Securities and Exchange Commission v. Galleon Management, LP et al

Filing 201

MEMORANDUM OF LAW in Opposition re: 195 MOTION in Limine to Preclude Defendants' Expert's Testimony and Other Disclosures.. Document filed by Raj Rajaratnam. (Lynam, Terence)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION
Plaintiff,
v.
GALLEON MANAGEMENT, LP, et al.
Defendants.

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No. 09-CV-8811-JSR
ECF CASE

DEFENDANT’S OPPOSITION TO PLAINTIFF’S
MOTION IN LIMINE TO PRECLUDE EXPERT TESTIMONY

John M. Dowd (admitted pro hac vice)
Terence J. Lynam (admitted pro hac vice)
William E. White (admitted pro hac vice)
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Ave, NW
Washington, DC 20036
[phone]
Attorneys for Raj Rajaratnam

Dated: June 3, 2011
New York, New York

TABLE OF CONTENTS
I. 

INTRODUCTION..............................................................................................................1 

II. 

ARGUMENT ......................................................................................................................3 
A. 

B. 

Professor Jarrell Should Be Permitted to Provide Summary
Testimony Pursuant to Rule of Evidence 1006. ...................................................4 

C. 

Expert Testimony Concerning Custom and Practice in the Securities
Industry Is Admissible. ..........................................................................................7 

D. 

The Public Nature of Information is Part of a Reliable Event Study
Analysis and a Proper Area of Expert Testimony. ..............................................8 

E. 

Professor Jarrell’s Opinion Concerning the Behavior of Reasonable,
Well-Informed Investment Professionals is Permissible Expert
Testimony. ............................................................................................................. 11 

F. 

Professor Jarrell’s Proposed Testimony Concerning How Investment
Professionals Gather Information Is Admissible Custom and Practice
Testimony. .............................................................................................................12 

G. 

Professor Jarrell’s Proffered Testimony is Based on a Reliable,
Widely-Accepted Methodology. ..........................................................................14 

H. 
III. 

Expert Testimony Concerning Stocks That Are the Subject of the
Substantive Counts of the Parallel Criminal Case Is Relevant to the
Disgorgement Amount in This Case, if Any, and Should Be Admitted. ............3 

Materiality is a Proper Area of Expert Testimony. ...........................................16 

CONCLUSION ................................................................................................................18 

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TABLE OF AUTHORITIES
CASES

Page(s)

Daubert v. Merrell Dow Pharms., Inc.,
509 U.S. 579 (1993)…………………………………………………………….................3
Dirks v. SEC,
463 U.S. 646, 657-58 (1983)……………………………………..…………………..….13
Eliasen v. Hamilton,
No. 81 C 123, 1987 WL 7815 at *5 (N.D. Ill. March 9, 1987)……………………….….17
Harmsen v. Smith,
693 F.2d 932, 941 (9th Cir. 1982)………………………………………………………..17
Highland Capital Mgmt, L.P. v. Schneider,
551 F. Supp. 2d 173, 180 (S.D.N.Y. 2008)…………………………………….7, 13, 15-16
In re Alstom SA Securities Litig.,
253 F.R.D. 266, 280 (S.D.N.Y. 2008)………………………………………………….…8
In re Countrywide Financial Corp. Sec. Litig.,
2009 WL 7322254, *29 (C.D. Cal. Dec. 9, 2009)…………………………………...17, 18
In re Flag Telecom Holdings, Ltd. Securities Litig.,
245 F.R.D. 147, 170 (S.D.N.Y. 2007)……………………………………………………15
In re Flag Telecom Holdings, Ltd. Securities Litig.,
574 F.3d 29, 40 (2d Cir. 2009)………………………………………………………...8, 15
In re Northern Telecom Ltd. Securities Litig.,
116 F. Supp. 2d 446, 460-61 (S.D.N.Y. 2000)………………………………………..14-15
Kumho Tire Co., Ltd. v. Carmichael,
526 U.S. 137, 152 (1999)…………………………………………………………………7
Lentell v. Merrill Lynch,
396 F.3d 161 (2d Cir. 2005)…………………………………………………………..…...8
Marx & Co., Inc. v. Diners’ Club, Inc.,
550 F.2d 505, 508-9 (2d Cir. 1977)………………………………………………..7, 13, 14
Press v. Chemical Inv. Servs. Corp.,
166 F.3d 529, 538 (2d Cir. 1999)………………………………………………………...17

