Earlier this month, judge and jury for the U.S. District Court in Manhattan acquitted hedge fund manager Rengan Rajaratnam of insider trading. This marks the first acquittal during the recent crackdown on insider trading. We reviewed several good summaries of the case and trial. Some of the best are listed below. In short, it appears that Rajaratnam was acquitted primarily because the evidence did not sufficiently prove he knew he was making trades based on illegally collected information.
From our perspective, what this case seems to emphasize is the importance of systematically collecting meeting information, such as pre- and post-call attestations from analysts, which affirm that no material nonpublic information was exchanged during each meeting. As Matt Levine points out in Bloomberg View, firms that rely on other people as key inputs in their fundamental research process risk exposure to information that is obtained illegally. Firms that do not put thoughtful systems around how information is sourced and gathered are likely to see extra scrutiny from regulators, relative to firms that have implemented such systems.
In our experience, leading firms are already building processes to manage these risks via a systematic Meeting Tracking program. These controls provide everyone in the firm tools to operate aboveboard throughout the research process, and to quickly prove that to any of their examiners.
Readers interested in learning more about why systems for Meeting Tracking and Meeting Compliance are important, and what information is most helpful to collect can reference our Meeting Compliance series in our Library.