Raj Rajaratnam insider trading case


In the case, US vs. Rajaratnam, filed in the US Southern District Court of New York, the US government charged Rajaratnam for using inside information while trading in stocks. The prosecution argued that the accused obtained confidential information from company insiders such as Rajat Gupta, a former director of Goldman Sachs, and used the information to trade in shares. Over a period of seven years, the hedge fund manager had earned a profit of more than $1 billion. The court began the trial in 2009 and concluded it in 2011. The court found the accused guilty in 14 counts even though it granted bail to Rajaratnam. The case showed that the government was sensitive to insider trading. Rajaratnam is the 35th individual charged for insider trading (Glovin et al, 2011). The judgment has raised a few issues regarding the stock market investment. For example, a demand to legalize insider trading has been raised. A few stock market experts argue that insiders provide valuable information to the stock market, thereby improving its efficiency (Bandow, 2011). It is important to analyze the rationale of the judgment and its implications for corporations.


The parties to the case were the hedge fund Galleon Group’s manager Raj Rajaratnam, Rajat Gupta of McKinsey Consulting, and the federal government represented by the Attorney Preet Bharara who was responsible for conviction of several executives accused of insider trading (Huneke, 2011). Apart from Rajaratnam, Danielle Chiesi, an investment consultant, and 15 other executives were also charged with the offense (Thomson Reuters 2010).


On 23 September 2008, at 6.42 pm, the CNN carried a news item regarding the investor Warren Buffet’s decision to invest $5 billion in the Goldman Sachs, and the news had an impact on the share price of the company, which reached $137 on 24 September 2008 (Luhby, 2008). The stock market traders, who obtained this news on 23 September, bought stocks of Goldman. They were in an advantageous position when compared to the ordinary investors who did not have access to non-public information.

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Rajaratnam obtained insider information from Goldman Sachs’ executive Danielle Chiessi and McKinsey executive Anil Kumar. The accused gave $500,000 to Anil Kumar for his support. Rajaratnam used inside information to invest in the shares of Goldman Sachs (Economist.com, 2011).


The Securities and Exchange Commission (SEC) brought the appeal before the court. On 16 October 2009, the SEC had filed civil as well as criminal cases with the US Attorney’s Office (USAO). The SEC documents show that the agency had recorded more than 18,000 personal and official communications, as it suspected involvement of Rajaratnam in an illegal activity. The USAO provided the wiretap communications to the defendants and instructed them to forward them to the SEC. Even though the defendants objected to handing over of wiretap communication to the SEC, the court instructed them to do so (Thomson Reuters, 2010).

The government identified 21 stocks for the wiretap, but Rajaratnam argued that the evidence regarding 10 stocks should not be considered as the government misled the court by giving unreliable information (McCool, 2010). The court convicted Rajaratnam in conspiracy and securities fraud case, as he had earned more than $60 million after obtaining inside information and using the same to trade in the stock market. The conviction implied that he might face up to 19.5 years of imprisonment (Cohan, 2011).


The question of insider trading was the major issue that the court discussed. The Securities Exchange Act of 1934 specifically prohibits insider trading, which includes fraud, manipulation, and abuse of non-public information. On the other hand, use of public information is not punishable by law. Insider trading is a form of deception, manipulation, and fraud because it negatively affects the relationship between company and shareholders who invest in the organization believing in its integrity and credibility (US District Court, 2011, p. 4).

By providing non-public information to a stock market investor, the company executives affected the shareholder trust in the organization. The issue also relates to the relationship between the tippee and the tipper. The tipper provides non-public information to the tippee who has used the same to earn profits by trading in the stocks of the company. The court discussed the definition of non-public information. The court also analyzed issues such as conspiracy and fraud (US District Court, 2011, p. 5).


The court found the solution to the problems by referring to earlier cases and their judgments. For example, United States v. McDermott, 245 F.3d 133, 137 (2d Cir. 2001) refers to evidences and implications of conspiracy between two or more individuals. The court also used the provisions of the Securities Exchange Act of 1934, which prohibits and defines insider trade. The previous court judgments showed that tipper and tippee are punishable as they are liable not to employ non-public information for trade in securities. This fact is revealed in the case SEC v. Ballesteros Franco, 253 F. Supp. 2d 720, 726 (S.D.N.Y. 2003) (US District Court, 2011, pp. 4-5).

The tipper can be punished for the offense of providing information to the tippee, and the latter is punishable for using the information to trade in the securities, and this judgment can be found in SEC v. Warde, 151 F.3d 42, 47 (2d Cir. 1998) (US District Court, 2011, p. 5). Similarly, any information becomes public when it is disclosed after using appropriate procedure, and this definition of public information is available in the case SEC v. Mayhew, 121 F.3d 44, 50 (2d Cir. 1997) (US District Court, 2011, p. 5).


It is important to understand the rationale behind the judgment pronounced by the court. The previous judgments were used as models while deciding the case. The court considered different arguments while convicting the defendant as revealed in Galleon conspiracy. The government showed that Adam Smith of Galleon obtained inside information, which he revealed to Rajaratnam, and he used the same information for trade (US District Court, 2011, p. 9).