ii

RMED Intern., Inc. v. Sloan’s Supermarkets, Inc.,
No. 94 Civ. 5587 PKL RLE, 2000 WL 310352 at *8, 10 (S.D.N.Y. March 24, 2000)
……………………………………………………………………………..……..10, 15, 16
RMED Intern., Inc. v. Sloan’s Supermarkets, Inc.,
185 F. Supp. 2d 389, 400 (S.D.N.Y. 2002)………………………………………………17
SEC v. Halingiannis,
470 F. Supp. 2d 373 (S.D.N.Y. 2007)…………………………………………………….4
SEC v. Koenig,
557 F.3d 736, 743 (7th Cir. 2009)………………………………………………………..17
SEC v. Mayhew,
121 F.3d 44, 51 (2d Cir. 1997)……………………………………………………..…….17
SEC v. Monarch Fund,
608 F.2d 938, 942-43 (2d Cir. 1979)……………………...……………………………...13
SEC v. Zwick,
317 Fed. Appx. 34, 35-36 (2d Cir. 2008)………………………………………………….7
SR Int’l Bus. Ins. Co., Ltd. v. World Trade Center Prop., LLC,
467 F.3d 107, 133-34 (2d Cir. 2006)………………………………………………………7
United States v. Bilzerian,
926 F.2d 1285 (2d Cir. 1991)………………………………………………………….....14
United States v. Blackwell,
459 F.3d 739, 751, 753 (6th Cir. 2006)…………………………………….………..8-9, 12
United States v. Bronston,
658 F.2d 920 (2d Cir. 1981)………………………………………………………….…..14
United States v. Cohen,
518 F.2d 727, 737 (2d Cir. 1975)………………………………………………………...16
United States v. Daly,
842 F.2d 1380, 1388 (2d Cir. 1988)…………………………………………………….....4
United States v. Faison,
393 Fed. Appx. 754, 758-59 (2d Cir. 2010)……………………………………………….5
United States v. Feliciano,
223 F.3d 102, 121 (2d Cir. 2000)………………………………………………………….5

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United States v. Libera,
989 F.2d 596, 601 (2d Cir. 1993)………………………………………………………...10
United States v. Mulder,
273 F.3d 91, 101 (2d Cir. 2001)…………………………………………………………...4
United States v. Nacchio,
519 F.3d 1140, 1155 (10th Cir. 2008)………………………………………………...….17
United States v. Nacchio,
555 F.3d 1234 (10th Cir. 2009)…………………………………………………………..17
United States v. Russo,
74 F.3d 1383, 1395 (2d Cir. 1996)…………………………………………………...…..16
United States v. Schiff,
602 F.3d 152, 171-72 (3d Cir. 2010)…………………………………………………16-17
United States v. Schlisser,
168 Fed. Appx. 483, 2006 WL 452005 at *3 (2d Cir. 2006)………………………….....16
United States v. Stewart,
433 F.3d 273, 311-12 (2d Cir. 2006)……………………………………………...……...14

RULES AND STATUES
Fed. R. Evid.
401……………………………………………………………………………………………….6
402………………………………………………………………………………………...……..6
403………………………………………………………………………………………...……..6
702…………………………………………………………………………………………….4, 7
1006………………………………………………………………………………………...3, 4, 6
OTHER AUTHORITIES
3 Alan R. Bromberg & Lewis D. Lowenfels, Bromberg & Lowenfels on Securities Fraud &
Commodities Fraud § 6:153, 159 (2d ed. 2007)………………………………………….……...17
5 Business & Commercial Litigation in Federal Courts § 62:77 (Robert L. Haig ed. 2005)……17
7-107 E. Michael Bradley & Anthony L. Paccione, Securities Law Techniques § 107.03
(Matthew Bender ed. 2007)……………………………………………………………………...17

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I.

INTRODUCTION
Defendant Raj Rajaratnam, through undersigned counsel, hereby opposes Plaintiff
Securities and Exchange Commission’s motion in limine to preclude certain expert testimony of
Professor Gregg A. Jarrell (“Professor Jarrell”) because the proffered testimony is highly relevant
to the SEC’s allegations against Mr. Rajaratnam, including those allegations that are unique to
the SEC’s complaint and not litigated during Mr. Rajaratnam’s criminal trial; is based on reliable
and widely-accepted scientific methodologies presented by a qualified expert; and will be helpful
for the fact-finder.1
On April 29, 2011 Mr. Rajaratnam provided notice to the SEC that he intends to call
Professor Jarrell as an expert witness. Professor Jarrell is a Professor of Economics and Finance
at the University of Rochester and the former Chief Economist at the SEC from 1984-87. In this
case, Professor Jarrell is expected to testify about changes in stock price in response to companyspecific events, impoundment and the related concept of economic materiality, the custom and
practice of securities professionals, and the economics of various market behaviors. Professor
Jarrell was permitted to give extensive testimony on those subjects in Mr. Rajaratnam’s criminal
trial, which the SEC observed. Professor Jarrell has previously qualified as an expert in complex
securities fraud cases and has provided expert testimony about issues similar to those in this case
on numerous prior occasions.
The SEC now moves to exclude Professor Jarrell’s testimony because it claims the
testimony: (1) concerns matters that a jury is capable of understanding on its own without expert

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Galleon Management LP concurs with and adopts the arguments set forth in this
Opposition.

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assistance; (2) is irrelevant, confusing, and prejudicial; and (3) is based on unreliable and/or
unscientific principles. Mot. at 4. All of these claims are meritless, repetitive of nearly identical
and unsuccessful claims made by the United States Attorney’s Office in the parallel criminal
case, and are merely an attempt to preclude appropriate expert testimony that the SEC realizes is
unfavorable to it.
As the SEC well knows, having observed his testimony during the course of the criminal
trial, Professor Jarrell is expected to opine on the results of event studies he and persons working
at his direction performed. The event studies performed in this case involved extensive analysis
of the price movement of stocks in response to the events at issue during relevant periods,
including events exclusive to the SEC’s complaint in this case that were not litigated during Mr.
Rajaratnam’s criminal trial. Professor Jarrell’s analysis included a review of publicly available
information concerning the relevant events and whether the events in question were in the public
domain such that they were already reflected, or impounded, in the stock price of the relevant
security prior to certain company announcements. Professor Jarrell performed statistical
regression analyses to determine whether company announcements about relevant events caused
statistically significant movements in the relevant securities. Professor Jarrell also formed
opinions as to whether, based on information publicly available in the market, it would have been
reasonable for a well-informed, professional investor to trade the relevant securities in a
particular manner. Although Professor Jarrell has reviewed many Galleon records and is quite
familiar with Galleon’s investment practices and trading, including Mr. Rajaratnam’s trading, he
will not present opinion testimony on those subjects. Rather, to the extent he mentions them at
all, it will simply be to provide brief and helpful background or to summarize voluminous
records.

