BREAKINGVIEWS - Prosecutors gain early edge in Rajat Gupta trial

Rajat Gupta, a former Goldman Sachs Group Inc. and Procter & Gamble board member, arrives at the Manhattan Federal Court in New York May 22, 2012.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Reynolds Holding

NEW YORK (Reuters Breakingviews) - U.S. prosecutors have gained an early edge in Rajat Gupta's insider-trading trial. Judge Jed Rakoff largely adopted their version of a preliminary jury instruction a week after allowing them to introduce wiretap evidence. The former McKinsey & Co. boss and Goldman Sachs (GS.N) director hasn't put on his defence yet. But he'll need some breaks soon if he's going to beat the insider trading rap.

A difficult case for the government got a lot easier when Rakoff said last week he would probably permit jurors to hear recordings of jailed insider-trader Raj Rajaratnam bragging about confidential tips from a Goldman friend, allegedly Gupta. And after just two days of testimony, the mini-winning streak continued with the jury instruction.

It was just a summary of the charges, something Rakoff typically provides to guide jurors as they hear evidence. But some defence attorneys argue that such summaries oversimplify cases, encouraging jurors to find guilt without proof of each element of a crime. And by adopting much of the prosecution's suggested language in this case, Rakoff put Gupta in an early hole.

A big issue, for instance, is whether Gupta received any benefit from passing information to Rajaratnam, an essential requirement for an insider-trading conviction. The defence wanted "benefit" defined as "personal benefit," believing the government can't prove Gupta directly gained anything from speaking with Rajaratnam. But prosecutors pushed for "some kind of benefit, directly or indirectly, however modest," hoping to make a conviction easier. Rakoff went with "at least some modest benefit," basically the prosecution's version.

That the two sides couldn't even agree on the meaning of "benefit" highlights a more fundamental problem with the law against insider trading. Many situations, like the trading indiscretions of Berkshire Hathaway's (BRKa.N) David Sokol, also turn on rubbery legal concepts with gray areas. Such a lack of clarity makes compliance with the law too difficult-and prosecutions under it too easy.

Gupta may yet turn things around. The case against him lacks the slam-dunk evidence that sank Rajaratnam, and his spotless reputation to this point should give his defence weight. But first impressions count, and thanks to Rakoff, jurors may already be growing skeptical.

CONTEXT NEWS

- The jury hearing the Rajat Gupta insider-trading case received on May 24 preliminary instructions about the charges against the former head of consulting firm McKinsey and board member of Goldman Sachs and Procter & Gamble (PG.N). U.S. District Judge Jed Rakoff asked each side to submit the instructions but largely adopted the prosecution's version.

- On May 17, the judge handed prosecutors another victory by tentatively allowing into evidence four tape recordings of telephone calls between Gupta and convicted insider trader and Galleon Group founder Raj Rajaratnam.

- Gupta, 63, is charged with criminal conspiracy and securities fraud for allegedly leaking details of P&G and Goldman board meetings to Rajaratnam, including confidential word of Berkshire Hathaway's $5 billion investment in the Wall Street firm in 2008.

- Reuters: First wiretap played at Gupta insider-trading trial

(Editing by Rob Cox and Emily Plucinak)