For Prosecutors, the Case That Got a Head Start on the Crime

Insider trading, the response so far has always been simple: crime came first. But the case against Raj Rajaratnam, the hedge fund manager who was convicted by a jury in federal court Wednesday, stems from an investigation that began long before the crimes were committed.

And that has made all the difference.

In normal case of insider trading, whether involving an individual brother-brother or famous that brought down Ivan F. Boesky a generation ago, the investigation began only after someone noticed suspicious trading, such as buying a stock just before a takeover bid was announced or selling shares just earnings before bad news was released.

Once the investigation began, the Securities and Exchange Commission could find who made the trades, and may wonder why they chose to make the trades in question. It could also find a source that would cast the "nonpublic information" to use the term legal information inside.

This investigation technique often failed to find evidence, although investigators were convinced that the law had been broken. It was more likely to work with small fish that the whales. If the trader in question had never purchased any before and then made a killing by buying call options just before a merger was announced, the investigators would be almost certain that there had a leak.

If it turned out that the CFO of the company being acquired also a neighbor of the investor is lucky, and that phone records showed they had spoken just before the transaction was made, the case is clear . In many cases, either fleeing or leaked would admit what had happened, and often identify others who had participated in the tip.

But this technique is all but useless if the suspect is a hedge fund manager as Mr Rajaratnam. His company made tens if not hundreds, of trades every day. He had a crowd of analysts and access to all research by Wall Street firms.

If a transaction in question were in some way, the company could arrive at any number of reasonable sounding explanations, as counsel for Mr. Rajaratnam, John M. Dowd, made the case that ended his conviction.

But these explanations sounded pretty lame when stacked against the audio recordings of conversations in which company executives gave confidential information to Mr Rajaratnam.

These bands exist only because the Department of Justice were involved in the investigation at first. Presumably, she had reason to believe that insider trading was going on, and has convinced a federal judge to approve wiretaps.

Accordingly, the F.B.I. could hear that the information was provided just before operations were performed. And they could hear Mr Rajaratnam discuss ways to get rid of an investigation initiated normal trading. He suggested sending choreographed e-mails with false reasons for a trade. He recommended negotiating and exit a stock that had accumulated because of inside information.

It seems likely that Mr Rajaratnam had only used the tactic in the past to explain the trades that had aroused suspicion. But to hear him describe a defense turned in a virtual confession.

These bands "showed that the accused knew what he was doing was not only unfair, but illegal," said a prosecutor, Mr. Reed Brodsky, in their closing arguments to the jury.

Insider trading was a common practice to Galleon. There were many leaks, and they came from the cream of American companies - from within large companies like Intel and Goldman Sachs and McKinsey, perhaps the company's most prestigious management consulting. CEOs of small businesses has provided Mr. Rajaratnam inside information about their companies, and benefited because they were allowed to invest in its funds.

Galleon has come to resemble a criminal enterprise, where information was illegally acquired by chains elaborate attempt to conceal the source of the money. Hedge fund investments have been made on behalf of a governess, and money was transferred abroad and return only to cover up the trail.