In Gupta trial, what is insider trading?

By Alison Frankel
May 23, 2012

Sometime in the next few days of testimony in the prosecution of former Goldman Sachs director Rajat Gupta, U.S. Senior District Judge Jed Rakoff will probably take a moment to give jurors what he has described in previous trials as a “heads-up.” Rakoff will offer the jury a preliminary instruction on what insider trading is. If you think that’s an easy task, you should look at the proposed instructions the government and defense counsel from Kramer Levin Naftalis & Frankel submitted to Rakoff this week. The two sides agree that Rakoff should use phrases like “material non-public information,” but beyond that they’re each trying to use the preliminary instruction to sway jurors.

The nine-page proposal from prosecutors Reed Brodsky and Richard Tarlowe (which includes transcripts of Rakoff’s instructions in two previous insider-trading cases) asks the judge to tell the jury that corporate directors have a “legal duty not to disclose to anyone outside the company financial or other confidential information about the company that the company has not yet made public or authorized to be made public.”

That’s straightforward enough, but prosecutors went on to suggest how Rakoff should describe the link between insider trading and securities fraud. “In connection with this charge, the government must show that Mr. Gupta anticipated some kind of benefit, directly or indirectly, however modest, from providing (Raj) Rajaratnam with the inside information,” prosecutors proposed Rakoff tell jurors. “Examples of a benefit include Mr. Gupta giving the information to Rajaratnam as a gift, giving the information to maintain a good relationship with a frequent business partner, or giving the information to receive money in exchange.”

That language would paper over one of the big evidentiary gaps in the government’s case: Gupta didn’t make any money from the information he allegedly passed to Rajaratnam, and he actually lost millions on investments with Rajaratnam’s hedge fund, Galleon Group. The government would very much like to establish early that it believes any kind of benefit Gupta derived from tipping Rajaratnam – even just maintaining their friendship – is enough to sustain a securities fraud charge. Having those words come out of Rakoff’s mouth would be a boon to the prosecution.

The jury instruction proposed by Gupta’s lawyers, a mere one-paragraph document, begins by noting a director’s fiduciary (not legal) duty not to disclose material, non-public information. Gupta’s lawyers then append a phrase to define what constitutes insider trading on that information: It has to be “for the improper purpose of deriving a personal benefit as a result of another person’s use of the information to purchase or sell the securities of the corporation.” Note how Kramer Levin wants Rakoff’s instruction to link disclosure to “a personal benefit” – that’s because a pillar of Gupta’s defense is that prosecutors can’t show any personal benefit to Gupta from the alleged tips.

Specifically, Kramer Levin suggests Rakoff tell jurors that Gupta “knowingly, intentionally and willfully breached his fiduciary duty … for the improper purpose of deriving a personal benefit as a result of Mr. Rajaratnam’s use of the information for trading securities.” The defense wants Rakoff to warn jurors that the government has to establish a much tighter link between tips and profits than prosecutors’ vague “some kind of benefit, directly or indirectly, however modest.”

Rakoff, of course, knows exactly what each side is trying to do, so you can be sure he’ll carefully craft the preliminary instruction he delivers. But these proposed preliminary instructions show why these big trials are so exhausting for both sides. Every single word counts.

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