BREAKINGVIEWS - Rajat Gupta goes down but insider trading may not

Sat Jun 16, 2012 9:19am IST

Former Goldman Sachs Group Inc board member Rajat Gupta (L) leaves Manhattan Federal Court with his lawyer, Gary Naftalis, following a guilty verdict in New York June 15, 2012. REUTERS/Lucas Jackson

Former Goldman Sachs Group Inc board member Rajat Gupta (L) leaves Manhattan Federal Court with his lawyer, Gary Naftalis, following a guilty verdict in New York June 15, 2012.

Credit: Reuters/Lucas Jackson

Related Topics

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

By Reynolds Holding

NEW YORK (Reuters Breakingviews) - Rajat Gupta has gone down, but insider trading may not. The guilty verdicts against the former McKinsey boss and Goldman Sachs and Procter & Gamble director should scare the bejeezus out of corporate America and Wall Street. But until the rules against passing privileged information are clearly defined and miscreants truly fear getting caught, the case's deterrence value will be limited.

A jury convicted Gupta of leaking boardroom information to Galleon Group founder Raj Rajaratnam, who himself is due to spend over a decade in prison for securities fraud. The speed of the verdict - less than two days of deliberations - suggests the case wasn't so tough, after all.

Unlike Rajaratnam and other insider traders, Gupta wasn't caught on tape discussing wrongdoing. And though he bought into a Galleon fund, the evidence that he gained financially from his tips was thin. Yet prosecutors made the most of their circumstantial case, including phone records of Gupta calling Rajaratnam seconds before the hedgie traded Goldman shares.

It shows prosecutors can win without a smoking gun. Although that should give every would-be tip giver or user pause, it doesn't mean it'll stop them from taking the risk. For one, it's still not obvious when an insider crosses the line.

Divulging information is only illegal if the divulger means to profit. Gupta didn't clearly benefit. That the jury convicted him anyway suggests a mere desire to help his friend may have been enough. Such a fuzzy legal standard, however, makes compliance complex.

And while the case against Gupta may look easy in hindsight, it took years of costly preparation. The government doesn't have the resources to bring more than a few prosecutions like it. High-profile wins send stern warnings, but occur too rarely to dissuade wrongdoers.

A more effective approach might be to file a greater number of easier-to-prove cases alleging, say, financial negligence rather than criminal fraud. Penalties would be smaller, but punishment - and perhaps deterrence - more powerful.

Gupta will probably appeal and a reversal isn't far-fetched. U.S. District Judge Jed Rakoff was arguably on shaky terrain when he excluded certain evidence favoring Gupta. Whatever ultimately happens, there will undoubtedly be some sort of chilling effect in U.S. boardrooms. It will take far more work, however, to reduce the menace of insider trading.

CONTEXT NEWS

- Rajat Gupta, the former head of consulting firm McKinsey and board member of Goldman Sachs and Procter & Gamble, was convicted on June 15 on three counts of passing inside information to Galleon Group founder Raj Rajaratnam. He was also convicted of one conspiracy charge but found not guilty on two other counts of securities fraud.

- Gupta, 63, was accused of leaking details of P&G and Goldman board meetings to Rajaratnam, including confidential word of Berkshire Hathaway's $5 billion investment in the bank in 2008. The U.S. Securities and Exchange Commission also filed civil insider-trading charges against Gupta.

- Gupta's lawyer, Gary Naftalis, said in a written statement: "This is only round one. We will be moving to set aside the verdict and will if necessary appeal the conviction."

(Editing by Jeffrey Goldfarb and Martin Langfield)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

RBI Policy Review

RBI Policy Review

RBI keeps rates on hold, warns on inflation  Full Article 

China iPhone Sale

China iPhone Sale

China regulator approves Apple's iPhone 6 for sale in China  Full Article 

Cleanliness Drive

Cleanliness Drive

Modi orders officials to clean loos on Gandhi's birthday.  Full Article 

Bid to Boost Trading

Bid to Boost Trading

RBI takes small steps to deepen markets.  Full Article 

Car Recall

Car Recall

Maruti Suzuki says to recall 69,555 cars.  Full Article 

China Factory Data

China Factory Data

China final HSBC PMI steady in September on stronger global demand but risks remain  Full Article 

Oil Demand

Oil Demand

India's thirst for oil grows even as China cuts back  Video 

EBay Divests PayPal

EBay Divests PayPal

EBay to spinoff PayPal in 2015  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage