Insider Trading Prosecutions Yield More Questions Than Answers

United States v. Raj Rajaratnam, No . 09-cr-01184-RJH, may have brought a degree of closure to the Department of Justice’s (DOJ) lengthy, and costly, investigation and prosecution into alleged insider trading by the founder of the Galleon Group (although the question of his sentence—the defendants faces an advisory sentencing range 15 ½-19 ½ years in prison under the US Sentencing Guidelines—remains open). However, the case itself raises a host of questions that need to be both vetted and answered, going forward, in all ongoing and future insider trading prosecutions. These include questions about the wisdom and appropriateness of using tools such as court authorized wiretaps (45 in this case) and agencies such as the FBI, whose time and efforts have been more traditionally reserved for investigating organized and violent criminal activity and combating terrorism,  to instead enforce security laws and safeguard the financial marketplace at a time when the considerable attendant costs associated with insider trading prosecutions in terms of resources, monies, and manpower are still desperately needed to fund and support so-called Wars on Violent Crime and Terrorism . Questions should also be asked about the fairness behind the DOJ’s consistent practice in "hammering" the tipper, who may have received no benefit beyond being paid low-level consulting fees, while regularly offering favorable cooperation deals to "downstream" traders and brokers who actually participated in the offending trades by executing orders on behalf of hedge funds and other clients, who relied on the alleged confidential information. Another reasonable question is whether it is proper and fair to predicate tippers’ sentencing calculations on the totals gained or lost from the ultimate trades, especially where the tipper not only did not participate in the actual trades themselves,  but did not directly benefit from them, either. (In at least one case, United States v. Adelson, 441 F. Supp.2d 506 (2006), a U.S. District Court Judge expressly ruled that loss calculations under the guidelines in that case led to a patently unreasonable result, and his decision was upheld by the 2d Circuit.)  Questions are also raised as to whether lay juries, who must unanimously agree about what specific information was passed along,  are even equipped to decide the required element of Materiality where the legal definition of the same is no better defined than "was there a substantial likelihood that a reasonable [investor] would consider it important in deciding how to invest", see SEC v. Warde, 151 F.3d 42 92d Cir. 1998) or whether lay juries have the wherewithal to determine whether the confidential information was "used in connection with the purchase and sale of a security", see United States v. O’Hagen, 117 S.Ct 2199, 2209(1997) rather than simply being passed along when "used" can be an industry term of art with nuanced applications, when such determinations may be better made, or answered,  by panels consisting of industry experts within the context of regulatory hearings and/or disciplinary proceedings where the sanctions remain only civil in nature. The question must also be asked whether jail sentences really are appropriate in any of these cases when heavy fines, disgorgement of profits, trading bans and various civil injunctions can be just as effective in "policing the industry".  Indeed, the question of whether or not criminal prosecution, and tying up the federal criminal case docket for weeks and months at a time with these cases, is appropriate when the SEC already has parallel enforcement powers on the civil side, which can be just as effective and sometimes easier given the lesser standard of proof, in both ultimately sanctioning and removing offenders from the industry all together, must also be asked. Now to be sure, none of these questions go directly to strategies behind defending against insider trading charges, which can truly only be considered on a case specific basis (although routine case analysis in insider trading prosecutions should necessarily include looking into whether the information was in fact still non-public at the time the underlying trade was executed, instead of when it was passed along, whether or not the information could have come from a public/alternative source,  and/or whether the information passed along truly constituted material, non-public information,  or whether it  was instead a mere forecast or prognosis based on analysis and opinion). Nonetheless, with the DOJ clearly emboldened by results such as the one they just obtained in the Galleon Case, bet on more of these cases being brought in the near term; and the more that happens, the more compelling will be the need for the above-asked questions to answered.