A tale of two (insider?) traders

February 2, 2011, 9:10 PM UTC

How would YOU defend yourself from insider trading charges? You can go the Raj Rajaratnam route or the Steve Cohen one. I’d take the latter.

Steve Cohen and Raj Rajaratnam: Two strategies, two outcomes?

If a man is known by the company he keeps (or has kept), then these are tough times, reputationally speaking, for hedge fund kingpins Raj Rajaratnam and Steve Cohen. While neither has been convicted of a crime, hardly a day goes by in which we don’t hear of another person getting arrested or pleading guilty to some sort of insider trading infraction. And they all seem to have at least a tangential connection with one of these two guys or their firms, Galleon Group and SAC Capital.

Today we learn from the Wall Street Journal that Rajaratnam’s younger brother, Ragakanthan Rajaratnam, has been named as a co-conspirator in the insider trading ring which is turning out to be as vast as originally promised by the Feds more than a year ago. He formerly worked with his brother as a portfolio manager at Galleon Group, and prosecutors are reportedly hoping to use the old “family member for guilty plea” exchange strategy with Raj, who currently plans to fight charges in court.

This follows Monday’s news that Samir Barai, head of hedge fund Barai Capital, was busted for purchasing inside dope from analysts at “expert network” Primary Global Research. Barai never worked for Cohen, but Primary Global is suspected of passing information on to people who once did. Some connection are more tangential than other, yes, but if someone were offering odds on Cohen eventually getting arrested himself, it would be a tough bet to pass up with the right incentives.

Fighting and friendless

Setting aside the issue of actual guilt or not – I’m no judge or jury, and have no inside information on the government’s insider trading investigation – watching Rajaratnam and Cohen respond to actual charges (in Rajaratnam’s case) or insinuation (in Cohen’s) has offered a case study in the two ways one might go about refuting allegations of misdeeds. Rajaratnam is playing it like Butch Cassidy, going down guns-a-blazing. Cohen, as has always been his wont, is attempting to hide in plain sight.

The latter seems a more prudent choice, at least from where I’m sitting.

To be fair to Cohen, he hasn’t been charged with anything — he’s only had the unfortunate experience of being mentioned in nearly every story on the subject of insider trading in recent months. Rajaratnam, on the other hand, is in the center of the most far-reaching insider trading investigation in memory. And the dominoes keep falling: on January 19, the “fishnet temptress” Danielle Chiesi pled guilty to three counts of insider trading in exchange for $1.7 million in ill-gotten gains. A week later, Michael Cardillo did the same. There are so many people pleading guilty in this case that it’s hard to keep track of them all. That leaves Rajaratnam as the last major figure fighting the charges against him.

He’s apparently still got some fight left in him: earlier this week he burned a bridge that few have ever dared burn, provoking the ire of global consulting powerhouse McKinsey by demanding all “documents concerning any investigation conducted by McKinsey into the disclosure of non-public information by Anil Kumar and/or Rajat Gupta.” Former McKinsey partner Kumar already pled guilty to leaking confidential information to Rajaratnam in the Galleon case, resulting in the greatest reputational crisis McKinsey has endured since its perceived involvement in the shenanigans at Enron. Gupta, on the other hand, hasn’t been charged with a thing, despite a litany of indicators that suggest the former McKinsey managing partner might have tipped Rajaratnam as well.

Or perhaps Rajaratnam believes McKinsey’s investigation contains evidence that would vindicate him. Either way, McKinsey can’t be happy about its involvement at all in this case. And as for Raj, well, a better strategy might be to hope he had some friends once he’s released from the pokey.

(Let’s not even talk about the website Rajaratnam has set up proclaiming his innocence. I’ve never been able to figure out just what audience it’s aimed at. Casual web surfers? Legal scholars? Journalists? Late night comedians?)

Hiding in plain sight, with humor

Cohen, on the other hand, is keeping his head down and not saying a thing — and maybe even laughing while he’s at it. According to CNBC, when he was asked in Davos last week to sit for an interview, he told them, “You don’t need to be talking to me. I’m on the way down.” Other than this one ill-advised taunt to a media that will take what it can get, Cohen has given no interviews and his press representative has continued to refuse every request to speak to the Connecticut hedge fund manager since this whole mess broke out in the fall.

The word on the street – and from a few hedge fund managers I’ve spoken with this week – is that Steve Cohen has made a career out of keeping himself insulated from his traders by several layers in order to prevent one rogue employee who might be trading off inside information from bringing Cohen down with him. Thus, even as the Feds continue to circle SAC Capital, they’ve obviously failed to find anything directly tying Cohen to an illegal act. Cohen is a well-known art lover, which might explain how he knows his way about the grey areas of insider trading law so well. It’s all just different shades of behavior, you see.

Rajaratnam, on the other hand, could pretty much be said of being in the smoking gun business as well as the hedge fund one. Everybody is dropping dime on the guy, and he’s in an increasingly lonely place at the defense table. Which is one possible reason why he made his recent Hail Mary misery-wants-company move to bring Rajat Gupta down with him. As I wrote in Fortune magazine last October, it seems quite unlikely that this latest gambit will succeed. If the Feds had anything on Gupta, they would have perp-walked him long ago.

But Rajaratnam, it appears, has nothing left to lose.

Also on Fortune.com:

Insider trading: New venues, old laws

Why it’s a great time to launch a hedge fund

For hedge funds, nowhere to go but up