The Future of Wall Street Insider Trading Prosecutions: A Criminal Defense Lawyer’s Thoughts on the Raj Rajaratnam Conviction

This week, Manhattan federal prosecutors scored a huge victory with a conviction in the insider trading trial of billionaire Raj Rajaratnam, the former manager of the successful Galleon hedge fund. Rajaratnam is expected to be sentenced to anywhere between 15.5-19 years in prison as a result of his conviction, though he plans to appeal to the Second Circuit Court of Appeals. Now that the trial phase is over, however, it is time to contemplate what, if any, consequences this conviction could have for the financial industry and the professionals working in it. Smart defense attorneys will also dissect this trial – in particular, the strategies used by the attorneys – and learn some valuable lessons from it.

To begin, it is widely believed that this conviction will embolden prosecutors and make them even more willing to pursue financial professionals suspected of insider trading. This is probably true, though some commentators seem to forget that federal prosecutors were already under significant pressure from the public and their politicians to hold the perceived Wall Street fat cats criminally accountable for the nation’s economic woes. (And the numbers speak for themselves: over the last 18 months, the Manhattan U.S. Attorney’s Office has charged 47 individuals with insider trading crimes and 36 have pleaded guilty or been convicted. Preet Bharara, the U.S. Attorney for the Southern District, has promised more prosecutions to come, as well.)

From an attorney’s standpoint, it was interesting to see techniques that were once reserved for cartel and Mafia prosecutions – such as wiretaps and cutting testimony deals with cooperating co-defendants – put to such effective use against Raj Rajaratnam. Indeed, as Rajaratnam’s attorney, John Dowd, discovered, an incriminating tape recording of your client can be very difficult to overcome. (Coincidentally, the other front-page trial currently in progress – that of the “rape cops” Kenneth Moreno and Franklin Mata – involves a highly damaging secret recording of the defendant.) The techniques prosecutors used were not new, but until now, Wall Street defendants were not used to seeing them used against them.

In some ways, though, this very public trial and conviction of Mr. Rajaratnam might yield some subtle silver linings for future inside trading defendants. From a criminal lawyer’s standpoint, the case against Mr. Rajaratnam was a grand affair : Mr. Rajaratnam was one of the richest and most successful hedge fund managers on the Street, the government had numerous recorded wiretapped conversations, and the prosecutors cut deals with other defendants for their testimony. So, the question becomes: will juries accept anything less? What if prosecutors don’t have incriminating wiretapped conversations? In some ways, the issue is analogous to the “CSI Effect” often lamented by prosecutors: without elaborate DNA evidence or scientific proof, juries that have spent years watching fictional and unrealistic television courtroom dramas are often less willing to convict defendants. So, what was once considered a cutting-edge prosecutor’s advantage – DNA evidence – has now almost become a prerequisite for their success. Similarly, juries in white collar/insider trading cases may not be willing to convict someone without the sort of wiretapped conversation that they may have read about in Rajaratnam’s case. Prosecutors have made it clear that they intend to pursue more wiretaps against Wall Street executives, but there is simply no way that every prosecution case will involve this evidence. Thus, those lucky defendants – particularly the lower-level defendants with less of a profile than Mr. Rajaratnam – may be able to successfully take advantage of this “CSI Effect” with their juries.

Hindsight always being 20/20, we hesitate to criticize the defense strategy, as it was most assuredly a difficult case to defend. However, there are two things that we can probably take away from this case: first, the jury on white-collar cases should probably not be blue collar. Right now, anti-Wall Street sentiment is at an all-time high in this country. Mr. Rajaratnam’s team deliberately avoided putting financial professionals on the jury – we suspect that they did that because they were concerned about jurors that would be personally familiar with the issues relating to public and private investment information. However, that strategy may have backfired; certainly, it is difficult for teachers and blue collar workers to relate or sympathize with the plight of billionaires. A few financial professionals on the jury might have felt a little “defensive” about the prosecution’s case, if, as defense attorney John Dowd suggested, what Mr. Rajaratnam did wasn’t a crime because this sort of thing “happens every day on Wall Street.”

Additionally, Mr. Rajaratnam perhaps should have testified in his defense. The decision whether or not to testify is a complicated one and we are sure that Mr. Rajaratnam and his team agonized over it, but ultimately, we think that it is exceptionally difficult to win cases like these unless the defendant personally provides an explanation for his actions, and, perhaps even more importantly, demonstrates to the jury that he is a decent and likable human being.

If you or a loved one have been arrested or are being investigated for insider trading or some other financial-related crime, you should strongly consider contacting the experienced criminal defense attorneys at the Law Office of Matthew Galluzzo. Our attorneys include three former Manhattan prosecutors that have tried, and won, exceptionally difficult trials and arbitrations under intense pressure. We have successfully represented Wall Street brokers, traders, and other financial professionals in a wide range of criminal and civil matters. Our attorneys have a deep and sophisticated understanding of the financial industry, and we have used that expertise to win stunning victories in cases involving alleged financial fraud. Call us or email us today to set up an appointment at our convenient Wall Street location.