You are on page 1of 13

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK


---------------------------------------------------------------x
:
UNITED STATES OF AMERICA, :
:
-v- :
: S1 09 Cr. 1184 (RJH)
RAJ RAJARATNAM and :
DANIELLE CHIESI, :
:
Defendants. :
:
---------------------------------------------------------------x

REPLY MEMORANDUM IN FURTHER SUPPORT OF


DEFENDANT RAJ RAJARATNAM’S MOTION FOR SEVERANCE

I. INTRODUCTION

The Superseding Indictment (“Indictment”) alleges seven distinct conspiracies—each one

described as a separate “scheme,” and each one charged as a separate count. As pled, only one of

the seven conspiracies involves both defendants. The other six allegedly involve one of the

defendants, but not both. Defendant Chiesi is not even mentioned in Counts One, Two, Three,

and Four – which are titled the “Rajaratnam-Far,” “Rajaratnam-Khan,” “Rajaratnam-Goel,” and

“Rajaratnam-Kumar” schemes. Conversely, Defendant Rajaratnam is not even mentioned in

Counts Five and Seven – titled the “Chiesi/CC-1” and “Chiesi-Kurland” schemes. The

Indictment also charges twelve substantive counts of insider trading, nine of which involve one

of the defendants, but not both. As with six of the conspiracy counts, Ms. Chiesi is not even

mentioned in the five substantive counts pled against Mr. Rajaratnam, and Mr. Rajaratnam is not

even mentioned in the four substantive counts pled against Ms. Chiesi. On the face of the

Indictment, there is no overlap whatsoever between nine of the counts pled against Mr.

Rajaratnam and six of the counts pled against Ms. Chiesi.


This is not, as the government contends (Opp. at 14), a “construction” of the Indictment.

This is what the Indictment actually says. What the Indictment does not say – and what the

grand jury did not charge – is that the defendants were jointly involved in a “Galleon Scheme”

and a “New Castle Scheme.” Those terms, and the theory that underlies them, appear for the

first time in the government’s opposition, where they were created as a vehicle to repackage the

nineteen counts actually alleged in the Indictment – fifteen of which involve only one of the

defendants – as two broad “schemes” in which both defendants are, by the government’s

construct, involved.

The government’s attempt to re-write the Indictment merely illustrates what the

defendants argued in their motions to sever: It is not enough, as the government appears to

argue, that the counts are similar in character (i.e., in that they involve allegations of insider

trading), as that is a standard found only in Fed. R. Crim. P. 8(a) and not Rule 8(b), which

governs joinder of defendants and the defendants’ motions to sever. Rule 8(b) is violated here

because the Indictment improperly joins the defendants on charges that are not alleged to “arise

out of a common plan or scheme” or to “be unified by some substantial identity of facts or

participants.” See United States v. Lech, 161 F.R.D. 255, 256 (S.D.N.Y. 1995) (Sotomayor, J.)

(citing United States v. Attanasio, 870 F.2d 809, 814 (2d Cir. 1989)). Counts One through Four,

and the related substantive counts, involve stocks – dozens of them – that Ms. Chiesi is not

alleged to have traded, and co-conspirators with whom Ms. Chiesi is not alleged to have

conspired, or even met. Counts Five and Seven, and the related substantive counts, involve

stocks that Mr. Rajaratnam is not alleged to have traded, and co-conspirators with whom Mr.

Rajaratnam is not alleged to conspired, or even met. Joinder of the defendants in a single trial

involving all these charges is clearly improper under Rule 8(b).

2
This, of course, is exactly why the government now attempts to cram all of the charges

into the so-called “Galleon Scheme” and “New Castle Scheme,” neither of which is mentioned

even once in the Indictment itself. As pled, the nine Rajaratnam-specific counts and six Chiesi-

specific counts do not overlap at all, and cosmetic arguments in a legal brief cannot change what

the Indictment actually says. Indeed, as the Court will surely have noticed, the so-called

“Galleon Scheme” and “New Castle Scheme” do overlap – but only because the government

constructed each to include the single joint conspiracy count (Count Six) and the related

substantive counts, which are already pled in the Indictment. That simply misses the point of the

motions to sever, which is that the defendants are improperly joined because of the other fifteen

counts. Indeed, under the government’s creative re-writing of the various charges in the

