Focus of Rajaratnam trial shifts to witness testimonies

As the prosecution part of the trial against Raj Rajaratnam comes to an end, the trial is starting to focus on the defense and some of the witnesses it might call to testify.

Rajaratnam, who received a Wharton School MBA in 1983, is on trial for the largest account of insider trading in United States history, according to prosecutors. They maintain that he made $45 million from illegally obtained insider knowledge.

Rajaratnam is the defendant in a criminal trial and a civil suit filed against the Galleon Group, a hedge-fund management firm which he cofounded.

The defense, which may begin as early as this week, according to Bloomberg Businessweek, is likely to call to on former chief economist to the U.S. Securities and Exchange Commission Gregg Jarrell to testify.

Jarrell, who now teaches at the University of Rochester, has stated that he found nothing illegal with stock trades by Rajaratnam and Galleon and that all insider tips were already public information.

“Jarrell generally concluded that Mr. Rajaratnam’s trading is economically inconsistent with the optimal exploitation of inside information,” defense attorney John Dowd wrote in a Feb. 28 letter that was made public on March 31.

The U.S. government is objecting to the possibility of Jarrell testifying on several grounds.

Prosecutors are claiming that Jarrell’s testimony is both speculative and outside of his expertise.

In addition, the prosecution is highlighting that it does not matter how well Rajaratnam used the insider tips.

“It is likewise irrelevant whether Rajaratnam’s trades were ‘economically inconsistent with optimal exploitation’” of illegal tips,” U.S. attorneys Jonathan Streeter and Reed Brodsky said, according to court documents. “The issue before the jury is whether Rajaratnam committed, and conspired to commit, securities fraud” and not “whether he did so in an ‘optimal manner.’”

This type of attack on the credibility of witnesses is standard in many trials, Penn Law professor David Abrams said.

The defense has been pursuing a similar strategy, attacking the credibility of several of the prosecution’s witnesses on the grounds that they were cooperating solely to mitigate their own criminal sentences.

For instance, Dowd tried to impugn the credibility of Anil Kumar, who pleaded guilty to securities fraud and is now cooperating with the government. The testimony of Kumar, also a 1983 Wharton MBA graduate and classmates and close friends with Rajaratnam, was a key focus of the trial two weeks ago.

“There are many examples where the defense tries to impugn witnesses for ratting on their client because they got a deal from the prosecutors to get their sentence shortened,” Abrams said. “It’s certainly a reasonable strategy.”

More recently, the trial has focused on Rajaratnam’s connection with Rajat Gupta, who allegedly supplied Rajaratnam with insider information while on the board at Goldman Sachs Group.

On March 30, the prosecution tried to convince the jury that Rajaratnam sold his shares in Goldman before they publicly reported their first quarterly loss due to illegal insider tips from Gupta, according to The Wall Street Journal.

If convicted, Rajaratnam could spend as long as 20 years in prison. He pleaded not guilty on Dec. 21, 2009.

However, some maintain that insider trading should not even be illegal.

“There’s a theory that it shouldn’t be illegal because what these insiders are doing is trading on relevant information to companies’ prices,” Abrams said. “By allowing them to trade on it, you’re making prices reflect fundamental information in the market more quickly.”

Yet most maintain that insider trading should be illegal since “it can potentially undermine people’s confidence in the markets,” Abrams said.

He explained that if people think some have more information on the value of stocks, they might be less willing to purchase in the market.

“I think it’s not a bad thing that we ban it,” Abrams said. “We’ll potentially lose some speed in the market, but I don’t think the cost is as big as the potential cost the other way.”

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