Have the feds claimed that your client made a bundle through insider trading? A client of mine was recently acquitted of that charge. What's to be learned? Insider trading cases can be difficult to defend. They are largely built on circumstantial evidence and inferences, derived from a relatively simple scenario.

Your client — who knows a corporate insider — has purchased stock just days before the announcement of favorable news about the insider's company, or has sold stock in the insider's company before the announcement of bad news. The cleint has made a substantial amount of money or avoided a substantial loss. The prosecutors will argue that these facts do not demonstrate luck but are compelling evidence of guilt. If other friends and relatives of the same insider also traded, the circumstantial evidence becomes overwhelming.

It also increases the odds that the government will immunize one of the tippees. Thus, the government will add to its circumstantial case direct testimony by someone, who will say that he or she received the tip in a furtive conversation with the insider. From this, the prosecutor will ask the jury to conclude that all the other people — who traded and knew the insider — received their tip in the same way.

The evidence demonstrates that the tipper and tippee knew each other, that they communicated, and that the client traded just before the announcement making a large sum of money. To compound matters, other co-conspirators traded in the same pattern as the client.

How do you extract a client from such an insurmountable predicament? While there is no one answer to this question, experience from acquittals in insider trading cases can serve as a model for constructing a winning defense. Those experiences show that defense counsel must do more than simply rebut the government's evidence and impeach its witnesses. It must tell its own story — which is equally plausible to that of the prosecution — in order to create reasonable doubt in the mind of the jury.

The single most limiting factor in constructing and presenting a compelling defense is often the client's interview or investigative testimony before the Securities and Exchange Commission. This limits the story defense counsel can tell because the client will have constructed the story for counsel.

Therefore, these interviews and testimony should be and can be avoided through invocation of the Fifth Amendment. Just think how different the outcome would have been for Martha Stewart if she had invoked the Fifth Amendment.

Assuming you are not cabined by your client's previously told story, at a criminal trial you will have the flexibility to propose an equally compelling story to offset the government's. This is not to say that you, as counsel for the defense, will fabricate a story and feed it to the client to be repeated to the jury. That would be unethical.

But, in most criminal cases, your client will not testify, and, in that case, you are entitled to propose alternate explanations to the government's version of the facts. Moreover, even if your client decides to testify, your diligent reconstruction of events may well refresh his recollection about important matters.

When someone is called on the phone months or years after the events by SEC staff, it is not uncommon for them to forget critical details. The job of a lawyer is to remind the client of those details consistent with the client telling the truth on the stand.

In presenting an insider-trading defense, counsel must first convince the jury that the government's circumstantial evidence is not evidence at all, but mere ambiguous circumstances from which the government asks the jury to hypothesize as to what might have occurred. In essence, counsel should open to the jury by arguing that the government is asking the jury to engage in rank conjecture, rather than draw legitimate inferences.

The jury must be continually reminded that it cannot convict based on speculation or guilt by association. Just because an insider and a friend spoke and the friend traded, does not mean a violation of the law has occurred. People have a right to speak to each other, and that conversation must be placed in the context of all the other evidence in the case.

Second, defense counsel must present an alternate theory explaining all of the government's facts. Every successful case must have an overarching theme that is presented to the jury in the opening, reinforcing in cross-examination, and hammered home in closing. In an insider-trading case, the overall theme is that there is a rational alternate explanation for the government's circumstantial evidence. In other words, confront the weaknesses in your own case and turn those weaknesses to the client's advantage. How do you do that?

The first weakness to be confronted is why did the client trade this particular stock out of tens of thousands of stocks traded on the U.S. markets? At first blush, the answer may seem counterintuitive, but normally, the best explanation is to concede that your client heard of the company from his friend, or became interested in the company because of his friend's connection with it.

It is often this question that trips up clients in initial interviews with SEC staff. They will deny that they ever spoke to the insider about the stock, often not because they received a tip, but, because the client thinks the SEC will assume he or she received a tip, if familiarity with the insider or contact with the insider is conceded.

Denying knowledge of the insider's role in the company or contact with the insider simply will not be believed by the jury, and making this admission is not a concession of guilt if coupled with the argument that hearing about a company and trading on inside information are two different things.

It is natural to invest in companies whose management the trader personally knows and trusts and has confidence in. Would you invest with a complete stranger or with an old and trusted friend? The relationship between the parties will explain why the client became interested in this particular company out of all those listed in The Wall Street Journal.

It is not unusual for old friends to talk about their common interests or even to discuss the company's business or its prospects. A great deal of information is disclosed about public companies every day, which causes people to buy and sell. That information is in the public domain, and an insider who shares such information with friends does not violate any law.

Indeed, it is not unusual for directors to talk about the companies on whose boards they serve, any more than it is unusual for two friends to talk about their jobs while playing golf. Indeed, it is entirely normal. In fact, management of a corporation often talk about their companies to the press and analysts.

