Opinion

Alison Frankel

Rajat Gupta and the hearsay rule

By Alison Frankel
May 16, 2012

Remember the children’s game Telephone? One kid whispers something in another kid’s ear, the second kid turns around and whispers what she heard to the next child, and so on down the line. At the end, the last one to receive the whispered message says aloud what she heard, the kid at the start of the chain announces the original phrase, and everyone laughs because the message was inevitably mangled as it was passed along. That’s why courts have a rule barring hearsay. Witnesses can testify about conversations they participated in, but they can’t generally tell jurors what they heard secondhand about discussions they weren’t directly involved in, because hearsay isn’t considered sufficiently reliable.

The same principle applies when prosecutors obtain wiretap evidence of phone conversations. Obviously, wiretaps provide a record of direct conversations. But when one person on a recorded phone call tells another about a conversation he had with someone else, is that evidence or hearsay?

For Rajat Gupta, the former McKinsey chief and Goldman Sachs director accused of passing tips to convicted inside-trader Raj Rajaratnam, the hearsay rule could well be the difference between acquittal and a long prison sentence. As I’ve previously reported, prosecutors from the U.S. Attorney’s office in Manhattan are relying on tapes of three conversations between Rajaratnam and his colleagues at the Galleon Group hedge fund to link Rajaratnam’s illegal trades with tips he allegedly received from Gupta. The government conceded in a brief filed earlier this month that those tapes are the best evidence it has – in a case in which there’s no proof Gupta profited from his alleged insider trading – that Gupta actually passed confidential information to the hedge fund billionaire. Without Rajaratnam’s fleeting recorded references to tips about Goldman Sachs, the government’s case against Gupta is all inference, requiring jurors to draw lines between phone records and Rajaratnam trades.

The prosecutors, Assistant U.S. Attorneys Reed Brodsky and Richard Tarlowe, don’t assert that the wiretap evidence is anything but hearsay. But they argued in their brief that the recorded conversations fall under exceptions to the bar on hearsay evidence in the federal rules of evidence. The government has asked U.S. Senior District Judge Jed Rakoff for a pretrial ruling that the tapes are admissible because they contain statements that were against Rajaratnam’s interests and were made in furtherance of a conspiracy involving both Rajaratnam and Gupta. Prosecutors also argued, in a bit of circular reasoning, that Rakoff should admit the hearsay evidence because the government really needs it to prove its case. The tapes “are the most probative evidence available that Rajaratnam traded Goldman shares based on a tip from Gupta,” the government’s brief said, citing a rarely invoked “residual exception” to the hearsay rule. “The introduction of these statements would be consistent with the rules of evidence and advance the interests of justice.”

Late Friday, Gupta’s lawyers at Kramer Levin Naftalis & Frankel filed their 41-page response to the prosecutors’ hearsay brief. It’s a do-or-die filing that argues against admission of the tapes on both procedural and substantive grounds. This is as good an examination of the hearsay rule, and its application in the 2nd Circuit Court of Appeals, as you’re going to find.

Kramer Levin first of all asserts that Rakoff cannot rule on the admissibility of the crucial Rajaratnam tapes until the government has established by a preponderance of evidence at trial that Gupta is part of the insider-trading conspiracy. That’s been the rule in the 2nd Circuit for more than 40 years, according to the brief. “The government seeks to dispense with the inconvenience of a trial – and Mr. Gupta’s testing of its trial evidence – by asking the court to admit alleged co-conspirator statements before trial, with virtually no evidence in hand, based largely (or perhaps even entirely) on bald statements in its brief that are unproven and, in many instances, unprovable,” Gupta’s lawyers wrote. “Worse, the government seeks to apply that truncated procedure with respect to out-of-court statements it believes are central to the case. The government cites no case in which any court in this circuit has departed from long-settled practice to proceed in that fashion.”

The brief goes on to analyze why the taped conversations between Rajaratnam and Galleon trader Ian Horowitz and Galleon Asia chief David Lau aren’t admissible because they don’t implicate Gupta in a conspiracy. In two conversations with Horowitz on the morning after the Goldman board was informed that Berkshire Hathaway was investing $5 billion in the bank in September 2008, Rajaratnam made elliptical references to “something good” he had learned about Goldman that led him to snap up some 200,000 shares of the bank in the final minutes of trading the previous day. Prosecutors allege that the “something good” was early news of the Berkshire investment, passed along by Gupta (as per phone records) immediately after the Goldman board learned of the capital infusion. And in a call the next month with Lau, Gupta said he’d “heard yesterday from someone who’s on the board of Goldman Sachs” that Goldman’s earnings would be drastically lower than analysts expected. Prosecutors assert the tip came from Gupta, and Rajaratnam dumped 150,000 shares of Goldman after receiving it.

But according to Gupta’s lawyers, to bring in the tapes under the hearsay exception for conspiracy, prosecutors have to show that Gupta knew Horowitz and Lau were part of Rajaratnam’s insider-trading ring and made the wiretapped statement to advance the conspiracy. They assert the government fails to do either. Prosecutors, they argue, can’t even establish that Horowitz, an unindicted co-conspirator in the Gupta case, took part in Rajaratnam’s insider trading on the stocks at issue in the Gupta prosecution, let alone that Gupta had any idea of Horowitz’s involvement with Rajaratnam (whose conduct Gupta claims to be ignorant of). And even if prosecutors can squeak through the gate linking Gupta, Horowitz, and Lau to Rajaratnam’s insider-trading scheme, Kramer Levin’s brief said, they can’t show that Rajaratnam’s statements to Horowitz and Lau furthered the conspiracy.

The Galleon chief’s “vague and generalized statements about ‘something good’” actually suggest that Horowitz wasn’t part of any conspiracy and that Rajaratnam wasn’t tipped about Berkshire, according to Gupta’s lawyers. “It makes no sense that Rajaratnam would use such vague and indefinite words with Horowitz if he had, in fact, received a valuable tip the day before,” the brief said. “Likewise, Rajaratnam’s complete failure in two separate conversations to supply Horowitz with the name of the person from whom he purportedly heard the ‘something good,’ or even some identifying information concerning that person, further confirms that Rajaratnam’s statements were not part of any insider trading conspiracy.”

According to Kramer Levin, the vagueness of the comments to Horowitz also argues against their admission as statements against Rajaratnam’s interest. The hearsay rules assume that when witnesses offer secondhand evidence that incriminates them, that evidence is reliable because it’s a statement against their interest. The government contended that Rajaratnam’s alleged disclosures that he received Goldman Sachs tips are incriminating statements that fall under that hearsay exception. Kramer Levin countered that Rajaratnam didn’t incriminate himself in those inconclusive conversations, and, moreover, the exception for statements against interest only applies when there’s corroborating evidence that the hearsay is trustworthy. Rajaratnam is a known braggart who lied about and exaggerated his access to inside information, Kramer Levin argued. Nothing he said is trustworthy.

The same is true, Gupta argued, of Rajaratnam’s statements to Lau – who’s not even an unindicted co-conspirator. That taped evidence “merely described supposed past events without requesting action by Lau, [so] settled law precludes any finding that they were ‘in furtherance of’ a conspiracy,” the brief asserted.

Gupta’s lawyers are asking Rakoff not only to deny the government’s request for a pretrial ruling on the admissibility of the tapes but to flat-out exclude the hearsay evidence from the trial. The judge hears arguments Wednesday.

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