The court suggested that in the absence of direct evidence regarding participation of the defendant in a criminal act, circumstantial evidences could be used. Based on this evidence, it is possible to prove the criminal intent of the defendant. The court refused to accept the argument of Rajaratnam that there was no direct evidence concerning his use of inside information for trade. The court accepted the argument of the government that Rajaratnam was aware that he was using inside information, as there is reference to communication between Rajaratnam and executives. The emails that the government produced contained code words, which clearly revealed criminal intent of the defendant (US District Court, 2011, p. 9).

The government also used the communication between Rajaratnam and Rajat Gupta regarding the investment of Hathway Berkshire in Goldman Sachs. A few minutes after this conversation, Rajaratnam was found taking trading decisions. Rajaratnam argued that in the absence of direct evidence, communication between him and Rajat Gupta should not be considered as the major evidence in the case. However, the court refused to accept Rajaratnam’s argument as it depended on the judgment given in the previous cases (US District Court, 2011, pp. 10-11). At the same time, the court decided to exonerate Raj Rajaratnam’s brother Rengan Rajaratnam as the government failed to prove his participation in the criminal event with criminal intent (Levine, 2014).

Case questions

The case discussed questions such as – What is insider trading and why is it an offense? What is non-public information? What evidences should be used to implicate the accused in the case of insider trading? What is a criminal conspiracy?

The court showed that insider trading refers to the use of non-public information available to a few insiders or members of an organization. Trading based on inside information becomes an offense because the trader affects the interest of investors who lack inside information. The hedge fund manager is expected to conduct research, and in the process, he or she can interact with insiders. All the same, he or she should be cautious while using the information for investment.

Non-public information is described as the information that is not available to the public, implying that only a few individuals have access to such information. By using non-public information, fund managers or brokers are likely to affect interest of innocent traders who lack such valuable information. The SEC rules prohibit such a behavior of hedge fund managers.

Another case question relates to the nature of the evidence that can be used while implicating the defendant. It is shown that in the absence of direct evidences, circumstantial evidences can be used. Consequently, the court refused to accept the argument of the defendants that there is no direct evidence concerning their involvement in the case.

The court defined criminal conspiracy as involvement of individuals in any act with a criminal intent. Based on this definition, it was proved that the defendant was involved in a criminal conspiracy.


The SEC brought a case regarding the violation of insider trading rules by Raj Rajaratnam, and the defendant failed to prove his innocence. Raj Rajaratnam was accused of violating SEC’s insider trading provisions. By using non-public information, Rajaratnam amassed considerable profit. The court allowed the prosecution to use wiretap communication as a piece of circumstantial evidence. Moreover, it suggested that in the absence of direct evidence, circumstantial evidence could be used to implicate the defendant. The court refused to accept the argument of Raj Rajaratnam. The court used the judgments given in the previous cases to justify its decision. The case shows that insider trading is a punishable offense.


Bandow, D. (2011 January 20). It’s time to legalize insider trading. Retrieved from             http://www.cnbc.com/id/101766558

Cohan, P. (2011). Does Rajaratnam conviction level the investment field? Retrieved           from http://www.forbes.com/sites/petercohan/2011/05/11/does-rajaratnam-          conviction-level-the-investment-playing-field/

Economist.com.(2011). Guilty as charged. Retrieved from   http://www.economist.com/node/18681788

Glovin, D., Hurtado, P. and Horis, B.V. (2011, May 12). Rajaratnam guilty in insider-      trading case. Retrieved from http://www.bloomberg.com/news/2011-05-      11/rajaratnam-is-found-guilty-of-all-counts-in-galleon-insider-trading-           trial.html

Huneke, S.C. (2011). Raj Rajaratnam and insider trading. Seven Pillar Institute.    Retrieved from http://sevenpillarsinstitute.org/case-studies/raj-rajaratnam-and-         insider-trading-2

Levine, M. (2013). Rengan Rajaratnam case shows right way to insider trade.        Retrieved from http://www.bloombergview.com/articles/2014-07-09/rengan-           rajaratnam-case-shows-right-way-to-insider-trade

Luhby, T. (2008). Buffet’s Berkshire invests $5B in Goldman. Retrieved from             http://money.cnn.com/2008/09/23/news/companies/goldman_berkshire/index.         htm?source=yahoo_quote

McCool, G. (2010). Exclude Goldman, other stocks from the case: Rajaratnam.      Retrieved from http://www.highbeam.com/doc/1P2-22012987.html

Thomson Reuters. (2010). Securities and Exchange Commission v. Raj Rajaratnam            and Danielle Chiesi. Retrieved from            https://epic.org/amicus/galleon_appellants_brief.pdf

US District Court. (2011). Memorandum opinion and order. Retrieved from             http://www.law.du.edu/documents/corporate-           governance/criminal/rajaratnam/Memorandum-and-Order-US-v-Rajaratnam-        S1-09-CR-1184-SD-NY-August-16-2011.pdf

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