Rajat K Gupta’s conviction on four of six counts shows that federal prosecutors can still win an insider trading case based largely on circumstantial evidence.
In the end, it appears that the jury was quite persuaded by wiretaps. For the two charges that he was acquitted on, the government did not present overheard conversations of Raj Rajaratnam describing his source of inside information.
The jury convicted Gupta on tips he made to Rajaratnam in September and October 2008, about developments at Goldman. Prosecutors had wiretaps of Rajaratnam describing his source on Goldman’s board, which pointed a finger directly at Gupta.
The sentence
With sentencing scheduled for October 16, the focus of the case will now shift to his punishment as well as the potential issues his defense lawyers may introduce on appeal.
In recommending prison terms for insider trading, the federal sentencing guidelines for insider focus primarily on the financial gains made by a defendant.
Gupta did not personally trade in Goldman Sachs or Procter & Gamble shares based on the inside information he received. But by tipping off Rajaratnam, he is responsible for the transactions conducted through Galleon Group based on the information he provided.
By convicting Gupta of conspiracy, prosecutors will most likely argue that he is responsible for all trading cited in the indictment — which was estimated at trial to have generated for Galleon over $16 million in gains or in losses avoided. Prosecutors will also seek to add on to the sentence by arguing that Gupta “abused a position of trust” by leaking information while serving as a director of Goldman and P&G.
Based on these two issues, the sentencing guidelines recommend a sentence of eight to ten years. Gupta will argue for a much lower sentence, claiming that the acquittal on two counts should mean that any trading gains from transactions related to those charges should be excluded from the sentencing calculation. He is also likely to argue that Rajaratnam himself made the decision on how much to invest, and so the amount of the gain overstates the harm from the insider tips.
But even based solely on the 2008 Goldman trades in which he was convicted of tipping Rajaratnam, the sentencing guidelines range would still dictate six to eight years in prison.
Gupta is likely to claim that other factors should be taken into consideration — his strong reputation in the business world and extensive charitable efforts — to argue for a much lower sentence, perhaps even home confinement.
Judge Jed S Rakoff of the Federal District Court in Manhattan will determine the sentence, and he has shown some hostility toward the sentencing guidelines in a previous securities fraud case. So he may be persuaded to impose a lower prison term than the government wants.
In United States vs Adelson, an accounting fraud case, the guidelines calculation called for a life sentence for a company’s former president who had helped cover up an accounting fraud. But Judge Rakoff rejected such a severe punishment, describing “the utter travesty of justice that sometimes results from the guidelines’ fetish with abstract arithmetic, as well as the harm that guideline calculations can visit on human beings if not cabined by common sense.”
You can be sure that Gupta’s defense team will include the Adelson opinion prominently in its sentencing arguments. And prosecutors naturally will do their best to explain why insider trading is different.
In 2009, Judge Rakoff sentenced the lawyer Marc Dreier to 20 years in prison for leading a scheme that defrauded investors of nearly $700 million, rejecting the government’s recommendation of a 145-year prison sentence.
At the sentencing, Judge Rakoff said that “Dreier is not going to get much sympathy from this court, but he is not Madoff from any analysis, and that’s why I can’t understand why the government is asking for 145 years.” As a result, prosecutors are likely to temper their sentencing recommendation, and will have to defend their interpretation if they want the court to impose a stiff sentence.
The wiretaps
Although the prosecution of Gupta did not involve extensive wiretap evidence, it is clear that the three recordings played by prosecutors were crucial in securing convictions.
Rajaratnam’s reference to his source on Goldman’s board appeared to provide a substantial boost to a case that otherwise relied on telephone records showing extensive contacts from which the jury needed to infer that Gupta was a tipper.
Rajaratnam himself is appealing his convictions before the United States Court of Appeals for the Second Circuit in Manhattan, and the decision in that case could have a substantial impact on Gupta’s convictions. Rajaratnam’s briefs focus almost exclusively on whether the government acted improperly in seeking authority under the Wiretap Act to record his telephone conversations.
If the Second Circuit agrees, then it is most likely that Gupta’s convictions would also have to be reversed because the wiretap evidence played a significant role in his case. Although the defense called witnesses to testify about a falling out between the two men, Gupta will now be rooting for his erstwhile friend to succeed.
Other Issues on Appeal Because the government’s case against Gupta relied on much more circumstantial evidence than Rajaratnam’s, the defense will also probably partly base any appeal on some decisions by Judge Rakoff on what could and could not be introduced as evidence.
One is Judge Rakoff’s ruling that prevented the defense from playing wiretap recordings of Rajaratnam speaking with David Loeb, an executive at Goldman, to argue that Loeb may have been the source of the inside information. The jury convicted Gupta based on tips in September and October 2008, so the defense will argue that evidence of another potential tipper was all the more important. The defense is likely to challenge other rulings by Judge Rakoff to argue that, taken together, the errors were sufficient to require a new trial.
The defense can also claim that there was insufficient evidence to convict Gupta, but that is a difficult argument to win on appeal. Unlike at trial when the defendant is presumed innocent, after a guilty verdict the appellate court views all of the evidence in favour of the jury’s decision. That means any close calls go in favour of affirming, rather than overturning, the conviction.
