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The Realities of Prosecuting Rajat Gupta – No Proof, No Profit

Rajat Gupta surrendered to the FBI over insider trading charges Wednesday morning. A grand jury charged Gupta with five counts of securities fraud and one count of conspiracy to commit the same. The alleged crimes were to have been conducted for the benefit of Raj Rajaratnam, the insider trader recently sentenced to 11 years.

Raj Rajaratnam listening to tip

Rajat Gupta’s Case is Not Open and Shut

Rajat Gupta’s case is different than Raj Rajaratnam’s and will present different challenges for the prosecution explains the New York Times. Most notably, “Wiretaps of Mr. Rajaratnam played a key role in his own conviction, but whether they will be admissible in court against Mr. Gupta, a former Goldman Sachs director, will be a key point that could tip the balance of the case.” Further, Gupta is being accused of providing insider trading tips to Rajaratnam – not of committing insider trading himself. Even if prosecutors are permitted to use the wire taps, they would then have to prove two vital things – that Gupta expected Rajaratnam to profit from the information and that he received some benefit from doing so. According to teh New York Times, “Simply telling someone confidential information is not a violation of the securities laws until the government proves it was done as part of a quid pro quo arrangement.”

Rajat Gupta did not Profit

Allowing for a minute that Rajat Gupta did provide Raj Rajaratnam with the information as alleged (after all, in spite of Rajaratnam’s case, this issue remains to be established), the prosecution would have to demonstrate how Gupta profited. The Atlantic explains, “insider trading cases usually require proving that the insider who delivered the information did so for some gain.  That gain doesn’t have to be immediate, or in cash, but it does have to be something that you can point to and say ‘That’s what he got out of it’. ‘Rajaratnam’s goodwill’ is slightly more nebulous than I believe usually goes to trial.  And that’s not just because you have to spend hours in court arguing about whether this is actually valuable.  It’s also because without a gain, there’s less in the way of a paper trail.”

In order to convict Gupta, assuming no “paper trail” is discovered, the prosecution wil have to prove that building friendships by sharing confidential information is a crime, which the Atlantic notes, “It will be very interesting if they get a jury to agree that building one’s friendships is a tangible enough gain to constitute insider trading–interesting most of all because these laws are ultimately enforced by Washington.  And Washington is a city built almost entirely on relationships that are fostered by a robust trade in confidential secrets.  As with the alleged crimes of Gupta, it’s almost never done with a crass quid pro quo.  Instead, one builds a long-term partnership for mutual gain, with the accounting done only obliquely.”