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II.

ARGUMENT
The SEC objects to portions of Professor Jarrell’s testimony on several grounds, nearly
all of which were previously and unsuccessfully raised by the United States Attorney’s Office
during Mr. Rajaratnam’s criminal proceeding. None of those objections are any more persuasive
now. Professor Jarrell’s proposed expert testimony meets all the requirements set forth in
Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993). It is relevant and reliable, will
assist the trier of fact in understanding a complex set of facts and issues, and Professor Jarrell is
eminently qualified to provide it. The other areas of Professor Jarrell’s proposed testimony
should also be admitted as summary testimony pursuant Rule of Evidence 1006.
A. Expert Testimony Concerning Stocks That Are the Subject of the Substantive
Counts of the Parallel Criminal Case Is Relevant to the Disgorgement
Amount in This Case, if Any, and Should Be Admitted.
The SEC disputes the relevance of expert testimony about transactions outside its socalled “non collaterally-estopped transactions” category. There are at least two problems with
the SEC’s objection to expert testimony about those transactions. First, the SEC will presumably
seek disgorgement of gains associated with transactions that are the subject of Mr. Rajaratnam’s
criminal conviction. As a result, expert testimony about those transactions is relevant to this
Court’s analysis of potential disgorgement amounts, if any, and should be permitted on that basis.
Second, the SEC’s arguments concerning the relevance of event studies conducted on
transactions that fall outside the “non collaterally-estopped” category are premature. The SEC
has not filed a motion for summary judgment as to any issue. Mr. Rajaratnam’s motion for
judgment of acquittal is still pending in the parallel criminal case, and may result in acquittal on
some (or all) counts of conviction; no final judgment has been entered against him; and he has
not yet been sentenced. Until a final judgment is entered in the criminal case at sentencing, and

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until this Court rules on any motion for summary judgment filed by the SEC, there is no way to
know which transactions Mr. Rajaratnam is truly estopped from litigating here. See, e.g., SEC v.
Haligiannis, 470 F. Supp. 2d 373, 382 n.8 (S.D.N.Y. 2007) (a judgment is final for estoppel
purposes only if it is sufficiently definite enough to acquire conclusive effect). The SEC agrees.
See Letter from SEC to Your Honor (May 27, 2011).
B. Professor Jarrell Should Be Permitted to Provide Summary Testimony
Pursuant to Rule of Evidence 1006.
Mr. Rajaratnam does not anticipate that Professor Jarrell will provide any opinion
testimony, lay or expert, about Galleon’s research, trading, or business practices or Mr.
Rajaratnam’s trading. To the extent Professor Jarrell mentions those subjects, it will merely be to
provide helpful background about a complex business or to summarize voluminous records
pursuant to Rule of Evidence 1006. For example, Professor Jarrell may provide brief
background testimony about Galleon, how securities trades are typically executed, Galleon’s
Order Management System (Galleon’s trade database), trading volume, and the frequency of
certain market events like takeovers and other corporate actions. Professor Jarrell will also
summarize the voluminous trading records he reviewed. The Second Circuit has held that
background and summary testimony is permissible and is not lay opinion. United States v. Daly,
842 F.2d 1380, 1388 (2d Cir. 1988) (“Background evidence may be admitted to show, for
example, the circumstances surrounding the events….”); United States v. Mulder, 273 F.3d 91,
101 (2d Cir. 2001) (expert testimony about the structure and workings of a group is permissible).
The SEC’s objection under Rule of Evidence 702 is therefore misplaced.
The SEC then argues that Mr. Rajaratnam should be required to call a separate summary
witness instead of presenting summary testimony through Professor Jarrell. The SEC does not

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cite a single case, however, that would preclude Professor Jarrell from testifying as both a fact
witness and an expert witness, particularly when the facts he will discuss are related to, and
provide helpful context for, his expert testimony. The Second Circuit has repeatedly approved
the use of dual fact and expert testimony. See, e.g., United States v. Feliciano, 223 F.3d 102, 121
(2d Cir. 2000) (finding no error in district court’s decision to allow witness to testify as both an
expert and a fact witness and noting that “[s]uch dual testimony is not objectionable in
principle.”); United States v. Faison, 393 Fed. Appx. 754, 758-59 (2d Cir. 2010) (approving of
the government’s use of a dual fact/expert witness). There is no dispute about the trading
records, so there is no reason the summary of those records should be in dispute. As to
undisputed facts, it does not make sense for the SEC to suggest it is somehow at a disadvantage
if Professor Jarrell presents the summary.
Summary testimony is particularly useful in a case like this one because, even if
Galleon’s trading records are introduced in evidence, they are so voluminous that it would be
very difficult for a fact-finder to review and interpret them without the benefit of summary
testimony of the type Professor Jarrell may provide. All of Galleon’s trading records were
loaded into a computer system to which Professor Jarrell had access. He is qualified to testify to
the volume of Galleon’s and Mr. Rajaratnam’s trading based on his review of those records – a
review that would have to be undertaken anew by a separate fact witness – and his testimony will
assist the fact-finder in understanding the context in which the trades at issue took place.2 In