Indictment into two separate “schemes,” all that would be necessary for joinder of defendants in

any case would be a single joint conspiracy count that is deemed to be part of each defendant’s

purported “scheme,” notwithstanding multiple additional unrelated charges against each

defendant. But that interpretation would eviscerate Rule 8(b)’s requirement that joinder of

defendants be based on a common scheme or plan connecting all the charges.1

Perhaps recognizing that its newly-created “scheme” labels alone will not suffice, the

government improperly attempts to supplement the facts actually alleged in the Indictment – and

actually charged by the grand jury. The government thus contends that Mr. Rajaratnam

participated as a “second-level tipper” of AMD information in “all three conspiracy counts [Five,

Six, and Seven] in which Chiesi is named as a defendant.” But that is not what the Indictment

says. Count Five alleges that “Chiesi obtained Inside Information regarding IBM, AMD, Sun

1
See Fed. R. Crim. Pro. 8(b) (joinder of defendants requires “same act or transaction” or
“same series of acts or transactions, constituting an offense of offenses.”).

3
Microsystems and other companies from CC-1,” and Count Seven alleges that “Chiesi obtained

Inside Information regarding IBM, AMD, Akamai, Sun and other companies from CC-1 and the

Akamai Source.” Neither count alleges that Ms. Chiesi obtained inside information from Mr.

Rajaratnam. In fact, neither count even mentions Mr. Rajaratnam. The government also claims

that the AMD and Akamai information allegedly exchanged between Mr. Rajaratnam and Ms.

Chiesi in Count Six is the same AMD and Akamai information exchanged between Ms. Chiesi

and others in Counts Five and Seven – facts which, again, are not alleged in the Indictment. As

the government itself admits, this attempt to supplement the allegations actually contained in the

Indictment (and actually charged by the grand jury) is precluded by the plain language of Rule

8(b). See United States v. Rittweger, 524 F.3d 171, 177 (2d Cir. 2008). This Court must decide

whether the defendants are properly joined under Rule 8(b) based on the facts actually alleged in

the Indictment, and based only on those facts. Id. Those facts, of course, are the only facts

actually charged by the grand jury.

The government’s attempt to re-write the Indictment also demonstrates the likelihood of

prejudicial confusion that warrants severance under Rule 14. On its face, fifteen of the nineteen

counts alleged in the Indictment mention one of the defendants, but not the other. Yet the

government contends that the defendants should be jointly tried because “overlapping facts are at

the heart of 12 of the 19 counts charged in the Indictment.” Opp. at 7. Similarly, the Indictment

makes no mention of a “Galleon Scheme” or a “New Castle Scheme.” Yet the government

contends that “as alleged in the Indictment, Rajaratnam participated in (and necessarily had been

aware of) the New Castle Scheme, and Chiesi participated in (and necessarily had been aware of)

the Galleon Scheme.” Opp. at 6. If the Court finds this confusing, that is because it is confusing,

4
and deliberately so. Indeed, the government’s opposition brief simply shows how it will use a

joint trial to smear each of the defendants with charges having to do exclusively with the other.

II. ARGUMENT

A. The Indictment Does Not Allege a Common Scheme or Plan or Substantial


Identity of Facts and Participants Necessary for Joinder Under Rule 8(b).

Mere similarity of offenses or commonality of participants is insufficient to sustain

joinder. United States v. Sattar, 314 F.Supp.2d 279, 316 (S.D.N.Y. 2004); Lech, 161 F.R.D. at

256. To satisfy Rule 8(b), the government must show that the charges against Mr. Rajaratnam

and Ms. Chiesi “(1) arise out of common plan or scheme, or (2) are unified by some substantial

identity of facts or participants.” Lech, 151 F.R.D. at 256. In other words, there must be an

“overarching scheme” connecting all the counts in the Indictment. U.S. v. Kouzmine, 921 F.

Supp. 1131, 1133 (S.D.N.Y. 1996).

The need for a “common plan or scheme” is settled law in this circuit, and the

government therefore devotes the better part of its brief to repackaging the fifteen facially

unrelated charges into just such a scheme – i.e., the overarching and overlapping “Galleon

Scheme” and “New Castle Scheme,” which it claims both defendants were aware of and

participated in. Yet at the same time, the government perplexingly misquotes Second Circuit

case law in order to suggest that no such connection is necessary, claiming that the Second

Circuit in United States v. Rittweger, 524 F.3d 171 (2d Cir. 2008) rejected the notion that joinder

requires “one over-arching scheme.” Opp. at 12. In fact, the court in Rittweger merely held that

defendants need not be “charged as participating in one overarching conspiracy” in order to

maintain joinder. Rittwegger, 524 F.3d at 178 (emphasis added). But Mr. Rajaratnam has never

argued that a single conspiracy must be charged. His argument is one that the Rittweger court

fully acknowledged and accepted: In order to sustain joinder, there must be a “common plan or

5
scheme” – i.e., an overarching scheme – among the multiple defendants and any separately

charged counts of conspiracy. See id. at 177 (citing United States v. Cervone, 907 F.2d 332, 341

(2d Cir. 1990)); accord Attanasio, 870 F.2d at 815.

