Gupta Win Strengthens DOJ's Hand In Insider Trading Cases
In convicting former Goldman Sachs Group Inc. director Rajat Gupta of insider trading on Friday, federal prosecutors proved they could ensnare Wall Street’s top brass even without their best evidence, a feat that may make defendants in other securities fraud cases less likely to take their chances at trial, experts say.
Prosecutors from the U.S. Attorney’s Office for the Southern District of New York convinced a jury that Gupta passed confidential information from corporate board meetings to his friend Raj Rajaratnam, the now-imprisoned hedge fund founder at the center of the government’s two-year crackdown on insider trading. And they did so with mostly circumstantial evidence, not the direct and damning wiretap recordings they used against Rajaratnam.
“It was a tough case and to win on these facts means the U.S. Attorney’s Office is going to be even tougher in plea negotiations in future insider trading cases,” Henry Asbill ofJones Day said. “They’re going to be feeling confident about their ability to win these cases when they go to trial.”
U.S. Attorney Preet Bharara and his team of prosecutors were no doubt already a confident bunch, but the conviction of Gupta, a former head of the esteemed McKinsey & Co. consultancy, gives them a new feather in their increasingly crowded cap, attorneys said.
“He was a really prominent figure on Wall Street and now he has been convicted of insider trading,” said Peter J. Toren of Weisbrod Matteis & Copley PLLC, a former federal prosecutor. “It shows nobody is safe from prosecution.”
Since October 2009, when they first began bringing cases against defendants as part of their insider trading probe, Bharara and his prosecutors have charged 68 defendants and netted 62 convictions, a stunning success rate that will further intimidate other defendants into dealing with the government rather than risking a trial, experts said.
“They’re going after the bigger fish and they don’t get too much bigger than Mr. Gupta,” said Ken Springer, a former FBI agent and founder of financial investigations firm Corporate Resolutions Inc. “It’s going to send a message that the government is serious about insider trading and that you have to play by the rules.”
Gupta’s case was viewed by many as the most difficult of the insider trading prosecutions to prove. Compared with the Rajaratnam case, in which prosecutors had a treasure trove of wiretap recordings with the defendant’s voice on them talking about illegal trades, the evidence amassed against Gupta was less overwhelming.
Prosecutors relied heavily on tying phone calls from Gupta’s numbers to Rajaratnam to big trades at Galleon Group LLC, Rajaratnam’s hedge fund. The evidence showed, for example, that Gupta-linked phones called Rajaratnam within minutes after Gupta hung up on Goldman board calls, and that Rajaratnam’s Goldman positions quickly underwent major swings, they said.
Gupta, who did not testify at trial, is not mentioned by name in wiretaps where Rajaratnam boasts about having an insider at Goldman, but prosecutors argued that all the circumstantial evidence showed clearly that the mystery source must have been Gupta.
To ignore all the circumstantial evidence against Gupta, Assistant U.S. Attorney Reed Brodsky argued in his closing arguments, one would have to believe that Gupta was “one of the unluckiest men in the world” — so unlucky that he accidentally found himself in incriminating circumstances again and again.
The jurors apparently agreed, taking just more than one day to find Gupta guilty on three of the five substantive securities fraud counts, as well as a count of conspiracy to commit securities fraud.
“Despite the burden of proof resting on the government, the jury really wanted to hear an explanation as to what those conversations were about,” said Matthew L. Levine, a New York white collar defense attorney and former federal prosecutor. “Because they had nothing else to debate over, the power of the pattern of the calls and the trades and the calls and trades became too much to ignore.”
Rajaratnam was found guilty in May 2011 and is now serving an 11-year sentence. At the time of his conviction, he was the government’s prized win. Gupta, who faces a theoretical maximum sentence of 65 years in prison, is its new trophy, attorneys said.
“For the U.S. Attorney’s Office, they can now take a very strong position in these cases even when they don’t have the wiretaps,” Dorsey & Whitney LLP partner Tom Gorman said. “A lot of times the defense can point to a case and say you have real proof difficulties here. But the answer now is going to be we’ve proved these types of cases. Look at Gupta.”