six people.
The government alleges that Danielle Chiesi and Mark Kurland, who worked at the hedge fund New Castle, swapped illegally obtained information with Rajaratnam. It says that they received this information from the other three defendants also named in the case: Robert Moffat, an executive at IBM (IBM, Fortune 500), Anil Kumar, a director at McKinsey, and Rajiv Goel, who worked at Intel Capital.
None have entered pleas yet, but lawyers for all six defendants have proclaimed their innocence.
"The recordings help prosecutors destroy the 'mosaic defense,' the most common defense against insider trading," says James Angel, a business professor at Georgetown University. "With the mosaic theory defendants try to say that by using lots of little bits of legal information and tips that fall into a gray area, they made investment decisions. It says no one intended to do anything wrong."
But the U.S. Attorney's complaint released last Friday includes conversations recorded by tapping phones owned by Rajaratnam and others involved in the case.
Wiretaps are rare in insider trading cases; and these conversations seem to show the speakers involved in the alleged scheme knew they were doing something wrong.
For example, the government complaint has Chiesi on tape telling "a co-conspirator not named as a defendant" information about an upcoming reorganization at AMD (AMD, Fortune 500) and answering his questions about when the announcement will be made.
Chiesi then says, "You put me in jail if you talk... I'm dead if this leaks. I really am... and my career is over. I'll be like Martha [expletive] Stewart."
"With the recorded conversations, it's harder for the defendants in the case to claim that their conversations were misconstrued," says Paul Radvany a law professor at Fordham and who formerly headed the criminal division for the U.S. Attorney's Office in the Southern District of New York.
But Alan Kaufman, the attorney representing Chiesi, says the case is not a slam dunk for the government. "What stands out is what is not in the complaint," says Kaufman. "There is not any allegation that Danielle, in connection with getting information from people, either gave or promised anything of value.
"I'm left to wonder what distinguishes what she did versus what other people on Wall Street do every day, where information is the coin of the realm and people work hard to get new information about publicly traded stocks."
It is true that Wall Street investors use a brew of paid research, market rumor, and conversations with company insiders to make trading decisions.
There are two ways to get an insider trading conviction, says Angel. One is to prove there was a simple breach of trust. "If you're an officer or director of a company, you work on behalf of shareholders," he says. "You can't breach trust and give out information that can be used to trade against the company or its shareholders; and you can't give it to some players ahead of others."
Angel says this will put a lot of pressure on Robert Moffat, and executive at IBM, Anil Kumar, a director at McKinsey, and Rajiv Goel, who worked at Intel Capital.
Getting the executives from IBM, McKinsey, and Intel (INTC, Fortune 500) to plead guilty and testify against Rajaratnam, Chiesi, and Kurland would be a big coup for the government, says Angel, because proving a case against the latter three people seems much harder.
"The government will have to prove that Rajaratnam, Chiesi, and Kurland actually obtained the information illegally," says Angel. "The person they really want is Rajaratnam, and to get him, they'll need a group of witnesses who all say that they were directed to trade or gather illegal information for him." 
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