Insider Trading Case Begins

The criminal trial of Galleon hedge fund founder Raj Rajaratnam begins on Tuesday with jury selection in a case at the heart of the biggest insider trading investigation in a generation.

Sri Lankan born Rajaratnam, 53, is the former head of the Galleon Group hedge fund that once managed $7 billion. He could face a 20-year jail sentence if convicted on the most serious charge of securities fraud.

Since arresting Rajaratnam in October 2009 and announcing charges against 26 former traders, executives and lawyers, the U.S. government has pressed ahead with what it calls the biggest probe of insider trading in the $1.9 trillion hedge fund industry.

Prosecutors allege Rajaratnam made $45 million in illicit profits through tips from former friends and associates. Nineteen people have pleaded guilty in the case, which stands apart from past insider trading probes because of the government's wide-scale use of phone taps.

The selection of a 12-member jury in Manhattan federal court is the first opportunity for prosecutors and defense lawyers to score points at trial after 16 months of jousting over wiretaps and other evidence. Opening statements will start once the panel is in place for a trial expected to last up to two months.

Rajaratnam is free on bail but fighting to stay out of prison in a saga involving leaked company secrets, phone taps and former friends, who will testify against him for the government.

It is not known whether Rajaratnam will testify in his own defense after the jury has heard hours of tapes and testimony from as many as six cooperating witnesses. Prosecutors say they could present up to 173 recordings of telephone conversations.

Among those who could be called by the government to testify is Lloyd Blankfein, chief of Goldman Sachs Group Inc (NYSE:GS).

Prosecutors and regulators have accused former Goldman board member Rajat Gupta of leaking information about the bank to his friend Rajaratnam, but Gupta has not been criminally charged.Rajaratnam's chief defense lawyer, John Dowd, has fought hard for his wealthy client, arguing prosecutors have broadened the definition of insider trading. A money manager's liberty should not be at risk because he trades on a stock while knowing something about the company, Dowd argues.

He also fought, unsuccessfully, to suppress the FBI's secretly recorded phone conversations from trial.

"In some ways it sounds like a classic insider trading case," said Sam Buell, law professor at Duke University in Durham, North Carolina, who is not involved in the case. "But we can expect some kind of twist here in the nature of defense arguments about this is a different realm of trading and information sharing."

For the jury to convict Rajaratnam, the government must convince all 12 panel members that its evidence shows Rajaratnam knew he was receiving secret corporate information from someone who had a fiduciary duty not to disclose it.

The case is USA v Raj Rajaratnam et al, U.S. District Court for the Southern District of New York, No. 09-01184.