The ongoing criminal insider trading trial of Raj Rajaratnam of the Galleon Hedge Fund is a fascinating look at how top players in the stock market make enormous amounts of money. The seminal case of insider trading is In the Matter of Cady, Roberts & Co. In that case, the SEC imposed disciplinary sanctions against a registered broker-dealer and his firm under Rule 10b-5 of 17 C.F. R. The broker had directed his customers to liquidate their holdings in a certain corporation after learning from a corporate director, that the firm was about to announce a dividend cut. The SEC found that the broker violated rule 10b-5 because his conduct in disclosing inside information to customers operated as fraud or deceit upon the purchasers of the stock. The SEC explained that a corporate insider whose position makes him privy to information which if known to others would affect their investment judgement has an affirmative duty to disclose material information known to him prior to trading shares of the corporation or else abstain from such trading. For Ragaratnam if he traded and profited from information he received from insiders he’ll be found guilty of a white collar crime. On the other hand if he can show that his trades were based on his own research and public information he’ll be found not guilty. The defense team will explain to the jury that insiders are always contacting Ragaratnam with hot tips because Ragaratnam is a heavy duty player in securities. His lawyers will also tell the jury that Ragaratnam is very generous with his money because he wants to keep the flow of information coming his way. The defense team will show the jury that Ragaratnam employs the brightest research team in the business and that he makes trades based on their research, public information and most importantly his own instincts. I have attached the actual indictment document.
This is another example of the importance of having a skilled criminal defense attorney on your case.