Spoiler alert: Not much.
Raj Rajaratnam, former billionaire hedge fund manager, appealed his notorious insider trading conviction. If you recall, he was the founder of the Galleon Group hedge funds who received insider information from contacts at McKinsey, Intel, Goldman Sachs and other hedge funds.
Among the issues raised at trial was whether the fraud counts should be vacated because the court told the jury that it could convict Rajaratnam if the “material non-public information given to the defendant was a factor, however, small, in the defendant’s decision to purchase or sell stock. He claimed that this allowed to jury to convict without a causal connection between the inside information and the trade.
The court noted that under the misappropriation theory of insider trading, a person commits fraud “in connection with” a securities transaction in violation of Rule 10b-5 when he misappropriates confidential information for securities trading purposes in breach of a duty owed to the source of the information. The Supreme Court in the O’Hagan case enshrined/created this theory to “protect the integrity of the securities markets against abuses by ‘outsiders’ to a corporation” who have access to confidential information that will affect the corporation’s security price but otherwise owe no duty to the corporation’s shareholders.
The court in this case endorsed the “knowing possession” standard* that is consistent with the cardinal rule of insider trading:
If you have a fiduciary or other duty to the company and hold material non-public information, disclose or abstain.
On this basis, the appeals court said that the district court’s instruction was more favorable to Rajaratnam than the legal standard. Rather than merely be in possession of the information, the jury had to find that he used it in some manner to find him guilty of insider trading. As a result, the jury instruction satisfied the “knowing possession” standard.