Gupta arrest puts Corporate America on notice

October 26, 2011

By Reynolds Holding
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The arrest of Rajat Gupta has put Corporate America on notice. U.S. prosecutors have nailed dozens of insider traders, including Galleon Group founder Raj Rajaratnam. But those cases now look like prologue to the one against the former McKinsey boss and Goldman Sachs director. The charges against Gupta will be tough to prove, but a conviction would be the ultimate deterrent.

Some of the 50 or so fraudsters bagged since 2009 are serving record-long sentences. Most, however, were outsiders who merely procured secrets for their illegal trades. Gupta, on the other hand, was the consummate insider — a full-fledged member of the blue-blooded establishment. If the charges are proven, it would be the worst kind of corporate betrayal.

Gupta has been an elusive target. Named as Rajaratnam’s co-conspirator, he wasn’t initially charged. Instead, the U.S. Securities and Exchange Commission sued him later in an administrative court. After Gupta complained that the abbreviated forum deprived him of important rights, the regulator dropped the suit. That gave the impression of a weak case.

What, if anything, has changed since isn’t clear. Unlike Rajaratnam and other insider traders, Gupta may not have been caught on tape discussing the alleged wrongdoing. And though he bought into a Galleon fund, there curiously seems to be no evidence that he benefited financially from his tips, typically a requirement for insider trading convictions.

Still, prosecutors may have enough to win. Phone records allegedly show Gupta calling Rajaratnam mere minutes after important Goldman board meetings. Rajaratnam traded in the bank’s stock shortly thereafter. And though not paid for tips, Gupta had business dealings with Rajaratnam that suggest he benefited in other ways from the favors. Such evidence may lack the slam-dunk quality of wiretaps, but it has sufficed in previous cases.

Federal prosecutors have been on something of a campaign against insider trading. Severe punishments like Rajaratnam’s unprecedented 11 years in prison should go a long way toward curbing the practice. But corporate chieftains may still consider themselves on a higher plane than those thrown behind bars so far. They might see things a little differently if one of their own goes down.

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