2

The SEC points out that Mr. Rajaratnam called Galleon’s former head of domestic
business as a fact witness in his criminal trial. Mot. at 11, n. 4. What the SEC neglected to
mention was that the witness did not provide any testimony concerning Mr. Rajaratnam’s trading
because he was not personally familiar with it and the summary evidence was presented by
Professor Jarrell.

5

light of Professor Jarrell’s familiarity with Galleon records, there is no need to waste time calling
a separate witness simply because the SEC does not want Professor Jarrell to mention facts about
the case.
The SEC also objects to summary testimony about Mr. Rajaratnam’s trading under Rule
of Evidence 401, claiming that such testimony is irrelevant because, as far as the SEC is
concerned, the remainder of Mr. Rajaratnam’s trading does not bear on whether the accused
trades were unlawful. Mot. at 12. Rule of Evidence 401 states that relevant evidence is that
which has a “tendency to make the existence of any fact that is of consequence to the
determination of the action more probable or less probable than it would be without the
evidence.” Fed. R. Evid. 401. The SEC cannot distort the meaning of that rule to suit its own
purposes. It cannot present select trading by Mr. Rajaratnam through a peephole while
preventing the defense from opening the door to reveal other facts that have a tendency to inform
the fact-finder’s decision about the legality of the trades the SEC has alleged were unlawful. Mr.
Rajaratnam seeks to present evidence of additional trades to clarify, not confuse, the trading the
SEC put at issue. Professor Jarrell’s proposed testimony will provide the fact-finder with a more
complete picture of the trading at issue, presenting the trades in the overall context in which they
occurred so that the fact-finder can evaluate the trading patterns surrounding the trades at issue.
He will not opine about the motivation behind particular trades and will only present larger
trading patterns as a factor for consideration. Mr. Rajaratnam’s total trading in the relevant
securities is clearly relevant and appropriate under the standards set forth in Rules of Evidence
401-403, is proper summary testimony of voluminous trading records pursuant to Rule of
Evidence 1006, and should be admitted.

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C. Expert Testimony Concerning Custom and Practice in the Securities
Industry Is Admissible.
Any testimony Professor Jarrell provides concerning the general business practices of
hedge funds and/or investment professionals is admissible as expert testimony about the custom
and practice of the industry. See, e.g., Marx & Co., Inc. v. Diners’ Club, Inc., 550 F.2d 505, 50809 (2d Cir. 1977) (expert testimony concerning the customary practice of those engaged in the
securities business is admissible); Highland Capital Mgmt, L.P. v. Schneider, 551 F. Supp. 2d
173, 180 (S.D.N.Y. 2008) (approving of custom and practice testimony from an experienced
expert witness and noting that such testimony is appropriate “[p]articularly in complex cases
involving the securities industry….”); SEC v. Zwick, 317 Fed. Appx. 34, 35-36 (2d Cir. 2008)
(affirming lower court’s decision to permit testimony from an SEC expert concerning a custom
and practice in the securities industry); SR Int’l Bus. Ins. Co., Ltd. v. World Trade Center Prop.,
LLC, 467 F.3d 107, 133-34 (2d Cir. 2006) (finding that the district court acted within its
discretion in permitting expert custom and practice testimony).
The SEC’s suggestion that Professor Jarrell is not qualified to provide expert testimony
about the customs and practices of hedge funds and investment professionals because he has
never worked at a hedge fund or as a trader is absurd. A witness is qualified to provide expert
testimony, including custom and practice testimony, if he has obtained specialized knowledge not
only through personal experience, but also through education and training. Fed. R. Evid. 702;
Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 152 (1999) (recognizing that expert testimony
may be based on “professional studies”). Professor Jarrell has “more than sufficient expertise” to
educate the fact-finder about the “sophisticated and difficult-to-understand” hedge fund industry.
United States v. Rajaratnam, 09 CR 1184, Trial Tr. at 3803 (April 8, 2011). Professor Jarrell,
although not a professional trader or hedge fund manager himself, is eminently qualified, both
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through his work at the SEC and his decades-long study of the securities industry, to provide
testimony about the customary practice of securities professionals. The SEC’s baseless claim to
the contrary should be rejected.
D. The Public Nature of Information is Part of a Reliable Event Study Analysis
and a Proper Area of Expert Testimony.
The SEC erroneously claims that Professor Jarrell should be precluded from testifying
about the public nature of certain information the SEC alleges was material and nonpublic. Mot.
at 12-14. But the SEC does not understand the function of public information in an event study
analysis and misconstrues the purpose of Professor Jarrell’s proposed discussion of public
information at trial.
Professor Jarrell conducted event studies to determine whether particular events had an
economically material impact on relevant stock prices. An event study, by its very nature, takes
into account information already in the market about a relevant event and the market’s view of it,
making testimony about public information concerning that event both relevant and necessary.
In re Alstom SA Securities Litig., 253 F.R.D. 266, 280 (S.D.N.Y. 2008) (accepting Professor
Jarrell’s event study comparing day-to-day percentage changes in relevant share prices resulting
from disclosures of new information). In other words, it is appropriate for an expert like
Professor Jarrell to opine on the impact of information “leakage” into the market, from whatever
source, to make a statistical determination about whether such information was already
impounded into a stock price. In re Flag Telecom Holdings, Ltd. Securities Litig., 574 F.3d 29,
40 (2d Cir. 2009) (citing Lentell v. Merrill Lynch, 396 F.3d 161, 175 (2d Cir. 2005)) (accepting
the validity of “leakage theory” and rejecting the notion that disclosures of information to the
market must come from the company itself). See also United States v. Blackwell, 459 F.3d 739,

