A Guide to Raj's Awesome Defense Strategy: All The Inside Info Was "Confidential—Not Material"

Raj Rajaratnam
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Raj Rajaratnam

The defense and the prosecution on the trial of Raj Rajaratnam fought more than ever this week over one question.

The question: Is this information material nonpublic information?

Now that it's in its the third week, it's clear that's the most important question of the trial.

On Tuesday the prosecution jumped in to object—4 times—to the defense's distinction between confidential information and material nonpublic information.

Now, most people, if they're like us, would read the transcript of the call in question and conclude that Raj had access to material information that came from Goel. Because during a phone call on March 20th call (a rough transcript of the call is available here), Raj and an Intel exec, Rajiv Goel, discussed specific information that wasn't publicly available.

But the defense has a great answer to the question, Is this information material nonpublic information?

According to the defense, the information is simply "confidential."

Defense attorney: You testified that this is confidential?

Viswanathan: I testified that everything in the term sheet [the sheet detailing the terms of Clearwire's deal with Intel, which was announced on May 7, 2008]...

Defense: It's against Intel's policy to talk about this but that doesn't mean it's material nonpublic information...

[Prosecution objects. The defense was told to re-phrase the question, we think]

Defense: You're not testifying that this is material nonpublic information, are you?

[Prosecution objects. More of the same follows, including the prosecution objecting to the defense's use of the phrase "this information," because it's too vague - the March 20th call is long.]

Defense, finally: Do you know if a money manager would consider this material nonpublic information?

And now that's the big question: is the information Raj received confidential or is it material?

So far, no one on the stand has been able to testify that any information Raj received was both confidential AND material nonpublic—probably because the defense won't let them. They jump in and object and the witness winds up testifying that the information was "confidential" and "it against company policy to tell anyone," instead of saying anything that might prove that Raj received material nonpublic info.

As far as the defense's strategy goes, it's smart.

The prosecution has been making a good case that the information Raj got was highly confidential and not speculative.

Here's a sample of what we've collected at court that suggests the prosecution is winning that argument.

On speculation vs inside information

The prosecution's case: Speculation is not the information that Raj traded on. He got material information from people in the know.

Evidence in the prosecution's favor:

  • "Speculation is people trying to guess," Blankfein said. In a board meeting, however, those board members "know what the company is going to do."
  • There are always rumors and speculation. In 2008 there were rumors about Sprint being acquired. To this date it hasn't happened.

The defense's case: Raj's so-called "inside" information was as good as speculation

Evidence in the defense's favor:

  • Raj wrongly believed that Intel would own 10% of the new Clearwire/WiMaxcompany. Intel ended up owning 12%.
  • The market could disagree with the price that a stock was offered at. The market price is the the only "fact." Until then, everything is speculation.
  • A Wall Street Journal article moved Sprint stock 20% in one day, which blurs the line of "speculation" in an article and "material nonpublic information" that affects markets.

So we can probably all agree that at least some of the information that Raj got was not speculation because it came true the next day.

But they haven't begun to prove that it's material and nonpublic yet. And in the meantime, the defense has been suggesting that there is some other classification of information that exists between speculation and material non public information.

That's how the defense gave birth to "the information was confidential—but not material" baby.

If this baby grows up, it's going to be a big problem for the prosecution, because she's driving a wedge between confidential information received through "good homework" and material information, and making them two totally separate things. Of course information could be both, but the defense is trying to group all of the information Raj received into the category of "confidential—not material" And they're doing a damn good job, in our opinion.

The prosecution essentially argues that specific information from informed employees is material and nonpublic. Raj got it, and he traded on it.

The defense counters that because of three things—analyst reports, news articles, and other people's knowing the same things as Raj—the information was confidential, but not material and nonpublic. It might have been wrong for company employees to reveal it, but the information was out there in the semi-public domain.

So the prosecution will have to prove that the information that Raj got was more accurate than the information that was out there from other company sources.

Here's the evidence each side is using to tell their side of the confidential vs material nonpublic story.

On analyst reports

The prosecution's case: analyst reports do not have the SPECIFIC information that Raj got from WELL-INFORMED SOURCES.

