Insider trading defense: It's just a bunch of lies

March 10, 2011: 11:04 AM ET

Prosecutors have what appears to be a very strong case against Raj Rajaratnam, with taped conversations and dozens of cooperating witnesses. But the defense team is not going to go down easy.

Raj Rajaratnam

Raj Rajaratnam enters the courthouse earlier this week.

In opening remarks Wednesday that ran over an hour and a half, defense attorney John Dowd began to dismantle what many assume to be the strongest evidence against his client, hedge fund manager Raj Rajaratnam: 2,400 taped phone conversations and testimony from former colleagues who accuse the financier of illegal insider trading.

Dowd, the chair of Akin Gump's criminal defense group, told the jury that witnesses for the prosecution would say things about the 53-year-old money manager that are "false and given to save their own skins." The government will take conversations out of context to make innocent statements sound criminal, Dowd said.

On the other hand, he portrayed his client as an honest, hardworking product of the American dream, someone whose determination and brilliance allowed him to attend some of the country's finest schools, rise through the ranks at investment bank Needham & Company, and eventually create his $7 billion hedge fund Galleon.

"To win this case, Raj's counsel has to successfully attack the credibility of the government's witnesses," says Stuart Meissner, a former securities prosecutor who worked in the New York Attorney General's investor protection office under Eliot Spitzer. "Much like in an organized crime case, the defense has to show that the witnesses are untrustworthy criminals."

Avuncular and gravel-voiced, Dowd skewered key government witnesses who have pled guilty to insider trading and conspiracy, including IBM's (IBM) Bob Moffat, former Intel (INTC) and Galleon employee Roomy Khan, former Galleon portfolio manager Ali Far, and former Galleon portfolio manager Adam Smith.

Anil Kumar, a former partner at McKinsey & Company who is expected to testify that he gave Rajaratnam tips about Advanced Micro Devices' (AMD) deal to buy ATI Technologies, is not a member of an illicit insider trading web, Dowd told the crowd. He's a man who was moonlighting at Galleon, hiding the additional work and money from his partners at McKinsey, and tax-dodging. He'll say "Raj made him do it," said Dowd, calling it a "monstrous lie."

Dowd said that Danielle Chiesi, who allegedly used her affair with Moffat to get IBM information for Rajaratnam, "did not even comprehend what Bob Moffat was saying." What you'll hear in recorded conversations with Chiesi, he said, is "self promotional gibberish" and just "a lot of drama." (For more, see Dangerous liaisons at IBM: Inside the biggest hedge fund insider-trading ring)

This isn't the highest profile case that Dowd has taken in his career. He represented Senator John McCain, who was one of five senators investigated for his role in the savings and loan scandal. Accused of taking money in the 1980s from savings and loan big shot Charles Keating in exchange for regulatory favors, McCain was cleared of any misconduct by a Senate Ethics Committee in 1991.

Dowd, a former marine, is fighting what looks like an unusually strong government case, backed by taped conversations and several corroborating witnesses. Rajaratnam faces 14 counts of securities fraud and faces 20 years in prison.

Assistant United States attorney Jonathan Streeter, delivered equally compelling opening remarks on behalf of the government.

"Use your common sense," Streeter told the jury, hinting at the fact that they would be presented with a dizzying array of trading records and data meant to create doubt rather than prove innocence.

But, he said, the case is actually quite straightforward.

Rajaratnam was "using stolen business information to make tens of millions of dollars," Streeter said. The great mosaic of information that Rajaratnam put together to pick stocks, Streeter said, sometimes included illegally obtained information, "information ordinary investors didn't have and couldn't get."

Much of what Rajaratnam did was perfectly legal, Steeter told the jury. "People did their homework, but they cheated, too."

Indeed, the government's challenge will be to keep the case focused on two key issues: Raj Rajaratnam obtained non-public information that no one else could get and that he knew what he was doing was wrong. The defense will work to blow up the prosecution with well-placed seeds of doubt about its witnesses, its data, and especially its wiretap evidence.

"It's the government's burden entirely in this case to prove Rajaratnam's guilt beyond a reasonable doubt, so they must make the jury believe that the stuff being brought out by the defense is not relevant," says Richard Scheff, a former consultant to the Assistant Secretary of the Treasury and chairman of Montgomery McCracken. "For the defense, the mission is just to raise a reasonable doubt. And they'll do that by introducing as much complexity as possible to convince the jury that things are not as straightforward as they seem."

This is why white collar crime is so hard to prove, says Scheff. Rajaratnam's fate rests on whether the jurors see the world as black and white, or in shades of gray.

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Katie Benner
Katie Benner
Writer, Fortune

Katie Benner joined Fortune in October 2006. As a writer for the magazine and the website, she focuses on Wall Street and the economy. Prior to joining Fortune, Benner worked at TheStreet.com, CNNMoney, and as a freelancer in Beijing for China International Business, the South China Morning Post, and as a columnist for Beijing Review. She has a B.A. in English from Bowdoin College.

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