8

751 (6th Cir. 2006) (Professor Jarrell provided expert testimony about “leakage theory,” opining
that “information about mergers and buyouts will often ‘leak’ to the public without insider
trading. Companies about to buy out or be bought will give off signals indicating a future buyout
will occur. Sophisticated investors, especially analysts and research companies looking for these
signals, often learn of buyouts before they are publicly announced.”).
Unlike the cases the SEC cites, Professor Jarrell will not opine about matters a lay person
is readily capable of understanding without the assistance of expert testimony. A determination
about what information was publicly available for the purposes of an event study is much more
than simply describing “what a news article or analyst report stated or the date it was published.”
Mot. at 14. The SEC misunderstands the way Professor Jarrell utilized the news stories and
analyst reports he considered. While a lay person may be able to understand the content of a
Wall Street Journal article, for example, a lay person cannot determine the statistical impact that
information may have had on the price of a particular security on a particular day. That
conclusion requires specialized knowledge of statistics and complex market behavior in response
to company specific events. The SEC does not dispute Professor Jarrell’s expertise in those areas
and his testimony about the statistical impact of certain publicly available information on stock
prices is admissible expert opinion.
The SEC also misunderstands the purpose of Professor Jarrell’s potential discussion of
public information at trial. In this case, the word “public” has both a practical meaning for the
purposes of an event study analysis and a legal meaning for the purposes of Section 10(b).
Professor Jarrell will not opine about whether information was public for the purposes of the

9

securities laws, distinguishing this case from United States v. Libera, 989 F.2d 596 (2d Cir.
1993), cited by the SEC.3
Instead, Professor Jarrell will testify as to what relevant information was in the market as
a practical matter, and must do so in order to explain the conditions of his event studies, his
conclusions about the statistical significance of changes in stock price, if any, and what trading
patterns the information may have supported. Event studies involve subjective elements and
expert testimony about them is permissible, including testimony categorizing events as fraud or
non-fraud related. RMED Int’l, Inc. v. Sloan’s Supermarkets, Inc., No. 94 Civ. 5587 PKL RLE,
2000 WL 310352 at *8 (S.D.N.Y. March 24, 2000) (denying defendant’s motion to exclude
plaintiff’s damages expert and approving of expert testimony concerning subjective elements of
event studies). Whether a piece of information was public such that it was impounded into a
stock price on a particular day is proper expert opinion and is different from whether the public
nature of the information satisfies the “non-public” element of an insider trading allegation. The
latter will be for the fact-finder to decide and Mr. Rajaratnam expects that a proper jury
instruction will be given to that effect should the need arise.
The SEC also argues that Professor Jarrell’s analysis of the public nature of certain
information should be excluded because it is “one-sided” and the result of selective culling of
news articles and analyst reports. Mot. at 14. It should be noted, however, that Professor Jarrell
and those assisting him reviewed many news articles and analyst reports regardless of their
content. Professor Jarrell selected particular articles and reports for use in his event study
3

Notably, in Libera, the court found that whether information was publicly in the market
so as to impound the information into a stock price was appropriate evidence for the jury to
consider in determining whether information was non-public for Section 10(b) purposes. 989
F.2d at 601.

10

analysis because, in his expert opinion, they contained information that was substantially similar
to the information the SEC claims was inside information. Put another way, Professor Jarrell
only utilized articles and reports that contained relevant information. Whether those articles and
reports supported a particular thesis was not a factor Professor Jarrell considered. The SEC
cannot support its claim that Professor Jarrell’s methodology is misleading on that basis. To the
extent the SEC disagrees with Professor Jarrell’s methods or opinions, it is free to call its own
expert to present a different opinion, but the SEC’s mere disagreement with Professor Jarrell’s
analysis is not a basis to exclude his testimony.
E. Professor Jarrell’s Opinion Concerning the Behavior of Reasonable, WellInformed Investment Professionals is Permissible Expert Testimony.
The SEC objects to Professor Jarrell’s proposed testimony concerning the trading
positions of other reasonable, well-informed professional investors. The SEC’s argument in
support of this objection is circular, however, and does not justify excluding Professor Jarrell’s
proper testimony on this issue. Specifically, the SEC claims that “the fact that someone else
might have made the same trade without the benefit of inside information that Rajaratnam made
while in knowing possession of inside information is irrelevant.” Mot. at 16. In order for that to
be true, one would have to accept that Mr. Rajaratnam traded based on inside information, a fact
the SEC has not proven. The SEC’s argument should be rejected for that reason alone.
Moreover, Mr. Rajaratnam is entitled to present alternative bases for particular trading
positions as a factor for the fact-finder to consider. Professor Jarrell is qualified to opine on
reasonable trading strategies based on his extensive experience analyzing market behavior and

