The reverberations from what prosecutors have dubbed the "biggest insider trading case in a generation,"1 the prosecution of Galleon founder Raj Rajaratnam, have continued far beyond his arrest in 2009 and subsequent conviction in May 2011. Much has been written concerning the breadth and success of the government’s recent Galleon-related insider trading investigations and prosecutions, the innovative tactics used in some of those investigations, and the decisions that the government has made regarding what type of proceeding to use, and what charges to bring, in pursuing those cases. Now that a number of cases have gone to trial and resulted in convictions, this article will review how decisions by courts in both criminal and civil cases have clarified or modified the parameters of insider trading liability. This article will also highlight some of the key issues that are likely to be litigated at the appellate level as these cases move from the Southern District of New York to the Second Circuit.
Source of Fiduciary Duty
It is well-established that a tipper has committed insider trading if he has, with the requisite scienter, (i) tipped material, non-public information, (ii) in breach of a fiduciary duty of confidentiality owed either to shareholders or to the source of the information, and (iii) while acting for his own personal benefit.2 With respect to the second element, the contours of the fiduciary duty in question determine whether there has been a breach of that duty. Yet, as Judge Jed S. Rakoff pointed out recently in the Whitman case, the issue of what law governs this issuestate or federal, and, if state, which one"has never really been addressed" or "fully resolved by the existing case law."3
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