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United v. Raj Rajaratnam and Danielle Chiesi

December 2, 2010

UNITED STATES OF AMERICA,
v.
RAJ RAJARATNAM AND DANIELLE CHIESI, AND ORDER DEFENDANTS.



The opinion of the court was delivered by: Richard J. Holwell, District Judge:

MEMORANDUM OPINION

On February 9, 2010, the government filed a nineteen-count Superseding Indictment ("Indictment") against Defendant Raj Rajaratnam ("Rajaratnam") and Defendant Danielle Chiesi ("Chiesi"). The Indictment charges Rajaratnam, the principal of Galleon Management L.P. ("Galleon"), a New York-based family of hedge funds, with four counts of conspiracy to trade on inside information in which Chiesi is not named; charges Chiesi, an employee of another hedge fund, New Castle Partners, in two insider trading conspiracy counts in which Rajaratnam is not named; and charges both Rajaratnam and Chiesi in a seventh conspiracy count. Related substantive counts are charged with respect to four of the seven conspiracies. Rajaratnam and Chiesi have moved to sever the Indictment pursuant to Federal Rules of Criminal Procedure 8 and 14. For the reasons discussed below, defendants' motions are GRANTED in part and DENIED in part.

BACKGROUND

A.The Rajaratnam Conspiracy Counts (One, Two, Three, and Four)

Count One alleges that, from some time in 2003 to March 2009, Rajaratnam conspired with Ali Far, a former Galleon portfolio manager and analyst, to trade on the basis of inside information that Far obtained regarding Atheros Communications, Inc. ("Atheros"), Marvell Technology Group, Ltd. ("Marvell"), and unspecified "other companies." (Indictment at ¶¶ 3-4.) The government alleges that, in exchange, Rajaratnam provided Far with inside information regarding Intel Corporation ("Intel"). (See id. at ¶ 4.) The government lateridentified numerous other sources of inside information regarding twenty-two "other companies" with respect to which Rajaratnam and Far are alleged to have conspired to trade. (See Letter from P. Bahara to J. Dowd, Mar. 22, 2010 at 4-5; Letter from P. Bahara to J. Dowd, Apr. 14, 2010; Letter from P. Bahara to J. Dowd, May 7, 2010; Letter from P. Bahara to J. Dowd, June 11, 2010.)

Count Two alleges that, from January 2006 to July 2007, Rajaratnam conspired with Roomy Khan, another former Galleon employee, to trade on the basis of inside information that Khan obtained regarding Polycom, Inc. ("Polycom"), Hilton Hotels Corp. ("Hilton"), and Google Inc. ("Google"). The government alleges that, in exchange, Rajaratnam provided Khan with inside information regarding Intel. (See Indictment at ¶11.)

Count Three alleges that, from some time in 2007 to some time in 2009, Rajaratnam conspired with Rajiv Goel, an Intel employee, to trade on the basis of inside information that Goel obtained regarding Intel. (See id. at ¶¶ 17-18.) The government alleges that, in exchange, Rajaratnam provided Goel with financial assistance and executed trades in Goel's brokerage account based on inside information Rajaratnam had received from other sources. (See id.) The Indictment also charges Rajaratnam with four substantive counts of securities fraud (Counts Eight, Nine, Seventeen, and Nineteen) related to the alleged conspiracy with Goel. These counts allege insider trading in Clearwire, PeopleSupport, and Intel. (See id. at ¶¶ 51, 55.)

Count Four alleges that, from some time in 2003 to October 2009, Rajaratnam conspired with Anil Kumar, a senior partner and director at the global consulting firm of McKinsey & Company, Inc. ("McKinsey"), to trade on the basis of inside information that Kumar obtained from McKinsey clients regarding Advanced Micro Devices Inc. ("AMD"), ATI Technologies Inc. ("ATI") and eBay Inc. ("eBay"). (See id. at ¶¶ 24-25.) The government alleges that, in exchange, Rajaratnam wired money to accounts controlled by Kumar, some of which was reinvested in Galleon funds in the name of Kumar's housekeeper, with the returns ultimately funneled back to accounts controlled by Kumar. (See id. at ¶ 25.) The Indictment also charges Rajaratnam with one substantive count of insider trading in ATI (Count Eighteen) related to the alleged conspiracy with Kumar. (See id. at ¶ 53.)

B.The Chiesi Conspiracy Counts (Five and Seven)

Count Five alleges that, from August 2008 to April 2009, Chiesi conspired with an unindicted co-conspirator and former employee of IBM identified only as "CC-1", and others, to trade on inside information CC-1 obtained regarding IBM, AMD, Sun Microsystems ("Sun"), and "other companies." (Id. at ¶¶ 31-32.)

Count Seven alleges that, from July 2008 to April 2009, Chiesi conspired with Mark Kurland, a Senior Managing Director of New Castle, to trade on inside information Chiesi obtained from CC-1 and an employee at Akamai ("the Akamai Source") regarding IBM, AMD, Akamai, Sun, and "other companies." (Id. at ¶¶ 44-45.) The Indictment also charges Chiesi with four substantive counts of insider trading in Akamai (Counts Eleven, Twelve, Fourteen and Sixteen) related to the Count Seven conspiracy.

