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Rajaratnam’s Brother Arraigned

The younger brother of hedge-fund manager Raj Rajaratnam pleaded not guilty to insider-trading charges in federal court in Manhattan after he was arrested over the weekend when he returned to the U.S. from Brazil.

Rengan Rajaratnam, the younger brother of imprisoned hedge fund manager Raj Rajaratnam, departs Manhattan Federal Court in New York on Monday after pleading not guilty to insider-trading charges.

The seven criminal charges against Rengan Rajaratnam come nearly two years after his older brother was convicted of conspiracy and securities-fraud charges for making improper trades based on inside information. The conspiracy and securities-fraud charges against Rengan Rajaratnam relate to insider-trading allegations that first emerged at his brother’s trial in 2011.

“Mr. Rajaratnam, how do you plead?” U.S. District Judge Naomi Reice Buchwald said.

“Not guilty, your honor,” Rengan Rajaratnam said.

Dressed in a black suit jacket and bluejeans, the younger Mr. Rajaratnam sat calmly and answered the judge’s questions during the hearing on Monday.

Mr. Rajaratnam was released on a $1 million personal recognizance bond. A native of Sri Lanka and a U.S. citizen, he surrendered his passport as part of his bail conditions.

On Sunday at about 6:30 a.m., Mr. Rajaratnam, 42 years old, was arrested by Federal Bureau of Investigation agents at New York’s John F. Kennedy International Airport after returning to the U.S. on American Airlines Flight 974 from Brazil, an FBI spokesman said.

The younger brother voluntarily surrendered to FBI agents in Brazil and was accompanied by them to the U.S., the spokesman said. He has been living and working in Brazil for the past year, his lawyers said.

Rengan Rajaratnam’s lawyers said in a statement their client denies the charges and looks forward to clearing his name. “We are confident that Mr. Rajaratnam will be vindicated upon careful consideration of all the evidence,” said Vinoo P. Varghese and David C. Tobin.

Mr. Varghese said his client reached out to U.S. authorities and sought to return as soon as he could after learning of the indictment against him but was unable to fly until Saturday night.

“Mr. Rajaratnam literally dropped everything in his life in Brazil,” Mr. Varghese said.

During the hearing, the judge indicated that she might have a potential conflict in overseeing the case: Her husband, a criminal defense attorney, represented Danielle Chiesi, a former co-defendant of Raj Rajaratnam who pleaded guilty to criminal charges in the matter.

Assistant U.S. Attorney David Massey said he expected some secretly recorded phone calls between Ms. Chiesi and Raj Rajaratnam to be played at trial, namely the pair exchanging nonpublic information that allegedly was shared with his younger brother. However, Mr. Massey said the government doesn’t anticipate calling as a witness Ms. Chiesi, who is serving a 2½-year prison sentence.

The judge, after hearing the extent of Ms. Chiesi’s connection to the latest case, decided she didn’t need to step aside.

In last week’s indictment, prosecutors alleged that the brothers conspired to make improper trades based on nonpublic information about investments in wireless-broadband firm Clearwire Corp. and chip maker Advanced Micro Devices Inc. in 2008, amassing a total of $1.2 million in illegal profits.

Rengan Rajaratnam left his brother’s fund, Galleon Group, in 2003 and joined Steven A. Cohen’s SAC Capital Advisors LP as an analyst. He formed his own fund, Sedna Capital Management, in 2004, but returned to his brother’s fund in 2007 after the SEC began investigating Sedna, which counted his brother as an investor.

Raj Rajaratnam was deposed in the Sedna probe, and Galleon was ultimately drawn into the investigation. Raj Rajaratnam blames Rengan for his woes, people close to Raj Rajaratnam say. Raj Rajaratnam was sentenced to 11 years in prison in 2011, one of the longest sentences ever imposed for insider trading.

In a separate civil lawsuit filed last week, the Securities and Exchange Commission accused Rengan Rajaratnam of making improper trades in AMD, Clearwire and several other stocks from January 2006 to August 2008, including Polycom Inc., Hilton Hotels Corp. and Akamai Technologies Inc.