Alison Frankel

Gupta appeal will be ‘very difficult,’ Holwell says

Alison Frankel
Jun 16, 2012 02:38 UTC

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.

In Gupta trial, what is insider trading?

Alison Frankel
May 23, 2012 19:38 UTC

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.”

Rajat Gupta and the hearsay rule

Alison Frankel
May 16, 2012 01:46 UTC

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.

In Gupta case, new filings crystallize prosecution’s challenge

Alison Frankel
May 10, 2012 00:01 UTC

From the beginning of the criminal prosecution of Rajat Gupta, it was clear that the government didn’t have the sort of evidence usually at the heart of insider-trading cases. Gupta didn’t profit directly from the tips he allegedly passed to Raj Rajaratnam, who has since been convicted of insider trading. In fact, as his lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel has said repeatedly, Gupta lost millions in his investment with Galleon, Rajaratnam’s hedge fund. That evidentiary gap has left space for Naftalis to argue that the government unfairly targeted his client because of Gupta’s high profile as a former head of McKinsey and director at Goldman Sachs. It also puts pressure on prosecutors to link Gupta directly to Rajaratnam’s tainted trades, since nothing else shows he was part of the conspiracy.

As Gupta’s May 21 trial date fast approaches, the latest filings from both sides disclose exactly how the government intends to establish that link, using phone records and wiretap evidence to show that Rajaratnam traded specifically because of tips he received from Gupta. But the new briefs also spotlight the inferences prosecutors will have to ask jurors to draw. The government’s case leans heavily on wiretapped conversations in which Rajaratnam tells associates at Galleon what he found out in alleged phone conversations with Gupta that were not taped by the government. Prosecutors argued in a motion in limine last week that Rajaratnam’s taped calls with Galleon conspirators fall under an exception to the rule barring hearsay evidence. If U.S. Senior District Judge Jed Rakoff disagrees, the government will have a much tougher time convincing jurors that Rajaratnam’s inside information came from Gupta.

The prosecution’s latest bill of particulars against Gupta includes allegations that Gupta tipped off Rajaratnam about Procter & Gamble news (Gupta was also a director there). But the government’s strongest evidence appears to involve two alleged Goldman tips. The first alleged tip came on the day in September 2008 that Goldman Sachs directors learned of Warren Buffett’s $5 billion investment in the bank. Moments after Gupta disconnected from the board’s conference call, his assistant placed a call to Rajaratnam, according to phone records. After that very brief call, which concluded only minutes before the end of the trading day, Rajaratnam placed orders to buy as much Goldman Sachs stock as he could snap up. He ended up paying about $25 million for more than 200,000 shares. The next day, according to wiretap evidence, Rajaratnam told his personal Galleon trader, an unindicted co-conspirator named Ian Horowitz, that he rushed to order hundreds of thousands of Goldman shares because he “got a call at 3:58 … saying something good might happen to Goldman.”

In Gupta case, U.S. must disclose Blankfein deposition prep

Alison Frankel
Mar 28, 2012 14:19 UTC

Jed Rakoff has bounced back quite nicely, thank you, from his appellate smackdown in the Securities and Exchange Commission’s collateralized debt obligation case against Citigroup. In the unlikely event you’ve forgotten, earlier this month the 2nd Circuit Court of Appeals stayed the SEC’s case before Rakoff, finding a strong likelihood that the government and Citi would prevail in their argument that the judge overstepped his bounds when he rejected their proposed $285 million settlement. Despite the notably critical language in the three-judge panel’s per curiam ruling in the Citi case, Rakoff, a U.S. Senior District Judge in federal court in Manhattan, seems undaunted in his determination to hold the SEC accountable. On Tuesday, he ruled that the agency must disclose documents used to prepare Goldman CEO Lloyd Blankfein for his deposition in the Rajat Gupta insider trading case.

Rakoff’s 10-page ruling, issued on the same day that he said the government can use wiretap evidence in the parallel Gupta criminal case, rejects the SEC’s argument that work-product privilege protects its preparation of Blankfein. The judge pointed to a 1993 case from the 2nd Circuit, In re Steinhardt Partners, and a 2003 ruling from the same appeals court, In re Grand Jury Subpoenas, in holding that the government waived its privilege claim when it voluntarily shared materials with Blankfein, a third-party witness. Rakoff said that Blankfein doesn’t have a “common interest” with the government in the Gupta case, so disclosures to him amount to “‘deliberate, affirmative, and selective’ use of work product [that] waives the SEC’s ability to now assert the privilege against the defendants.”