C.The Rajaratnam-Chiesi Conspiracy Count (Six)

Count Six is the only conspiracy count that charges both Rajaratnam and Chiesi. Count Six alleges that, from July to October 2008, Rajaratnam and Chiesi conspired with each other and others, known and unknown, to trade on the basis of inside information regarding AMD that Rajaratnam had obtained from Anil Kumar and inside information regarding AMD and Akamai that Chiesi had obtained from CC-1 and the Akamai Source. (See id. at ¶ 38.) The government alleges that Rajaratnam and Chiesi exchanged the information they received from their respective sources and traded on the basis of that information. (See id.) The Indictment also charges both Rajaratnam and Chiesi with three substantive counts of insider trading in Akamai (Counts Ten, Thirteen, and Fifteen) related to the Count Six conspiracy.

LEGAL STANDARD

A.Rule 8

"For reasons of economy, convenience and avoidance of delay, there is a preference in the federal system for providing defendants who are indicted together with joint trials." United Statesv.Feyrer, 333 F.3d 110, 114 (2d Cir. 2003). However, "[u]nless the standards set out in Rule 8(b) are met, a motion for severance should be granted even absent a showing of prejudice." Id. at 113.

Rule 8 of the Federal Rules of Criminal Procedure provides:

(a) Joinder of Offenses. The indictment or information may charge a defendant in separate counts with 2 or more offenses if the offenses charged-whether felonies or misdemeanors or both-are of the same or similar character, or are based on the same act or transaction, or are connected with or constitute parts of a common scheme or plan.

(b) Joinder of Defendants. The indictment or information may charge 2 or more defendants if they are alleged to have participated in the same act or transaction, or in the same series of acts or transactions, constituting an offense or offenses. The defendants may be charged in one or more counts together or separately. All defendants need not be charged in each count. "Unlike Rule 8(a), Rule 8(b) does not permit joinder of defendants solely on the ground that the offenses charged are of 'the same or similar character.' Thus, though both subdivisions of Rule 8 focus on the nature of the acts constituting the alleged offenses, 8(b) provides a more restrictive test when multiple defendants are involved." United States v. Turoff, 853 F.2d 1037, 1042-43 (2d Cir. 1988). Since the Indictment charges both Rajaratnam and Chiesi with multiple offenses, their motion could be understood as a motion under either Rule 8(a) or Rule 8(b). However, "when a defendant in a multiple-defendant case challenges joinder of offenses, his motion is made under [Rule] 8(b) rather than 8(a)." Id. at 1043.

Under Rule 8(b), "multiple defendants may be charged with and tried for multiple offenses.only if the charged acts are part of a series of acts or transactions constituting.offenses." Id. (quotation marks omitted) The Second Circuit has interpreted this language to mean that "joinder is proper where two or more persons' criminal acts are 'unified by some substantial identity of facts or participants,' or 'arise out of a common plan or scheme.'" United States v. Cervone, 907 F.2d 332, 341 (2d Cir. 1990) (quoting United States v. Attanasio, 870 F.2d 809, 815 (2d Cir. 1989)). That hardly settles the matter, for courts in this Circuit have interpreted and applied each standard in varying terms and have not formally distinguished between the two standards.

In obliquely elaborating on the "substantial identity of facts or participants," the Second Circuit has inquired whether "a reasonable person would easily recognize the common factual elements that permit joinder.." Turoff, 853 F.2d at 1044. For example, joinder is proper where, "even if the district court had tried the[] two defendants separately, the evidence at one trial would essentially [have] duplicate[d] the evidence at the other.." Feyrer, 333 F.3d at 114. Likewise, joinder is proper where "proof of one scheme is indispensable for a full understanding of the other." Turoff, 853 F.2d at 1044. Conversely, joinder is improper where "[c]ommission of one of the offenses neither depended upon nor necessarily led to the commission of the other" and "proof of the one act neither constituted nor depended upon proof of the other." United States v. Halper, 590 F.2d 422, 429 (2d Cir. 1978).

The Second Circuit has elaborated less extensively on the "common plan or scheme" standard. Generally, "a non-frivolous conspiracy charge is sufficient to support joinder of defendants under Fed. R. Crim. P. 8(b)." United States v. Nerlinger, 862 F.2d 967, 973 (2d Cir. 1988). However, "[w]hether the joinder of defendants in two conspiracies is warranted must be determined on a case-by-case basis." United States v. Rittweger, 524 F.3d 171, 178 (2d Cir. 2008) (emphasis added). In that circumstance, joinder is proper where "one scheme stemmed from the other" such that one scheme is "part and parcel" of the other. Turoff, 853 F.2d at 1044. This is so because "there is a key link between the two offenses.and that link provides a sound basis for joinder under Rule 8(b)." Id. Knowledge of the other conspiracy is at least one "indicator of whether or not there is a common scheme or purpose." See United States v. Ohle, 678 F. Supp. ...


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