Raj Rajaratnam’s defense to insider-trading charges, which could start as early as next week, may be helped by the testimony of a former chief economist to the US Securities and Exchange Commission who has found nothing improper with stock trades by the Galleon Group co-founder.
Gregg Jarrell, who was SEC’s top economist from 1984 to 1987 and now teaches at the University of Rochester’s graduate school of business in upstate New York, will testify about Rajaratnam’s trades in Goldman Sachs Group stocks and dozens of other companies. If permitted by the judge, he’ll say that allegedly illegal tips involved information that was already public or immaterial or had been incorporated into Galleon research by the time Rajaratnam got them.
“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 February 28 letter that was made public March 31 as part of a US request to block all or part of his testimony.
Rajaratnam, 53, was charged in the largest crackdown on hedge-fund insider trading in US history. The Sri Lankan-born money manager is accused of making $45 million from tips by corporate insiders. Rajaratnam denies wrongdoing, saying he based trades on research and published sources.
In their filing, prosecutors are seeking to block Jarrell’s anticipated testimony, which they say is speculative or outside his expertise. They noted that a federal judge in Ohio limited Jarrell’s testimony in a 2005 criminal case against Roger Blackwell, a director of Worthington Foods Inc. who was convicted of trading on inside information.
‘Optimal Manner’
“Professor Jarrell should be precluded from opining about the basis upon which Rajaratnam made trading decisions,” assistant US attorneys Jonathan Streeter and Reed Brodsky said in court papers in Manhattan federal court.
“It is likewise irrelevant whether Rajaratnam’s trades were ‘economically inconsistent with optimal exploitation’” of illegal tips, they said. “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.’”