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Galleon hedge fund insider trading trial begins this week

Broadly defined, insider trading is trading stocks based on material, non-public information. Insider trading is both a crime and a civil offense and the Securities and Exchange Commission can elect to enforce the insider trading laws by seeking fines as well as prison time. Insider trading, like most white collar crimes, is a felony that carries the possibility of a lengthy prison sentence.

This week, one of the largest insider trading prosecutions in the history of country and the largest such case involving hedge funds went to trial in federal court. Raj Rajaratnam, who founded and managed a hedge fund company called Galleon Group, stands accused of making $45 million in profits by trading on insider information.

The case against Raj Rajaratnam is of the criminal variety. If convicted, he could spend as much time as 20 years in federal prison. The Rajaratnam trial began this week with jury selection and is expected to last months. The prosecution plans to introduce 2,400 wiretapped conversations involving 130 individuals as evidence of insider tips involving 37 companies.

Judge Richard Holwell is presiding over the trial and has a history of taking a tough stance against insider trading. Before the trial, the prosecution and the defense argued before Judge Holwell about the evidence that could be presented at trial. The defense had argued that the wiretap evidence was illegally obtained because law enforcement authorities had misled the judge who authorized the taps. Judge Holwell rejected these arguments and he has allowed the wiretap evidence to be presented to the jury.

Source: Bloomberg, "Rajaratnam Judge Condemned Insider Trading in Previous Cases," Bob Van Voris, Patricia Hurtado and David Glovin, 3/7/2011

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