Federal prosecutors suffered the first defeat in their half-decade-long crackdown on insider trading Tuesday with the acquittal of Raj Rajaratnam's younger brother, a bracing reversal after a string of 81 convictions.

The loss in some ways represented prosecutors' efforts coming full-circle: The original investigation into Rengan Rajaratnam's trading years ago kick-started a probe into his older sibling that ultimately uncovered a network of hedge-fund managers and analysts sharing confidential tips and produced convictions that shook Wall Street.

It took a federal jury less than four hours to find Rengan Rajaratnam, 43 years old, not guilty of taking part in that conspiracy. The acquittal followed a rebuke of parts of the government's case by the judge who presided over the three-week trial, and comes as an appeals court is weighing a decision in a separate case that could raise the bar for prosecutors pursuing such crimes.

Only 10 cases have gone to trial in the insider-trading crackdown, and Mr. Rajaratnam's was the first acquittal. "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," U.S. Attorney Preet Bharara said in a statement.

Until Tuesday, the office had enjoyed an untarnished winning streak that secured convictions for 81 of the 88 people charged, mostly through guilty pleas. The other cases are still pending. The string of victories has burnished the career of Mr. Bharara, dubbed by some as the "sheriff of Wall Street."