How will Raj Rajaratnam's defense team counter all those undercover recordings of the hedge fund mogul receiving inside stock tips? By showing that the tipsters weren't telling him anything he didn't already know.
The defense case in the landmark insider trading trial begins on Monday, and it will center on the testimony of University of Rochester business professor Gregg Jarrell, who served as Chief Economist at the Securities and Exchange Commission during the Reagan administration.
Jarrell took the witness stand on Friday outside the presence of the jury, at a hearing in which prosecutors sought to limit his testimony as an expert witness in the case.
When he testifies in front of the jury next week, Jarrell will be allowed to present what he calls "event studies" involving the 36 stocks Rajaratnam is alleged to have traded illegally.
One of those stocks is EBay . On October 3, 2008, a Friday, stRajaratnam received a tip from former McKinsey consultant Anil Kumar that EBay would announce major layoffs the following Monday.
But Jarrell, previewing his testimony for the court, said he found speculation about the layoffs had been in the news for days. When the layoffs were announced on Monday October 6, the resulting selloff in the stock was "not statistically significant" compared to a broader selloff in the market that day, Jarrell said.
In other words, the news was already priced into the stock.
The defense says Rajaratnam traded only on publicly available information and expert analysis, not material non-public information as the government contends.
Assistant U.S. Attorney Jonathan Streeter questioned the statistical analysis behind Jarrell's findings, but Jarrell said not all of it favors the defense.
"Some of it you won't like and some of it you will like, Mr. Streeter," Jarrell testified.
Compared to the government's case, which lasted nearly five weeks, included 18 witnesses and more than 700 exhibits, the defense case will apparently move with lightning speed.
Jarrell is one of just five defense witnesses planned at this point, and lead defense attorney John Dowd said their testimony could be complete by the end of the day Tuesday.
Dowd said he had not made a final decision on whether Rajaratnam himself would testify, though that is seen as highly unlikely.
If Rajaratnam does not take the stand, closing arguments in the case could begin as soon as Wednesday.
Rajaratnam faces 14 criminal counts in what authorities have called the largest hedge fund insider trading investigation in history.