Sunday, January 20, 2013
Wall Street as Yossarian: The Other Effects of the Rajaratnam Insider Trading Conviction, by Scott Colesanti, Hofstra University - Maurice A. Deane School of Law, was recently posted on SSRN. Here is the abstract:
Without warning, the patient sat up in bed and shouted, ‘I see everything twice!’
And thus Yossarian, the war-weary bomber pilot of the masterful novel, Catch-22, was able to malinger in an Italian hospital even longer while nervous doctors attended to the strange malady of his neighbor.
The storied literary diversion may highlight the good fortune of those evading government prosecution of financial crimes in 2011, a year that fulfilled the promise that observers of hedge fund discipline would similarly see things twice. To wit, in May 2011, a Manhattan jury convicted billionaire hedge fund entrepreneur Raj Rajaratnam of fourteen counts of conspiracy and securities fraud. Chief among these convictions was the crime of insider trading. The case punctuated two years of criminal actions based upon insider trading allegations by the U.S. Attorney for the Southern District of New York, who had called Rajaratnam “the modern face of illegal insider trading.” Perhaps more significantly, five months later, Judge Richard J. Holwell sentenced Rajaratnam to eleven years in prison, in handing down the harshest sentence ever in such a case.
The Rajaratnam trial was the climax to a prolonged investigation that resulted in the conviction of over two dozen hedge fund workers and public company/financial firm employees for their roles in a $50 million scheme. The case also emphasized the unforgiving nature of securities fraud accusations where those who should know better (for example, attorneys) were concerned, as lawyers ensnared in the net cast at the fallen Galleon Management, LP (“Galleon”) received consistently glaring prison sentences. Further, the Rajaratnam conviction seemingly reverberated through the courts, leading to strict interpretations of procedural rules attending unrelated insider trading cases
But the celebrated conviction failed to end the parallel U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) investigation, litigation, or its pursuit of both fine and disgorgement. Thus, while commentators accurately noted that the use of Department of Justice (“DOJ”) wiretaps changed the nature of both the game and the results for Wall Street’s illegal players, receiving less attention is the delaying effect the trial had — both on clarifying insider trading law and questioning the unchecked use of government resources. While no one could quibble with the efficiency of the DOJ’s results, this Article seeks to reveal their equally significant effects on the government’s ongoing crusade against insider trading. Born via an administrative decision, decades after the adoption of the securities laws themselves, the uniquely American insider trading prohibition (and the attendant efforts of its chief enforcer) became perhaps a little more unique and problematic with the U.S. Attorney’s 2011 conviction of Rajaratnam.