The government’s belated effort to repackage the Indictment into two broad, overlapping

schemes is easily understood in light of its heavy reliance on United States. v. Rittweger. But this

case is not like Rittweger. In Rittweger, the indictment actually alleged two criminal schemes

encompassing thirteen counts of conspiracy and related substantive offenses. See Rittweger, 524

F.3d at 175-76. The “First Scheme” sought to defraud customers of Credit Bancorp, Ltd.

(“CBL”) by fraudulently inducing them to invest in the CBL Insured Credit Facility via fictitious

account statements. See id. The “Second Scheme” likewise sought to defraud potential CBL

customers by inducing them to invest in the CBL Insured Credit Facility through false and

misleading misrepresentations about a large financial institution’s investment in CBL. See id.

Though the two schemes utilized different means of defrauding customers, the Court found that

they were part of a common plan, involving the same company and the same key players

working towards the same purpose – to induce customers to invest in the CBL Insured Credit

Facility. See id. at 177. The instant case is different. Here, the Indictment sets forth seven

separate criminal schemes involving different stocks, different co-conspirators, different

purposes, different time periods, and different plans. Despite the government’s attempts to

refurbish it, the Indictment simply does not allege two overlapping schemes under a common

plan embracing all of the counts against both defendants, as did the indictment in Rittweger. As

such, the Indictment in this case completely lacks the sort of allegations that united the various

conspiracy counts in Rittweger.

6
United States v. Feyrer, 333 F.3d 110 (2d Cir. 2003), also cited heavily in the

government’s memorandum, offers no relief. In that case, the indictment charged two criminal

schemes to defraud by creating artificial demand for the stock of Banyan Corporation and First

Colonial Ventures, respectively. Defendant Goldenberg was charged in only the Banyan

conspiracy; defendant Yost in only the First Colonial one. However, both defendants, and both

schemes, were alleged to be part of a “common plan” revolving around the same “middleman,”

Freyer, and using the same brokers. In fact, the two “schemes” were hatched at a single meeting

with Freyer and the brokers that both Yost and Goldenberg had attended, during which “the

conferees discussed bribing brokers to buy stock for customers in the corporations that Yost and

Goldenberg controlled.” Id. at 113. On these facts, the court unsurprisingly found that “[t]here

can be no doubt that the charges against Yost and Goldenberg were united by overlapping facts

and participants and a common plan.” Id. at 114. Here, there is no comparable commonality

alleged among the counts against Mr. Rajaratnam and Ms. Chiesi. Indeed, the Indictment does

not allege that Ms. Chiesi was even aware of the schemes alleged in Counts One through Four, or

that Mr. Rajaratnam was aware of the schemes alleged in Counts Five and Seven.

The government’s analogies to United States v. Cervone, 907 F.3d 332 (2d Cir. 1990) and

United States v. Biaggi, 909 F.2d 662 (2d Cir. 1990), also fail because the offenses joined in

those cases were fundamentally part of the same overarching criminal scheme. The allegations

in Cervone centered on a large labor racketeering operation. “Count 87,” against defendant

Perna, charged him with bribing co-defendant Cervone; “Count 88,” against Cervone, charged

him with receiving the very same bribe in violation of RICO. 907 F.3d at 341. The two counts

were so “integrally related” that they “could easily have been combined in a single count.” Id.

With the “same payment at issue” in both counts, “concern[ing] common defendants and a

7
common scheme involving a single labor bribe,” the court unsurprisingly found that Rule 8(b)

was satisfied. Id. Similarly, in Biaggi, the court’s finding that joinder was appropriate rested on

the fact that the extortion count at issue was “inextricably related” to the other offenses charged

against the defendant. 909 F.2d at 676. The same cannot be said about the offenses charged

here; the Indictment does not demonstrate that the conspiracies charged against Ms. Chiesi alone

are related in any way to the conspiracies implicating only Mr. Rajaratnam, much less that they

are “integrally” or “inextricably” related as in Cervone and Biaggi.