Evidence in the prosecution's favor:

  • Raj got specific details from Rajiv Goel about an Intel/Clearwire deal during a March 20th call
  • No analyst reports contained the specific details that Raj did about the date of the Intel/Clearwire deal, the $1 billion that Intel planned to invest in the new Clearwire/WiMax company, the range of the collar expected (16 or 17 to 20), or that the new company would have $4.7 billion.
  • Many analyst reports after "Analyst Day" did not mention Clearwire, nor did they mention any potential deal brewing.

The defense's case: analyst reports contain information or speculation that came from the same sources based on the same speculation that Raj had. Raj did his homework and got CONFIDENTIAL information out of employees, just like an analyst.

Evidence in the defense's favor:

  • After Intel's "Analyst Day," a few analyst reports mentioned "Clearwire" and "deal"
  • Intel told its employees that during "Analyst Day," analysts would prod them for information. Intel warned them that analysts would "triangulate" data and try to trick them into revealing details, but that it was the Intel employees' job to have the strength to say to the analysts, "I can't comment on that." Of course the defense's suggestion is that 1) it was the analyst's job to probe for confidential information and 2) that *some* of the analysts may have learned confidential information about the Clearwire deal from Intel employees anyway.
  • An analyst report predicted that Intel was about to make a sizable investment in a WiMax carrier.
  • An analyst report predicted that Intel would put a capital injection which may approach $2 billion in the company.

On news articles

The prosecution's case: news articles are just speculation, with NO SPECIFIC details and/or anonymous sources. Raj did not get his information from news articles.

[No relevant evidence.]

The defense's case: news articles contain the same CONFIDENTIAL information that Raj had.

Evidence in the defense's favor:

  • A Wall Street Journal article about the on March 26th said, "Intel has signaled a willingness to put in about $1 billion or more" into a tech company.
  • Another article says that some Wall Street firms were considering buying commercial banks. The article quotes someone saying something along the lines of, "any rumors about Goldman Sachs are nonsense."

On other people's knowing the same info Raj knew

The prosecution's case: Raj's information was SPECIFIC information that came from WELL-INFORMED SOURCES.

Evidence in the prosecution's favor:

  • Goel knew Intel's earnings ahead of time and he told them to Raj
  • Goel knew the details on the term sheet of the Intel/Clearwire deal and he told them to Raj
  • Gupta, a Goldman board member, knew that Warren Buffett would invest $5 billion in Goldman, knew that there would be a stock offering to the public the next day, and knew that Goldman was considering buying AIG or Wachovia
  • "Speculation is people trying to guess," Lloyd Blankfein testified. In a board meeting, however, those board members "know what the company is going to do."

The defense's case: Other astute investors got or knew the same CONFIDENTIAL info that Raj got

Evidence in the defense's favor:

  • An email from a JPMorgan employee to Intel's Viswanathan after Intel "Analyst Day" said, "I want to thank you for talking to JPMorgan on the WiMax business and the prospects surrounding Intel's investments in the technology. I look forward to future announcements concerning WiMax and Intel."
  • Clearwire filed a public disclosure on March 25, 2008 that said the company was changing its compensation plan, which the market could read as a precursor to an acquisition.
  • Sudany publicly resigned from the Clearwire board ahead of the deal, citing a conflict of interest that may arise, which the market could read as a precursor to a deal.
  • Viswanathan told the FBI in May 2010 that Goel (Raj's source) was "on the outside" of the Intel deal.
  • Raj and Gupta discussed Goldman's potential purchase of AIG or Wachovia in preparation for Raj's meeting with Gary Cohn. Cohn visited the office of the "Tier 1" client at the Galleon office two days later. The suggestion is that Cohn might have told Raj the same info because he was a valued client.
  • Significantly, the defense argued, and an Intel board member (Viswanathan) agreed, that the fact that a board meeting occurred is confidential, but it is not material.

That's the only thing that's been clearly defined as one but not the other, in the court proceedings we've attended.

As for everything else, the prosecution has made a strong case that all of the information Raj got from his tipsters was confidential.

But in our opinion, the defense is making it hard for the prosecution to prove that the information Raj traded on is both confidential and material nonpublic information.

Of course the trial is only in its third week and it's expected to last for up to 3 months. We'll keep you posted if this argument continues, which we suspect it will.

This story originally appeared on Business Insider.

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