11

trading patterns.4 Professor Jarrell will not attribute the behavior of other investors to Mr.
Rajaratnam, will not opine about the bases for his trades, and will in no way attempt to usurp the
function of the fact-finder by characterizing Mr. Rajaratnam’s trading as lawful or unlawful.
Because Professor Jarrell’s testimony will not concern Mr. Rajaratnam’s motivation for making
particular trades, cases such as United States v. Zafar and Kidder, Peabody & Co. v. IAG
International, cited by the SEC, are inapplicable.
F. Professor Jarrell’s Proposed Testimony Concerning How Investment
Professionals Gather Information Is Admissible Custom and Practice
Testimony.
The SEC objects to what it characterizes as Professor Jarrell’s views on the law and
economic benefit. Mot. at 19-21. This objection is misplaced as Professor Jarrell will not testify
about his interpretation of the insider trading laws, although he is familiar with them. He may
testify about the lawful methods that investment professionals use to study the market and
develop a mosaic of information that informs their trading decisions. The SEC’s objection to this
testimony is similar to its objection to other custom and practice testimony and should be
rejected for similar reasons, as discussed above. See supra Section II.C.

4

The SEC argues that testimony concerning an alternative basis for trading should be
excluded and cites United States v. Blackwell, 459 F.3d 739 (6th Cir. 2006), in support. But the
SEC’s description of Blackwell is grossly misleading. Professor Jarrell did in fact testify about
“leakage theory” in that case, opining that “information about mergers and buyouts will often
‘leak’ to the public without insider trading. Companies about to buy our or be bought will give
off signals indicating a future buyout will occur. Sophisticated investors, especially analysts and
research companies looking for these signals, often learn of buyouts before they are publicly
announced.” Id. at 751. Professor Jarrell was permitted to explain to the jury how news of a
buyout will sometimes leak out, as evidenced by market behavior, without any improper
disclosure by an insider. Id. at 753. The only portion of Professor Jarrell’s testimony that was
excluded was testimony related to the existence of trading by persons with relationships to
directors other than the defendant. There are no such persons in this case and Professor Jarrell
will not offer any such testimony.

12

Additionally, mosaic theory is a well-recognized method for collecting and analyzing
information to inform trading decisions and has been accepted as such by the Supreme Court in
Dirks v. SEC, 463 U.S. 646 (1983) and by the Second Circuit in SEC v. Monarch Fund, 608 F.2d
938 (2d Cir. 1979). In Dirks, the Supreme Court acknowledged that “a duty to disclose arises
from the relationship between parties…and not merely from one’s ability to acquire information
because of his position in the market….It is commonplace for analysts to ferret out and analyze
information.” Dirks, 463 U.S. at 657-58. In Monarch Fund, the Second Circuit similarly stated:
All reasonable investors seek to obtain as much information as they can
before purchasing or selling a security. Investors will usually consult a
broker, having confidence that such a professional keeps abreast of the
market, including the information circulated regarding specific securities,
and will rely upon the information given to them by their broker.
Therefore, investment advisors seek to obtain as much information
including rumors regarding a security as they can so that they may
properly advise their clients.
Monarch Fund, 608 F.2d at 942.
Professor Jarrell’s explanation of mosaic theory serves as background for his testimony
regarding how the market absorbs public information and how professional investors collect, and
make trading decisions based on, a mosaic of information. Such testimony is appropriate and
should be permitted. As the Second Circuit stated in Marx & Co., Inc. v. Diners’ Club, Inc.,
expert testimony concerning the customary practice of those in engaged in the securities business
is admissible. 550 F.2d at 508. See also Highland Capital Mgmt, L.P. v. Schneider, 551 F. Supp.
2d 173, 180 (S.D.N.Y. 2008). Professor Jarrell, although not a professional trader himself, is
eminently qualified, both through his work at the SEC and his decades-long study of the
securities industry, to provide testimony about the customary practice of securities professionals.

13

In light of the actual nature of Professor Jarrell’s testimony, the SEC’s reliance on United
States v. Stewart, 433 F.3d 273 (2d Cir. 2006), is easily distinguishable on at least two grounds.
First, the proposed expert in Stewart was explicitly called to testify about a legal issue, i.e.,
whether Stewart’s trading constituted unlawful insider trading. Id. at 311. Second, the legality
of Ms. Stewart’s trading was irrelevant to the false statement charge against her, which was the
only charge under consideration. Id. at 311-12. The other cases the SEC cites are no more
helpful to its argument as they all stand for the undisputed, but totally inapposite, proposition
that expert testimony cannot instruct the fact-finder on the law. For example, in Marx & Co.,
Inc. v. Diners’ Club, Inc., 550 F.2d 505 (2d cir. 1977), the court found error in the trial court’s
decision to permit expert testimony from an attorney concerning the legal obligations of the
parties under a contract. Id. at 508. What the SEC has neglected to point out is that the court
approved of expert testimony concerning the customary practice of those engaged in the
securities business. Id. at 508-9. Similar statements of the law in United States v. Bilzerian, 926
F.2d 1285 (2d Cir. 1991), and United States v. Bronston, 658 F.2d 920 (2d Cir. 1981), are
likewise irrelevant. Professor Jarrell’s testimony concerning the behavior of investment
professionals is admissible custom and practice testimony and his descriptions of mosaic theory
are relevant to that proper testimony.
G. Professor Jarrell’s Proffered Testimony is Based on a Reliable, WidelyAccepted Methodology.
The SEC does not object to Professor Jarrell’s proffered testimony concerning event
studies, correctly acknowledging that an event study is a scientific, reliable, and widely-accepted
method for determining the impact of information on stock prices at certain times. Mot. at 23.
See, e.g., In re Northern Telecom Ltd. Securities Litig., 116 F. Supp. 2d 446, 460-61 (S.D.N.Y.
2000) (finding proposed expert testimony “fatally deficient” in a securities case when it did not
14