Stripped of the government’s attempts to repackage it, the only place in which the

Indictment alleges actual overlap between the two defendants is with respect to Count Six and

the related substantive counts. Mr. Rajaratnam is not alleged to have been involved in, or even

aware of, the schemes alleged in Counts Five and Seven; Ms. Chiesi is not alleged to have been

involved in, or even aware of, the schemes alleged in Counts One through Four. These

allegations, as stated in the Indictment, alone control the Rule 8(b) analysis. Rittweger, 524 F.3d

at 177. Nevertheless, the government attempts to supplement them by alleging that the inside

information at issue in Count Six is, in part, the same as the inside information at issue in Counts

Four, Five, and Seven, and that Mr. Rajaratnam and Ms. Chiesi were thus “second-level tippers”

in the counts in which they are not named. But such an attempt to connect unrelated schemes as

“springboards” for one another was expressly rejected by the Court in Lech, 161 F.R.D. at 255.

There, a seven-count indictment alleged three criminal schemes involving the New York City

Board of Education (“BOE”). A defendant, Lech, who had been charged in only one of the three

schemes moved for severance from his alleged co-conspirators. Despite the fact that Lech “did

not participate in, or have specific knowledge of” the other schemes, the government contended

that Lech was aware that his co-conspirators were somehow involved in another, separate

8
criminal endeavor, and that their success in executing another scheme was “an unmistakable

springboard” for Lech’s scheme. Id. at 256-57. Then-Judge Sotomayor declined to follow the

government’s request that she “find a common thread by imparting [the co-conspirators’] prior

dealings with the BOE to Lech” and granted severance. Id. at 258. The same is true here. The

Indictment does not allege that Mr. Rajaratnam was involved or aware of the two Chiesi-only

conspiracies, or that Ms. Chiesi was involved or aware of the four Rajaratnam-only conspiracies.

Even assuming that some of these individually-charged conspiracies served as “springboard” for

the one joint conspiracy, “this allegation alone is insufficient to support [Mr. Rajartnam’s]

joinder” under Rule 8(b). Id.

By conveniently including Count Six (the sole joint conspiracy count) in both of its new

“schemes,” and focusing on the obvious connections within that count, the government attempts

to distract the Court from the basic truth that the Indictment also charges six other distinct

conspiracies, encompassing fifteen other offenses, at least six other co-conspirators, and at least

eleven other securities2 - all of which involve only one of the defendants. But creative

repackaging and novel allegations cannot obscure what the Indictment has made plain. The

Indictment simply alleges no common plan, no substantial identity of facts and participants, that

can connect all the charges and defendants under Rule 8(b). For the government to insist on

trying Mr. Rajaratnam and Ms. Chiesi together on such disparate offenses offends the plain

language of Rule 8(b).

2
Although the Court’s analysis under Rule 8(b) is limited to the allegations actually pled
in the Indictment, the number of stocks and conspirators at issue in the Rajaratnam-only counts
and Chiesi-only counts is actually much greater than this according to the government’s March
22, 2010 letter providing additional detail about these counts.

9
B. The Substantial Risk of Prejudice and Complexity of the Issues and Evidence
Weigh Strongly in Favor of Severance Pursuant to Rule 14.

This Court has broad discretion to grant severance “[i]f the joinder of offenses or

defendants in an indictment . . . appears to prejudice a defendant.” Fed. R. Crim. P. 14. A key

consideration is whether evidence admissible only against one defendant might improperly “spill

over” to the jury’s consideration of the other defendant’s guilt. Zafiro v. United States, 506 U.S.

534, 539 (1993). Where the risk of prejudice from a joint trial “is sufficiently severe to outweigh

the judicial economy that would be realized by avoiding multiple lengthy trials,” severance is

appropriate. United States v. Walker, 142 F.3d 103, 110 (2d Cir. 1998).

As an initial matter, the government attempts to confuse the Rule 14 analysis by arguing

that severance should only be granted if its denial would constitute a prejudicial abuse of

discretion amounting to a “miscarriage of justice.” But that is the standard of review on appeal

from a discretionary decision of this Court, and a test which presumes that the trial has already

occurred; it is not the relevant test at this stage. Whether to grant severance under Rule 14 is a

matter within this Court’s discretion. The Court can, and should, sever the defendants if it

determines, in the exercise of that discretion, that the likelihood of prejudice outweighs the

efficiencies of a joint trial. Walker, 142 F.3d at 110. It need not conclude – and could not

possibly conclude at this early stage – that the denial of severance would amount to a prejudicial

abuse of its own discretion resulting in evidentiary “spillover” so extensive as to constitute a

“miscarriage of justice.”

