The Rajaratnam Verdict and its Impact on Reg FD
After six weeks of testimony in the biggest insider trading trial in US history, the jury found Raj Rajaratnam guilty on all 14 counts against him. The government played dozens of secretly recorded phone conversations. Three of Rajaratnam former friends were brought in to testify. The lawyers for Rajaratnam brought in graphs and charts to document the mosaic theory, explaining that research and public information guided his trades. Rajaratnam is free on bail set at $100 million until his July sentencing. His attorney, John Dowd is appealing the decision. This verdict may have a big impact on Regulation Fair Disclosure. The rule is: "Whenever an issuer, or any person acting on its behalf, discloses any material nonpublic information regarding that issuer or its securities to [certain enumerated persons], the issuer shall make public disclosure of that information... simultaneously, in the case of an intentional disclosure; and... promptly, in the case of a non-intentional disclosure."1 This verdict raises many questions. How much information can companies disclose to analysts and investors? Will the decision today deter insider trading? What kind of clamp does it put on the information flow? In my opinion, there has already been serious pressure on the flow of information, not only from companies but by consultants and expert networks as well. It will be interesting to see how the public companies will try to enforce the flow of information from their employees. For example, if I am an employee of company x, what information am I going to be able to share about company y or z with whom we conduct business? Companies may bear liability in the future for their employee’s breach of fiduciary duty. Will it be easier to prosecute these cases going forward? The SEC has gotten more aggressive in their investigations and their unwillingness to settle cases. The Rajaratnam verdict will strengthen the SEC’s position to prosecute similar cases. However, the SEC needs to add more people, acquire more resources. The SEC is the first to admit that they are understaffed and under financed. 1 – SEC – Selective Disclosure and Insider Trading, http://www.sec.gov/rules/final/33-7881.htm. The case is USA v. Raj Rajaratnam et al, case No. 09-01184, U.S. District Court for the Southern District of New York.