Second Circuit Reaffirms Continued Use Of The 'Knowing Possession' Causation Standard In Rajaratnam Insider Trading Case

In United States v. Rajaratnam, No. 11-4416-CR, 2013 U.S. App. LEXIS 12885 (2d Cir. June 24, 2013), the United States Court of Appeals for the Second Circuit upheld the conviction of Raj Rajaratnam ("Rajaratnam") for insider trading, holding that a jury instruction that the non-public information obtained by Rajaratnam "was a factor, however small" in his decision to purchase stock was proper as a matter of controlling Second Circuit law. The unanimous three-judge panel rejected Rajaratnam's argument that more of a "causal connection" between the inside information he possessed and the trades he executed was required. After discussing the separate issue of wiretapping evidence, the court analyzed and applied previous decisions to conclude that the district court's instruction was proper -- and, in fact, was more generous to Rajaratnam than the law required. This decision reaffirms that criminal liability for insider trading may lie simply for trading while in possession of material inside information, even if trade was not motivated by that inside information.

Rajaratnam founded and managed hedge funds known collectively as the Galleon Group. In 2009, Rajaratnam was indicted on five counts of conspiracy to commit securities fraud and nine counts of securities fraud for trading on inside information. At the end of a seven-week trial, the district court instructed the jury that it could convict if the "material non-public information given to the defendant was a factor, however small, in the defendant's decision to purchase or sell stock" (emphasis added). After twelve days of deliberation, the jury returned a guilty verdict on all counts.

Rajaratnam appealed to the Second Circuit, arguing, in part, that the jury instruction allowed for conviction without the necessary finding of a causal connection between the inside information possessed and the trades executed. The Second Circuit rejected this argument.

The Court began by analyzing United States v. Teicher, 987 F.2d 112, 120-21 (2d Cir. 1993). In Teicher, the district court instructed the jury that "[i]t is sufficient if the government proves that the defendant[] purchased or sold securities while knowingly in possession of the material nonpublic information." Upon review, the Second Circuit enumerated the factors that weigh in favor of a "knowing possession" (as opposed to a "causal connection") standard. First, Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and...