The government also attempts to downplay the risk of prejudice to the defendants posed

by a joint trial by once again focusing on the single joint conspiracy count at the expense of the

other, unrelated counts charged in the Indictment. It claims that because some evidence against

Ms. Chiesi on Counts Five and Seven relates to the allegations against both defendants in Count

10
Six, the danger of spillover is minimized. Opp. at 19. This position ignores that there is a vast

amount of evidence that would be relevant to the charges against Ms. Chiesi that do not relate to

Mr. Rajaratnam, and vice versa. Notably, the government’s March 22, 2010 letter to defense

counsel has disclosed that it intends to offer evidence on dozens of previously unidentified stocks

and co-conspirators on the counts alleged against only one of the defendants.3 See Ltr. from R.

Brodsky (Ex. A) (redacted to protect identities of alleged co-conspirators not charged with any

crimes). If the government’s case proceeds as suggested in that letter, its case-in-chief will

involve the presentation of evidence that Mr. Rajaratnam allegedly conspired with dozens of

people that Ms. Chiesi has probably never met to trade in dozens of stocks that she may never

have traded, and vice versa.

The government also glosses over the tremendous complexity of the issues and charges in

this case, contending that the case is “not complex,” that “there is nothing complicated about the

charge of illegal insider trading,” that “[t]he proof in such cases is straightforward,” and that “the

case law … are [sic] well-established.” Opp. at 23. These claims are absurd, especially in light

of the fact that the government effectively tripled the number of stocks at issue in its March 22

letter. This case is extraordinarily complex, with allegations spanning a six-year period and

implicating dozens of individuals, dozens of companies, hundreds of separate securities

transactions, and millions of individual securities – all in the context of highly sophisticated

hedge fund operations. This is not a run-of-the-mill securities fraud prosecution; it is, as the U.S.

3
Although the Court’s analysis under Rule 8(b) is limited to the allegations actually
contained in the Indictment, and should not take extraneous factual allegations into account, its
assessment of the likelihood of prejudice under Rule 14 necessarily involves consideration of the
evidence at trial. In this regard, the Court can, and should, consider the fact that the government
has indicated, by way of its letter providing particulars, that it intends to offer extensive proof of
conspiracies to trade dozens of stocks involving only one of the two defendants.

11
Attorney himself declared, “the largest hedge fund insider trading case in history.” See

10/16/2009 Press Release (Ex. B). The government’s blithe assertion that this trial will be

“simple,” Opp. at 24, is a disingenuous attempt to mask the serious risk of jury confusion created

by trying the defendants jointly.

Finally, the government exaggerates the “inefficiencies” of separate trials, claiming that

“many of the same documents would be admitted into evidence” and that “many of the same

witnesses, including several cooperators, would be required to give the same testimony.” Opp. at

2. In truth, any overlap in evidence between separate trials would be minor, relating only to the

single scheme alleged in Count Six and the two stocks and co-conspirators at issue there.4

4
The government attempts to exaggerate the inefficiencies of separate trials by arguing
that some of the evidence relevant to Count Six (the sole joint conspiracy count) is also relevant
to Counts Five and Seven (the Chiesi-only conspiracy counts). The Indictment contains no such
allegation, but even assuming it is true, separate trials would result in no greater inefficiency than
if the evidence was relevant only to Count Six. Separate trials of the two defendants on the
Count Six conspiracy of course will involve the presentation of some limited amount of the same
evidence in both trials, but the degree of duplication is not affected by the fact that the evidence
may also be relevant to other charges on which Ms. Chiesi will be tried.

12
III. CONCLUSION

For all the foregoing reasons, Mr. Rajaratnam respectfully requests that the Court grant

his motion for severance.

Dated: New York, New York

April 9, 2010
Respectfully submitted,

By: /s/ John M. Dowd_________________________________


John M .Dowd (admitted pro hac vice)
Terence J. Lynam (admitted pro hac vice)
James E. Sherry (admitted pro hac vice)
Anne J. Lee (assisting in the preparation)
Akin Gump Strauss Hauer & Feld LLP
1333 New Hampshire Ave, NW
Washington, DC 20036
(202) 887-4000

Robert H. Hotz, Jr. (RH-4456)


Samidh Guha (SG-5759)
Akin Gump Strauss Hauer & Feld LLP
One Bryant Park
New York, NY 10036
(212)872-1000

Attorneys for Raj Rajaratnam

13