include an event study); In re Flag Telecom Holdings, Ltd. Securities Litig., 245 F.R.D. 147, 170
(S.D.N.Y. 2007) (vacated in part on other grounds by In re Flag Telecom Holdings, Ltd.
Securities Litig., 574 F.3d 29 (2d Cir. 2009)) (noting that “numerous courts have held that an
event study is a reliable method for determining market efficiency and the market’s
responsiveness to certain events or information.”).
Instead, the SEC argues that Professor Jarrell’s methodology is unreliable because
“[a]side from the event studies, Jarrell has applied no discernable technique or theory in forming
his opinions.” Mot. at 22. In other words, the SEC does not have a problem with the
methodology Professor Jarrell used, but rather with unknown methodologies that he did not use.
This objection is nonsensical. Professor Jarrell’s proposed testimony contains expert opinions he
formed by reviewing the results of event studies the SEC concedes are appropriate. As discussed
above, those opinions necessarily include subjective analysis that is admissible expert testimony.
RMED Intern., Inc. v. Sloan’s Supermarkets, Inc., No. 94 Civ. 5587 PKL RLE, 2000 WL 310352
at *8 (S.D.N.Y. March 24, 2000). The remainder of Professor Jarrell’s proposed testimony is
either summary or background testimony meant to assist the fact-finder, or custom and practice
testimony about an industry Professor Jarrell has spent decades studying. All three categories of
testimony are admissible for the reasons stated previously, and should be permitted.
The SEC’s argument that Professor Jarrell’s opinions cannot be tested is similarly bizarre.
His event studies are mathematical calculations, the bases for which have already been provided
to the SEC and, by extension, the SEC’s own economists. Additionally, the SEC will
presumably cross-examine Professor Jarrell about his opinions at trial and may, of course, put on
its own expert to rebut those opinions with which it disagrees. Highland Capital Mgmt, L.P. v.
Schneider, 551 F. Supp. 2d 173, 180 (S.D.N.Y. 2008) (“vigorous cross-examination, presentation
15

of contrary evidence, and careful instruction on the burden of proof are the traditional and
appropriate means of attack” and are preferred over “wholesale exclusion” as the “appropriate
safeguards”). It is hard to see, then, how the SEC is unable to test Professor Jarrell’s opinions.
H. Materiality is a Proper Area of Expert Testimony.
Finally, the SEC objects to Professor Jarrell’s proposed testimony concerning the results
of his admittedly proper event studies. Mot. at 23. Professor Jarrell’s testimony explaining
whether any of the information at issue was economically material is appropriate to support an
event study that compares the “return” on a stock when the event is announced to the stock’s
normal volatility. Event studies are routinely done in securities fraud cases and even the SEC
acknowledges that price “impoundment” (i.e., economic materiality) is a proper area for expert
testimony. Mot. at 23.
The Second Circuit and the Southern District of New York have repeatedly approved of
expert testimony concerning materiality, especially in complex cases like this one where
concepts at issue may be unfamiliar to the average juror.5 Other courts agree.6 Because
5

See, e.g., United States v. Russo, 74 F.3d 1383, 1395 (2d Cir. 1996) (holding that
“particularly in complex cases involving the securities industry, expert testimony may help a jury
understand unfamiliar terms and concepts” and concluding that the expert’s description of certain
stock transactions and his opinion on their effect on the market was appropriate) (emphasis
added); United States v. Schlisser, 168 Fed. Appx. 483, 2006 WL 452005 at *3 (2d Cir. 2006)
(allowing expert testimony that bore “on the materiality” of the defendant’s misrepresentations to
investors because the government had offered other evidence on the same point, including its
own expert who testified as to materiality of the information); United States v. Cohen, 518 F.2d
727, 737 (2d Cir. 1975) (finding that expert testimony from an SEC branch chief concerning the
concept of materiality was properly admitted, in part, because the case involved “complex
questions involving the securities laws”); RMED Inter., Inc. v. Sloan’s Supermarkets, Inc., No.,
2000 WL 310352 at *10 (S.D.N.Y. March 24, 2000) (permitting expert to testify on materiality in
a Section 10(b) case);
6
United States v. Schiff, 602 F.3d 152, 171-72 (3d Cir. 2010) (acknowledging that use of
an expert on materiality is appropriate and noting that courts “often turn to economic experts to

