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Will New U.S. Insider Case Taint Rajaratnam Jury?

Date: Thursday, April 14, 2011
Author: Jonathan Stempel, Reuters

NEW YORK (Reuters)—As lawyers for Raj Rajaratnam tried to poke holes in the federal government's insider trading case against the Galleon Group co-founder, prosecutors were charging another former star hedge fund manager with getting illegal stock tips.

Yet with the case against Mr. Rajaratnam likely just days from going to a jury, some in the legal community said it is fair to wonder about the timing of those new charges, against former FrontPoint Partners LLC fund manager Joseph "Chip" Skowron, in a case prosecutors have been building for several months.

Dr. Skowron, who worked in Greenwich, Conn., was accused of trading on tips from a French doctor about problems in a clinical drug trial being conducted by Human Genome Sciences Inc., allowing him to avoid $30 million of losses.

Yves Benhamou, the doctor, was charged in November with tipping an unnamed investor who prosecutors now say is Dr. Skowron. Dr. Benhamou pleaded guilty on Monday [April 11], while Dr. Skowron was released Wednesday [April 13] on $6 million bail. Dr. Skowron did not enter a plea.

For the most part, lawyers said the timing of Dr. Skowron's arrest and charges should not affect Mr. Rajaratnam's trial, but that view is not universal. Some suggested the case could give a bit of tactical boost to Mr. Rajaratnam's defense though even that could backfire.

"It could cut both ways, and pose an interesting tactical decision for Rajaratnam's lawyers," said Daniel Richman, a Columbia Law School professor and former federal prosecutor, referring to the timing of the Skowron announcement.

"Defense lawyers could complain about the risk of jury taint," he said. "They could ask for the jury to be questioned by the judge, but that could have downside risk because jurors who weren't aware of the case might now be made aware."

Jim McCarthy, a spokesman for Mr. Rajaratnam, declined to comment.

For their part, federal prosecutors in New York suggested the timing of the Skowron announcement simply reflected how that case was ready to move forward.

"This has nothing to do with the Raj case," U.S. Attorney Preet Bharara in Manhattan told reporters. "We bring cases when we have sufficient evidence to bring the case, and there are a lot of factors that go into that."

The FBI has dubbed its undercover insider trading probes that led to Dr. Skowron and other defendants the "Perfect Hedge."

Mr. Bharara said at a press conference that Dr. Skowron is the 47th defendant that his office has charged with insider trading in the last 18 months, and Dr. Benhamou is the 31st to plead guilty.

Notably, Reed Brodsky, a prosecutor in the Rajaratnam case, approved the filing of Tuesday's [April 12] complaint against Dr. Skowron.

"It's unfortunate," said Solomon Wisenberg, author of "White Collar Crime: Securities Fraud" and a partner at Barnes & Thornburg LLP in Washington, D.C. "Jurors are told to deliberate only on the evidence on their case, but if they see an atmosphere of insider trading, it could affect them. I'm not saying it is unethical or improper, just unfortunate."

But Robert Weisberg, a criminal law professor at Stanford University, said each investigation "has its own timing and own rhythm" and that probably dictated events in the Skowron case more than anything else. He added: "I have never heard of a judge taking action in a pending trial because of a concern about prejudicial publicity involving an entirely different case."

Lawyers said they would not be surprised if John Dowd, Mr. Rajaratnam's lead lawyer, suggested to presiding Judge Richard Holwell that news about Dr. Skowron could taint his client's jury. But they also said Mr. Holwell could rely on or even repeat earlier instructions to jurors not to read the newspapers or consider evidence other than what they hear in the courtroom.

"The Justice Department can argue that the wheels of justice are not going to stop because someone is on trial in a case that has no factual relationship to a different case," said David Siegal, a partner at Haynes and Boone LLP in New York and former federal prosecutor.

Once Mr. Rajaratnam's case is in the jurors' hands, though, anything could happen.

"I once had a case as a prosecutor, and talked with a juror who said the biggest thing was how the female defendant wore a different matching pair of shoes and a purse every day," Mr. Wisenberg recalled. "It had nothing to do with the case."

He said he won.

By Jonathan Stempel; additional reporting by Basil Katz and Grant McCool