Gupta appeal will be ‘very difficult,’ Holwell says

June 16, 2012

Without former U.S. District Judge Richard Holwell, there probably would not have been any prosecution of Rajat Gupta, the former Goldman Sachs director and McKinsey chief convicted Friday of insider trading and conspiracy. In 2010, Holwell ruled that prosecutors could use wiretap evidence in their case against Galleon Group hedge fund founder Raj Rajaratnam, rejecting defense arguments that the government is not authorized to use wiretaps to investigate insider trading. If prosecutors hadn’t been able to use those Rajaratnam wiretaps – in which Rajaratnam obliquely referred to tips from a Goldman insider – it’s unlikely the government would have gone to trial against Gupta, since the tapes were the only link between Gupta’s alleged tips and Rajaratnam’s trades.

Holwell, who is now in private practice at Holwell, Shuster & Goldberg, told me Friday that wiretaps have forever changed the way the government investigates insider trading. “Prior to the Rajaratnam case, you look at insider trading rings, and they’re very small. Prosecutors would wind up getting one, two, three people.” The Rajaratnam case showed that with wiretaps, you can sweep in rings of tippers, leading to “a vast array of prosecutions,” Holwell said.

It’s also unlikely, he said, that prosecutors would have uncovered Gupta’s role in Rajaratnam’s insider trading ring if they had not been authorized to tape the Galleon founder. The classic evidence in insider trading prosecutions is trading and telephone records, but since Gupta didn’t profit directly from Rajaratnam’s trades, he probably wouldn’t have come to the government’s attention if it hadn’t been for those taped references.

But that doesn’t mean, according to Holwell, that the case against Gupta was weak. In fact, he said, he thinks Gupta’s lawyers at Kramer Levin Naftalis & Frankel have “a very difficult appeal in this case.” Holwell said he thinks U.S. Senior District Judge Jed Rakoff made the right decision to admit wiretap evidence against Gupta, despite defense arguments that the tapes were inadmissible hearsay; the former judge agreed with Rakoff that the conspiracy exception applied to tapes of Rajaratnam telling other Galleon execs about tips he supposedly received from a Goldman insider. And beyond the tapes, Holwell said, “there was a lot of evidence in this case,” pointing to the circumstantial telephone and trading record evidence that was the hallmark of insider trading prosecutions before Rajaratnam and wiretaps.

Holwell, who was a federal judge for nine years, said the defense argument that Gupta didn’t make any money from Rajaratnam’s trades is no reason to invalidate the conviction, since the legal standard for a tipper is only that he or she gained some benefit from passing along information. The former judge said he’s seen other prosecutions of tippers like Gupta, though most were “pillow talk” cases involving tips passed between people who are intimate.

The surprises in the Gupta case, according to Holwell, were the quick verdict – the Rajaratnam jury, by contrast, was out for two weeks – and the seesawing over Gupta’s testimony. Lead defense counsel Gary Naftalis suggested last week that Gupta might testify, then told Rakoff Monday that his client would not take the stand. “That will be the Monday morning quarterbacking,” he said.

But the real takeaway from the case, Holwell said, is that Wall Street should be worried. Between his ruling that wiretap evidence is admissible and Rakoff’s ruling that the hearsay rule doesn’t bar the tapes, no one who’s passing along insider information can be confident it won’t someday end up on a wiretap played before a jury. “What the government wants to do is change behavior,” Holwell said. “The way to do it is to bring these cases against highly visible defendants.”


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