New York, NY – Last Friday, Rajat Gupta, former head of McKinsey & Co. and a former director at Goldman Sachs and Proctor & Gamble Co., was convicted on four of the six criminal counts brought against him for passing along material nonpublic information gathered from boardroom discussions to Galleon Group’s Raj Rajaratnam – earning the hedge fund manager millions of dollars in illicit trading profits.
Seemingly Straightforward Guilty Verdict
After less than 10 hours of deliberations, a federal jury found Mr. Gupta guilty on three counts of securities fraud and one count of conspiracy for passing along confidential boardroom information about Goldman Sachs to Mr. Rajaratnam, who then traded on these tips. Mr. Gupta was acquitted of two counts of securities fraud, including the only one relating to Proctor & Gamble.
Mr. Gupta was originally implicated in the Galleon case more than a year ago. However, since then, he has consistently denied the charges. His lawyers said Rajaratnam cheated Gupta out of $10 million and the two men had a falling out in 2008. They argued that prosecutors “had no real, hard, direct evidence” against Gupta.
No Issue with Circumstantial Evidence
Much of the prosecution’s evidence against Mr. Gupta was circumstantial, including phone records that showed that he called Mr. Rajaratnam a number of times immediately after receiving confidential information from Goldman Sachs’ board meetings. Rajaratnam then directed his traders at Galleon Group to trade on the inside information he received.
It is interesting to note that the Gupta case relied primarily on circumstantial evidence, unlike the recent insider trading cases brought by federal prosecutors which have focused on the use of wiretaps. In fact, since 2009 federal authorities in New York have used wiretapped phone calls to obtain 62 convictions and guilty pleas out of a total of 68 people who were charged with insider trading. Before 2009, federal insider trading cases relied primarily on circumstantial evidence, like in the Gupta case.
Preet Bharara, the U.S. attorney in Manhattan explained the guilty verdict, “Violating clear and sacrosanct duties of confidentiality, Mr. Gupta illegally provided a virtual open line into the board room for his benefactor and business partner, Raj Rajaratnam.”
Gary Naftalis, Mr. Gupta’s lawyer, said that Gupta plans to ask U.S. District Judge Jed Rakoff to set aside the verdict and will appeal if he allows the verdict to stand.
Sentencing Yet To Come
A tentative sentencing date of October 18 has been set by Judge Jed Rakoff. The maximum sentence for securities fraud is 20 years and the maximum sentence for conspiracy is five years, although many experts think it unlikely that Gupta would receive the maximum sentence of 25 years.
However, recent insider trading sentences have been severe. Rajaratnam, was convicted of 14 counts of securities fraud and conspiracy last year and is serving an 11-year prison term. In early June, a New Jersey federal court handed down a 12-year sentence – the longest ever for insider trading – to former corporate lawyer Matthew Kluger, who provided insider tips in a scheme that lasted over 17 years and netted more than $20 million in profits.
Some argue that the success of the prosecutions’ case against Mr. Gupta using circumstantial evidence may embolden federal prosecutors to bring other insider trading cases in which they don’t have the “smoking gun” of wiretapped phone conversations between the tipper and tippee.
However, as a result of the US government’s ongoing investigation into insider trading, it purportedly has already gathered information on at least 50 hedge funds through 300 hours of wiretaps containing conversations with some 250 consultants or experts. This should provide enough evidence to bring a large number of insider trading cases for some time to come.