Here’s the fascinating backstory. At Blankfein’s deposition on Feb. 24, Gupta’s lawyers at Kramer Levin Naftalis & Frankel asked him standard questions about how he prepared to testify. Blankfein, according to Kramer Levin’s March 1 brief, revealed that on two occasions leading up to the deposition, he met with SEC lawyers, an agent from the Federal Bureau of Investigation, and prosecutors from the Manhattan U.S. Attorney’s office. At those two sessions, he said, prosecutors asked him 75 percent of the prep questions; the SEC asked the other 25 percent of the questions. Blankfein’s own lawyers at Sullivan & Cromwell, according to Kramer Levin, didn’t ask him questions at the two prep sessions with government lawyers. Blankfein also disclosed that government lawyers showed him 10 or 12 documents in advance of his deposition testimony.

Gupta’s best defense? Raj broke ‘relationship of trust’

Alison Frankel
Oct 26, 2011 21:02 UTC

The Justice Department and the Securities and Exchange Commission apparently do not have the evidence to assert a classic insider-trading case against former Goldman Sachs and Procter & Gamble director Rajat Gupta. Typically, the government brings insider-trading cases against people who profited directly from trades based on confidential information. Gupta doesn’t fall into that category. Neither the SEC nor the DOJ claims that he realized any direct profits from the trades Galleon Group chief Raj Rajaratnam allegedly made based on his tips. Indeed, Gupta’s lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel, has said many times that Gupta “lost his entire investment” in Rajaratnam’s hedge fund. “[Gupta] did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo,” Naftalis told Reuters in a statement.

But while the absence of a direct profit motive complicates the Justice Department and SEC cases against Gupta, it doesn’t preclude them. The government doesn’t have to show that Gupta directly profited by tipping Rajaratnam, only that he benefited in some way from passing along inside information. “It’s not your standard model, but it’s not unprecedented,” said Thomas Gorman of Dorsey & Whitney, who represented an Ohio State business-school professor convicted in a no-profits insider-trading case in 2005.

The government, in fact, has broad leeway to define the benefits a tipster derived from disclosing confidential information, Gorman said. Benefits can be as amorphous as enhancing a friendship or angling for future favors. In the Gupta case, the SEC and the Manhattan U.S. Attorney are so far offering only vague motives for his alleged insider trading. The SEC’s new complaint asserted that Gupta received indirect profits from Rajaratnam’s illicit trades, since he was an investor in Galleon funds. The complaint also refers to Gupta’s “variety of business dealings with Rajaratnam,” and alleges that the former McKinsey chief “stood to benefit from his relationship with Rajaratnam.” Similarly, the U.S. Attorney’s indictment said Gupta revealed inside information to Rajaratnam to deepen his relationship with the Galleon chief. “Gupta benefited and hoped to benefit from his friendship and business relationships with Rajaratnam in various ways, some of which were financial,” the indictment said.

Why does Rajit Gupta want the SEC to sue him in federal court?

Alison Frankel
Aug 10, 2011 00:16 UTC

Former Goldman Sachs director Rajat Gupta and his lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel, declared what might seem to be a very strange kind of victory last week when the Securities and Exchange Commission agreed to drop its administrative proceeding against Gupta. The two-page stipulation between Gupta and the SEC makes it clear that the SEC isn’t giving up on its claims that Gupta engaged in insider trading when he allegedly passed confidential information about Goldman Sachs and Procter & Gamble to Galleon Group hedge fund chief Raj Rajaratnam. All Gupta won was a pledge that the agency will sue him in federal court. And that is indeed a huge victory.

The SEC chose an anomalous vehicle for its March 1 suit accusing Gupta of helping Rajaratnam engage in insider trading. Instead of bringing a case against Gupta in Manhattan federal court — as the SEC did when it sued 28 other Galleon insider trading defendants — the agency filed what’s known as a public administrative proceeding. Those proceedings take place before an administrative law judge under SEC rules, not the federal rules of civil procedure. There’s no jury, and the first appeal of any adverse ruling goes to the SEC commissioners, not to an appeals court.

As Gupta counsel Naftalis laid out in his March 18 federal court complaint against the SEC, the differences between an SEC administrative proceeding and a federal court case added up to a big pile of prejudice against Gupta. Gupta wouldn’t be able to take depositions or conduct full discovery to counter the SEC’s assertions. The SEC, meanwhile, would be able to introduce hearsay evidence that it might not be able to get into evidence in federal court, according to the Gupta complaint. “The only plausible inference is that the Commission is proceeding how and where it is against Mr. Gupta for the bad faith purpose of shoring up a meritless case by disarming its adversary,” the complaint asserted.