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

Shares Hit Record

Sensex, Nifty rise to second consecutive record high

Sensex surges 500 points on BOJ easing, L&T gains

The BSE Sensex and Nifty surged to record highs for a second consecutive session on Friday after Bank of Japan's surprise expansion of its massive stimulus programme raised hopes for additional foreign inflows, boosting blue-chips such as Larsen & Toubro.  Full Article 

REUTERS SHOWCASE

Wilful Negligence?

Wilful Negligence?

SEBI piles pressure on Sahara to sell overseas hotels  Full Article 

Indian Economy

Indian Economy

India's fiscal deficit in H1 almost 83 pct of full-year target.  Full Article 

M&M Earnings

M&M Earnings

M&M Q2 net profit down 4 percent, hit by poor monsoon.  Full Article 

Ban on E-Cigs?

Ban on E-Cigs?

Govt considers ban on e-cigarettes, sale of single smokes.  Full Article 

Commodities

Commodities

Silver futures in India hit four-year low on global cues.  Full Article 

BOJ Policy

BOJ Policy

BOJ shocks markets with surprise easing as inflation slows.  Full Article 

Shadow Banking

Shadow Banking

China's shadow banking sector growing rapidly, third largest in world - FSB.  Full Article 

Reuters India Mobile

Reuters India Mobile

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