16

materiality in a securities case is a mixed question of law and fact, Professor Jarrell may opine on
the fact aspect of the materiality inquiry. Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 538
(2d Cir. 1999) (whether information is material is a mixed question of law and fact); SEC v.
Mayhew, 121 F.3d 44, 51 (2d Cir. 1997) (“The materiality of information is a mixed question of
law and fact.”); RMED Intern., Inc. v. Sloan’s Supermarkets, Inc., 185 F. Supp. 2d 389, 400
(S.D.N.Y. 2002) (same).
Professor Jarrell has previously provided expert testimony on complex securities matters,
including the materiality of information as determined by event study analysis. In In re
Countrywide Financial Corp. Sec. Litig., No. CV-07-05295-MRP, 2009 WL 7322254 (C.D. Cal.
Dec. 9, 2009), for example, Professor Jarrell was an expert for the plaintiffs and offered opinions
that securities traded in an efficient market. The court agreed that he could so testify regarding

determine whether a particular announcement had an appreciable effect on the stock price.”)
(internal citations omitted); United States v. Nacchio, 519 F.3d 1140, 1155 (10th Cir. 2008)
(vacated in part on other grounds by United States v. Nacchio, 555 F.3d 1234 (10th Cir. 2009)
(“expert economic testimony is routine when a materiality determination requires the jury to
decide the effect of information on the market”); SEC v. Koenig, 557 F.3d 736, 743 (7th Cir.
2009) (SEC presented event study-based testimony of an economic expert on the question of
materiality); Harmsen v. Smith, 693 F.2d 932, 941 (9th Cir. 1982) (finding jury verdict supported
by expert’s testimony on materiality); Eliasen v. Hamilton, No. 81 C 123, 1987 WL 7815 at *5
(N.D. Ill. March 9, 1987) (“It appears that much of the proof concerning materiality will be
through expert testimony.”). See also, 3 Alan R. Bromberg & Lewis D. Lowenfels, Bromberg &
Lowenfels on Securities Fraud & Commodities Fraud § 6:153 (2d ed. 2007) (“Opinion evidence,
e.g., by experts…is admissible on whether information would have a substantial market
impact.”); Id. at § 6:159 (“Experts…should be able to testify that the information would have
had a substantial effect on the market price or that reasonable investors would have considered it
important.”); 5 Business & Commercial Litigation in Federal Courts § 62:77 (Robert L. Haig ed.
2005) (In securities cases, “economic experts often play the most significant role of any witness”
especially on “whether the disclosure of certain information had an effect on the market price
and, if so, what amount” and whether it “was material.”); 7-107 E. Michael Bradley & Anthony
L. Paccione, Securities Law Techniques § 107.03 (Matthew Bender ed. 2007) (“In securities
litigation, expert testimony has been found helpful and been admitted with respect to a wide
variety of matters,” including “to demonstrate materiality.”).

17

the common stock, options, capital securities and some of the debt securities, finding that “Dr.
Jarrell defined the events for study as every quarterly earnings release dated during the class
period where earnings differed from analysts' consensus estimates. This is a fairly objective
criterion. None of the three defense experts has any objection to the methodology used in Dr.
Jarrell's event study on the common, at least ‘in principle.’” Id. at *29. The court added: “Of
course, many decision points in designing an event study require some subjectivity: identifying
news, categorizing which news is ‘material,’ and determining whether news should have a
certain (albeit rough) magnitude of positive or negative influence on price are all subjective
determinations.” Id.
Economic materiality refers to Professor Jarrell’s expert interpretation of the analysis he
performed as part of his event studies. It speaks to statistical significance, which is a
quantitative, rather than legal, concept. Professor Jarrell’s opinions about this economic factor
have never been presented as the “sine qua non” of materiality, as the SEC accuses. Rather, they
are presented to assist the fact-finder in evaluating the significance of information so that it can
make a factual determination about materiality for the purposes of liability under the securities
laws. Professor Jarrell’s opinion about economic materiality is simply a factor to consider. Here
again, if the SEC disagrees with Professor Jarrell’s expert opinion on the economic materiality of
any event, it is free to name its own expert to testify on that subject. The SEC’s decision whether
or not to do so hardly precludes the defense from offering its own expert testimony on
materiality, however.
III.

CONCLUSION
For the reasons stated herein, Plaintiff Securities and Exchange Commission’s Motion in

Limine should be denied.

18

Dated: June 3, 2011
New York, New York

Respectfully submitted,
By:

___/s/John M. Dowd_________________
John M. Dowd (admitted pro hac vice)
Terence J. Lynam (admitted pro hac vice)
William E. White (admitted pro hac vice)
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Ave, NW
Washington, DC 20036
[phone]
Attorneys for Raj Rajaratnam

19

CERTIFICATE OF SERVICE
The undersigned hereby certifies that the foregoing document was served on Plaintiff by
causing a copy to be filed via the Court’s CM/ECF system and sending a copy by email on this
3rd day of June 2011.
Valerie A. Szczepanik
Senior Trial Counsel
Securities and Exchange Commission
New York Regional Office
3 World Financial Center, Suite 400
New York, New York 10281
[phone]
[e-mail]
Attorney for Plaintiff

___/s/John M. Dowd__________________
John M. Dowd (admitted pro hac vice)
Terence J. Lynam (admitted pro hac vice)
William E. White (admitted pro hac vice)
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Ave, NW
Washington, DC 20036
[phone]
Attorneys for Raj Rajaratnam

1