Having such a conversation with a friend is not abnormal or unusual. In a recent insider-trading acquittal, the evidence showed that a director of a corporation had conversed with a friend about the prospects for a company before he had any inside information.

The information he shared was publicly available in annual and quarterly reports and showed that the company had a consistent pattern of growth. Also, the evidence showed that the same director had made public statements about his belief that the stock was trading at a discount and was posed to experience dramatic growth in the future.

In any takeover situation, these same facts will probably apply; after all, the acquirer is purchasing the target because the target is undervalued and believes the takeover candidate is posed for growth. The acquirer is doing no more than recognizing an arbitrage opportunity that with some analysis is also disclosed in the publicly available information.

Once having established how your client became interested in the corporation, the next hurdle will be to explain to the jury why your client traded the stock just before the newsworthy public announcement. Here, it is essential to have a rational explanation showing that the publicly available information made this stock pick a "buy."

What do the annual reports reveal? What do news stories and analyst reports show? For example, if the financials show a pattern of growth and payments of dividends, it will go a long way toward explaining the investment. Such evidence is crucial to a client's defense. The Internet should be reviewed for details for chat room stories recommending the stock and predicting that it will go up. In a recent acquittal, the evidence showed that analysts were predicting the price of the stock would double within a year and there were rumors of an acquisition.

You will then have to justify the size of the investment. To do this, you will have to show that your client could afford the risk he undertook and that he or she had traded in a like manner in the past.

If your client purchased on margin, you will have to explain this to the jury. One way to do that is to argue that it is actually cost effective to buy on margin, rather than sell stocks with a potential for appreciation held in your client's portfolio.

In other words, it makes little sense to sell stocks that your client owns, which have the potential to increase in value, in order to buy the stock at issue in the insider trading case, when the client could hold those stocks and benefit from a future increase in their value, yet still buy the subject stock on margin. To put it another way, if you anticipate that the stocks in your portfolio might increase 10 percent in value, it makes no sense to sell these stocks to buy the stock at issue in the insider-trading case, if you will be paying margin interest of less than 10 percent to buy the subject company.

In a recent acquittal, the alleged tippee showed that while he had never before taken such a large position in a single stock, he had experience trading securities, and that favorable news and the analysts' predictions that the stock would double in a year motivated this large purchase on margin. Since his other holdings had dropped in value, he would have had to liquidate at a loss to establish a position in the subject company. While the government will argue that margin is risky, in fact it is not, because you can limit your risk by selling the stock and paying off the margin debt, if the subject stock does not perform as expected.

Finally, you will have to explain why the client bought just before the merger announcement. Again, defense counsel must show that the information in the marketplace signaled a "buy" at that particular time. In a recent acquittal, the defense showed that the defendant bought a stock just before a merger because of just such a signal.

An analysis of the subject company's price and volume data over the course of a two-year period showed that it generally traded up on volume one week before an earning's announcement was released. Over those two years, the company had reported increasing sales from quarter to quarter, and the market anti-cipated that growth by bidding up the price of the stock just before earnings were released.

This indicated that the market anticipated and traded in advance of earnings reports issued by the company. Consequently, the most opportune time to accumulate a large position in the company's stock was just before the end of the subject company's quarter. If the market reacted as it had over the last two years, and advanced just before the end of a quarter on expectations of improving earnings, one would expect a significant short-term increase in the price of the stock at that time.

In any event, even if the stock did not anticipate increased sales volumes at the end of the quarter and rise in the short term, significant long-term gain could still be achieved, based on the conclusions of the analysts whose recommendations indicated that the stock was seriously undervalued and would almost double in price within a year.

The defense outlined above can be bolstered by an expert's testimony. In the 1980s, the SEC conducted a study of insider trading and concluded that it is normal for friends and relatives of an insider to trade the stock of corporations with which such insiders were associated.

The study found that such trading occurs for reasons other than trading on inside information, that is, friends and relatives of insiders have a natural tendency to trade in the stock of corporations where they knew someone associated with management or the board of directors. It also found it was not unusual that such trading occurs immediately before a material corporate event.

The fact is that friends and relatives often observe an insider's behavior and can sometimes conclude that a material event is about to occur at the insider's corporation without the insider tipping them. This phenomenon is known as "leakage." It is not illegal to trade based on such observations. In fact, an arbitrageur in New York actually paid NYU MBA candidates to follow T. Boone Pickens around in the 1980s to ascertain what his next takeover candidate might be by piecing together where he was traveling and with whom he was meeting.

