Brother of fund founder acquitted in NYC federal prosecutor's 1st insider trading case loss

NEW YORK, N.Y. – The brother of an imprisoned ex-billionaire hedge fund founder was acquitted of conspiracy on Tuesday, handing Manhattan prosecutors their first loss after dozens of insider trading convictions in prosecutions that relied heavily on wiretaps and the testimony of those who pleaded guilty.

After the verdict was announced, Rengan Rajaratnam hugged attorneys before jurors even left the room. The smiling 43-year-old defendant left the courthouse without commenting. He still faces civil charges from the Securities and Exchange Commission.

“Today is the day Rengan has been waiting for,” said his lawyer, Daniel Gitner. “We thank the jury for its careful attention. Rengan looks forward to getting on with his life.”

Federal Judge Naomi Reice Buchwald had dismissed the two most serious charges last week, and prosecutors had withdrawn four other charges when the judge raised questions about them in a written opinion.

In a statement, U.S. Attorney Preet Bharara said his office was “disappointed with the verdict on the sole count that the jury was permitted to consider.”

The defendant’s brother, Raj Rajaratnam — founder of the Galleon Group of hedge funds — is serving an 11-year sentence after the government said he earned up to $75 million illegally by trading on secrets provided by corrupt employees of public companies and a network of analysts and portfolio managers who also obtained inside information.

Two dozen other defendants have pleaded guilty or were convicted in the case. In all, prosecutors have obtained guilty pleas or jury verdicts against 81 individuals in insider trading cases in the last six years.

The probe, initially focused on hedge fund portfolio managers, analysts and employees of public companies, eventually was extended to include research professionals at networking companies.

Prosecutors had alleged that Rengan Rajaratnam joined his brother to cheat in the stock market in 2008 on the securities of two technology companies.

Gitner said in closing arguments Monday that the prosecution had “failed on every score” to prove its case.

He told jurors his client, who was born in Sri Lanka and living in Brazil when he learned of the charges, had immediately announced: “I am innocent. This is about my brother, not me. I want to go back. I want to clear my name.”

Assistant U.S. Attorney Christopher Frey urged jurors in his closings to use common sense and review trading records.

The charge against Rengan Rajaratnam was an extension of charges in a prosecution in which the government touted its novel use of wiretaps to catch Wall Street professionals acting illegally.

Former federal Judge Richard J. Holwell, who presided over Raj Rajaratnam’s trial, said the acquittal was not a profound loss for the government, given its 81 victories before a defeat.

“It probably indicates that the government just pushed too far with too little,” said Holwell, who left the bench in 2012 to work in private practice.

He said prosecutors may have done Rengan Rajaratnam a favour by not indicting him with his brother.

“There’s always some prejudice that arises by being tried with a guiltier co-defendant. It just rubs off on you,” Holwell said.