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The Morning Brief: Rengan Rajaratnam Acquitted on Insider Trading Charges

A New York jury acquitted Rengan Rajaratnam, the brother of disgraced Galleon Group founder Raj Rajaratnam, of charges of conspiracy to commit insider trading, resulting in U.S. attorney Preet Bharara’s first loss of an insider trading case. The not-guilty verdict was surprising, although last week Judge Naomi Reice Buchwald of Federal District Court in Manhattan foreshadowed this outcome when she dismissed the two insider trading charges against Rengan Rajaratnam and questioned the strength of the remaining charges. Experts say the upshot of the verdict suggests that to prove an illegal insider trading case going forward, prosecutors need to prove the recipient of the information knows the tipper is receiving something of value.

“While we are disappointed with the verdict on the sole count that the jury was permitted to consider, we respect the jury trial system whatever the outcome, and we thank the jury for their service,” said Bharara, the U.S. Attorney for the Southern District of New York, in a statement. “This office maintains its faith in the criminal justice system, a system that has resulted in the convictions by trial or guilty plea of 85 other defendants on insider trading charges. We will continue to seek justice in the investigation and prosecution of those who violate the securities laws of the United States.”

The acquittal snaps Bharara’s string of 85 convictions or guilty pleas from various individuals within and outside the hedge fund industry, including SAC Capital Advisors, the firm founded by Steven Cohen. “This defense verdict sends a powerful message that juries are willing and able to reach a not-guilty verdict if they don’t believe the government has presented enough evidence to convict,” says White & Case Partner and former SEC Trial Attorney Greg Little in a statement. “Fighting back against the government is not easy, but it is also not impossible. Those who are facing charges by the government should not assume a jury will agree with everything the government alleges, and a strong, well presented defense may result in a favorable ruling for the defendant.”

The average hedge fund rose 1.3 percent in June, bringing the gain for the first six months to 3.2 percent, according to Chicago-based industry tracker Hedge Fund Research’s widely followed composite index. However, this has been a volatile year, as hedge funds only made money in three of the first six months, according to the firm. The HFRI Fund of Funds Composite Index rose 0.9 percent in June and 2 percent for the first six months. Equity Hedge topped all fund categories last month, gaining 1.7 percent in June, and is now up 3.3 percent through six months. The HFRI Event Driven Index was up 4.3 percent in the first half.

Robert Citrone’s South Norwalk, Connecticut–based firm Discovery Capital Management is warning clients that the Federal Reserve could start raising interest rates sooner than the market is currently expecting. “We are not there yet,” it states in a recent weekly e-mail to clients. But, if this happens, investors should duck. “We are anticipating financial markets to have a significantly negative reaction when the announcement is made,” Discovery warns. However, investors in the Tiger Cub’s macro and other funds should not worry, the firm writes. “We expect the positioning of the portfolio to benefit from strong U.S. economic data, which we believe will continue to strengthen going forward,” it states in the e-mail message. One of its favorite investments is India. “It is our view that the budget to be presented on July 9th will be a further catalyst for positive change,” Discovery states. “India remains one of our high conviction markets from a long perspective.”

The Alden Global Opportunities Fund - Class A extended its hot streak in June, gaining 1.8 percent for the month. As a result, it is up 20.3 percent for the year. Performance for the $1.4 billion fund, which is run by New York–based Alden Global Capital, was driven by Lehman paper, Greek banks and credit and equity positions in Venezuela.

Crumbs Bake Shop has crumbled. The cupcake chain’s shares fell by about 75 percent, to a mere $0.03 or $0.04 per share, after it announced it would shutter all of its stores. The biggest loser seems to be J. Carlo Cannell’s Cannell Capital, which at the end of the first quarter was the largest shareholder with more than 4 percent of the common shares. However, it did cut its stake by 43 percent from year-end. Interestingly, as recently as April 8, it said it owned closer to 8.14 percent of the shares if you include shares convertible under the terms of the company’s senior convertible notes. This stake was down from more than 10 percent as of October 11, 2013. In any case, it is safe to say Cannell’s stake in the company is now worth, well, only crumbs. Sorry, couldn’t resist!

John Lykouretzos’ Hoplite Capital Management disclosed that it owns 8.5 percent of Sinclair Broadcast Group. The New York–based firm, founded by a former Tiger Management analyst, indicated in a regulatory filing that the investment is passive. Hoplite had more than $3.6 billion in equities at the end of the first quarter.

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