Rajaratnam Steers Clear of Brother’s Crimes in Insider Case

Jun 16, 2014 3:38 pm ET

(Updates with court hearing in 24th paragraph.)

June 16 (Bloomberg) -- When Rengan Rajaratnam started Sedna Capital Management LLC, he named the hedge fund after a newly discovered dwarf planet on the edge of the solar system, reflecting his focus on small-cap businesses unnoticed on Wall Street.

Rajaratnam, who worked his way up through Steven Cohen’s SAC Capital Advisors LP and Galleon Group LLC, the hedge fund co-founded by his billionaire brother Raj, said in a 2004 interview that “Sedna speaks to our strategy of looking where other people aren’t looking.”

A decade later, his defense strategy against charges that may land him in prison for years is to move as far away from his brother as Sedna is from Earth. Raj Rajaratnam is serving an 11- year sentence for a masterminding a massive, multimillion dollar insider-trading scheme. This week, Rengan goes on trial in Manhattan federal court on charges he made at least $800,000 on illegal tips from people in his big brother’s Rolodex.

Rengan Rajaratnam’s defense has had some success. The U.S. last month dropped four of seven counts after defense lawyers and the judge said prosecutors were overreaching. Prosecutors made a “very strained” argument that Rengan could be held responsible for aiding actions which his brother undertook on his own, the judge said.

Rengan still faces two counts of securities fraud and one count of conspiracy to commit fraud over trades of Clearwire Corp. and Advanced Micro Devices Inc. Securities fraud carries a 20-year maximum prison sentence, while conspiracy carries a term of as long as five years.

Plea Deal

Having rejected a recent offer of a plea deal, Rengan Rajaratnam is taking his chances with a jury. He is squaring off against the office of Manhattan U.S. Attorney Preet Bharara, who has won 80 convictions in insider-trading cases since August 2009, mostly through guilty pleas. His office hasn’t lost any at trial.

Pretrial testimony in Raj Rajaratnam’s case revealed that while Sedna operated only for a short time, it was long enough to attract the scrutiny of the U.S. Securities and Exchange Commission, which began an insider-trading probe in 2006.

The Federal Bureau of Investigation and the Manhattan U.S. attorney’s office joined the case, focusing on Raj Rajaratnam. He was found guilty in 2011 after prosecutors placed him at the center of the most wide-ranging insider-trading ring in U.S. history.

Supreme Court

Today, he lost a U.S. Supreme Court bid to overturn that conviction. The court without comment rejected Raj Rajaratnam’s appeal, in which he argued that prosecutors should have been required to prove inside information played a substantial role in his trades. The Justice Department argued that it provided overwhelming evidence on that issue.

Rengan, a graduate of the University of Pennsylvania and Stanford University’s business school, was implicated during his older brother’s trial, where wiretapped conversations between the two men were played in court. It was the first white-collar case to make extensive use of federal wiretaps, a tactic previously associated with investigations of organized crime.

Taped Calls

The government won permission to reprise some of the same secretly taped phone calls at Rengan’s trial -- over his objections. The U.S. claims the recorded calls illustrate the brothers’ desire to exploit sources, including one July 2008 call in which Raj Rajaratnam exhorts his younger brother to reach out to his former business school classmates, saying, “You got to work your Stanford there.”

The following month, Rengan Rajaratnam did just that, the U.S. claims. After being told about Raj’s tip from a business school classmate that Sunnyvale, California-based AMD was getting a multibillion-dollar investment, Rengan called his older brother to tell him what he’d learned from one of his own classmates, according to prosecutors.

Rengan Rajaratnam said the former classmate “spilled his beans” about the proposed deal when he was asked about investing in the company’s stock, according to the wiretap transcript.

“He’s like, ‘Buy it, buy as much as you can as soon as you can,’” Rengan Rajaratnam told his brother on the call.

Rengan Rajaratnam worked as an analyst at Stamford, Connecticut-based SAC Capital from May 2003 to January 2004 after working at Morgan Stanley, and for his brother at Galleon, according to the government. After Sedna closed, he returned to his brother’s hedge fund, around 2008, when the alleged insider trading occurred.

Judge

U.S. District Judge Naomi Reice Buchwald, who’s presiding over Rengan Rajaratnam’s case, barred prosecutors from referring to his employment at SAC Capital, saying such a reference would be “most toxic” in a jury trial.

The government’s seven-year probe of SAC Capital has yielded convictions against eight of the hedge fund’s managers and analysts, as well as a guilty plea and $1.8 billion settlement by the firm.

The fund has since shut its doors to outside investors and changed its name to Point72 Asset Management LP.

While Buchwald rejected Rengan Rajaratnam’s bid to exclude the wiretapped calls with his brother as evidence, she ruled that he can present an “innocent mindset” defense.

The jury will be allowed to hear about his immediate return to the U.S. from Brazil last year upon learning he’d been indicted, with his brother already in prison.

‘Swiss Bank’

Buchwald said at a May 30 hearing that she was concerned that references to Raj Rajaratnam’s conviction, like Rengan’s history with SAC Capital, might prejudice the jury.

Daniel Gitner, Rengan Rajaratnam’s lawyer, told the judge it will be difficult finding jurors who don’t know about the older brother.

“The name Rajaratnam is now synonymous, unfortunately, with that kind of case,” Gitner said.

At a pre-trial hearing today, Buchwald barred prosecutors from using statements Rengan Rajaratnam allegedly made to an FBI agent during his March 2013 flight back to New York. The U.S. claimed Rajaratnam said he was returning to the U.S. because he wanted “to avoid Brazilian detention” and had seen “a movie that depicted harsh conditions.”

Buchwald said the government failed to mention the statements earlier, and that allowing them as evidence would lead to a “potential sandbagging” of the defendant. Only if Rajaratnam testifies in his own defense can the statements be used, she said.

Separately, Gitner told the judge at the hearing that he may seek to delay the trial a few days, as Rajaratnam’s father is near death.

The case is U.S. v. Rajaratnam, 13-cr-00211, U.S. District Court, Southern District of New York (Manhattan); the civil case is SEC v. Rajaratnam, 13-cv-01894, Southern District of New York (Manhattan).

--With assistance from Bob Van Voris in federal court in Manhattan and Greg Stohr in Washington.