Thus, the key to a successful defense is an alternative theory as to why and when the client traded. Defense counsel must explain how the client learned about the information, and why he traded that stock when he did. Counsel must show the jury that the client did precisely what you would expect any investor to do in a capitalistic society. He analyzed the market and placed a bet. There is nothing illegal about that! Ultimately, an alternative explanation of your client's actions must be at least as plausible as the government's theory that the client must have traded on inside information.

Perhaps the hardest piece of evidence will be the fact that in the same period of time, other individuals who were close to the insider also traded. The government will argue that it was no coincidence that several friends and relatives traded at precisely the same moment. Therefore, the jury can infer that the client was tipped, if it finds others were tipped by the insider.

In order to blunt this argument, defense counsel must constantly remind the jury that each of the defendants has to be judged based on the evidence offered against him or her and that a jury cannot convict based on mere guilt by association. This must be a consistent theme throughout the case, and it must begin at the very outset of the case.

In a case involving multiple tippees, defense counsel will want to argue in a motion to dismiss the indictment that the government's decision to charge multiple conspiracies in one single conspiracy count is prejudicial, because it allows the jury to draw the assumption that if the tipper told one tippee about the inside information, he must have told all the tippees. This, however, violates the Supreme Court's holding in Kotteakos v. United States , 328 U.S. 750, 755 (1946).

In Kotteakos, Brown, the president of a lumber company, who had experience in applying for loans under the National Housing Act, used his expertise to assist others in acquiring loans. Essentially, each alleged co-conspirator worked individually with Brown to make a false application for a loan.

The Supreme Court found that multiple conspiracies existed because there was no connection shown between the co-conspirators other than Brown, who had been instrumental in each instance in obtaining the loan. The other defendants did not have any relationship with each other, other than Brown's connection with each transaction. The court concluded that each of the defendants constituted separate spokes, which met in a common center — Brown — but that there was no rim that enclosed the spokes.

Charging such multiple conspiracies in one count was highly prejudicial, the court believed, because of the possibility of conviction based on mere guilt by association.

In the normal insider-trading case in which multiple defendants are consecutively tipped by a common tipper, the conspiracy is a Kotteakos or "wheel" conspiracy. The tipper is at the center and each of the tippees is a spoke. In order for each of the tippees to be charged in the same conspiracy, each of the tippees must have some knowledge or foresight that the tipper tipped multiple individuals. In other words, each of the tippees must have knowledge or foresight of the conspiracy's broader scope and its multiple objectives.

In the words of the Supreme Court, such knowledge provides a "rim" to the wheel and with a "rim" a wheel conspiracy charged in a single count is permissible. Without proof of knowledge by the tippees that the tipper tipped multiple individuals, a "wheel" conspiracy is prejudicial.

In cases of consecutive tips, there will normally be no evidence that each of the tippees knew of the other's trading or that the tipper had tipped others. This theme must be repeated throughout the trial, like a drum beat. Although each defendant is alleged to have obtained information from a common tipper in the conspiracy count, and each proceeded to buy the company's shares before the pertinent disclosure, there is no proof that any defendant knew anyone else who possessed the same information.

If this is the case, it allows the defense to argue to the jury that the government's single conspiracy charge is on its face preposterous and should be disregarded in favor of judging each defendant on the facts relevant to him or her.

It is important to distinguish the difference between a "chain" conspiracy and a "wheel" conspiracy — the two prominent conspiracy theories in criminal law. In a "chain" conspiracy, even though an individual participant may be unaware of the other conspirator's conduct, if he is on notice that he is joining a larger conspiracy by virtue of the nature of the business or the transaction, he may be charged with participating in a single conspiracy. You normally have a "chain" conspiracy in an insider-trading case only when the information flows from tipper to tippee to sub-tippees. There is a succession of tips from one person to another as the tip is distributed from the single source. Each sub-tippee realizes that he is a participant in a joint venture, even if he does not know the identities of the many participants above him.

If the case does not involve sub-tippees, but the distribution of information from a central source to different tippees, then it is a "wheel" conspiracy.

The "wheel" conspiracy theme helps focus the jury on the facts relevant to each defendant and continually reminds the jurors that they must determine guilt or innocence based on the evidence with respect to each individual tippee and not on any spillover effect. It is essential to maintain this focus since the government clearly will try to convict based on the fact that others have been tipped and traded at exactly the same point in time as your client.

In other words, the government will argue that even in the absence of any contact between your client and the tipper, during the period that the alleged tipper had the inside information, the jury can convict based on an amorphous conspiracy theory that allows conviction based on guilt by association. The government will hope that the jury will ignore crucial and dispositive flaws in the government's case, and find instead that if the tipper gave information to others, he must have given it to your client.

In conclusion, ambiguous circumstances and trading may often be transformed by the prosecution into circumstantial evidence of insider trading. The job of defense counsel is to take those same circumstances and present the jury with an equally plausible and believable story consistent with innocence.