The most precious commodity on Wall Street is information, and savvy players will do almost anything for it.

Some investment funds canvass doctors to scout out blockbuster drugs. Others pay meteorologists to forecast weather that will affect the price of oil and wheat. And still others hire corporate executives to provide an inside view of companies and industries.

But now some of Wall Street’s biggest hedge funds are watching nervously as prosecutors allege that Raj Rajaratnam, a billionaire fund manager, went too far in this relentless quest for a trading edge.

On Friday, federal prosecutors charged Rajaratnam and five other people with insider trading — using information that they received illegally in an effort to make riskless profits on stocks. Prosecutors have said they are still investigating the case, and some defence lawyers who are not representing people already facing charges said on Monday that they could not comment on the record because they may be retained soon. Insider trading, however, can be difficult to prove, said Leslie R. Caldwell, the co-chief of the white-collar crime division at the law firm Morgan, Lewis & Bockius. The line between buying legitimate research, trading rumours and gossip, and illegally paying for market-moving information can be complicated.

“There are some obvious insider trading cases where people obviously have a duty, they’re obviously misappropriating information,” said Caldwell, the former chief of the task force that prosecuted the Enron cases. “In terms of money managers and other people, where the duty becomes a little less clear, the relationships become a little less clear, the motivations become a little less clear, it can become more and more challenging.”

The case against Rajaratnam and his co-defendants appears to be far more complicated than a simple exchange of cash for information. A close reading of the two criminal complaints filed so far, and an associated civil complaint filed by the Securities and Exchange Commission, suggests a web in which hedge fund managers, analysts, corporate executives, and consultants and other people outside Wall Street traded tips — sometimes for money, sometimes for other tips, and sometimes for little more than the promise of unspecified future favours.

Not every trade that the complaint outlines was profitable. In fact, Rajaratnam’s hedge fund, the Galleon Group, lost millions of dollars buying shares of Advanced Micro Devices, the computer chip maker, after learning that the government of Abu Dhabi planned to invest in AMD, according to the complaint. The investment did occur, but AMD stock plunged between August 2008, when Galleon began buying, and October 2008, when the deal was announced.

At other times, Rajaratnam received information from an unnamed witness who is cooperating with the government investigation. But the complaint does not state whether Rajaratnam knew the ultimate sources of the information he received from the witness. Nor does it allege that Rajaratnam paid the witness for the information.

Still, the existence of a cooperating witness — along with the fact that prosecutors wiretapped some of Rajaratnam’s conversations — gives them a great advantage in the case, said David S. Ruder, a law professor at Northwestern University and a former chairman of the SEC. The conversations may help show that Rajaratnam knew the information was valuable and that he should not be trading on it, Ruder said. “It gets you around the mens rea, or state of mind question,” he said. “If you know it’s coming from an insider, or if you have strong reason to believe it’s coming from an insider, you’re in trouble.”

The SEC has tried to combat insider trading for decades, relying mainly on tips and reports of suspicious trading in a single stock. Two years ago, the commission began to install sophisticated data-mining software that examines trading records, looking for patterns of trades across stocks that appear suspiciously profitable.

Unlike the inquiries conducted by stock markets like the New York Stock Exchange, which focus on individual stocks, the SEC’s programme aims to identify traders who pop up repeatedly, making surprisingly successful trades in many companies.

The SEC has identified some insider trading cases through this project, but the investigation of Rajaratnam was not one of them.

Federal securities laws put limits on the race for information. Corporate executives are not allowed to give investors market-moving tips about their companies. Companies must disclose critical news, like quarterly earnings, to everyone at the same time. Investors who try to lock in guaranteed profits by, say, paying to see a news release an hour before a company posts it are engaging in illegal “insider trading.”

Those are the laws that prosecutors alleged on Friday were broken by Rajaratnam, and five other investors and corporate executives. — © 2009 The New York Times News Service

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