Rajat Gupta, the former head of the consulting firm McKinsey and a former member of Goldman Sachs, was convicted today on insider trading charges. This is the latest of several insider trading suits that the government, particularly US Attorney in the Southern District of New York Preet Bharara, has focused on. While no executive has been put in jail for the financial fraud that led to the crisis of 2008, several have been put in jail for insider trading.
Gupta is perhaps the biggest fish in this sweeping insider trading investigation. He was convicted of leaking information about Goldman Sachs and Procter and Gamble, information he gleaned from being on the board of the two corporations, to Raj Rajaratnam, a hedge fund manager who has also gone to jail for insider trading.
The judge in the case, notably, was Jed Rakoff, who has thundered against weak settlements between the SEC and various financial firms for improper and illegal securities sales, at one point denying a settlement because it included language allowing the firm in question, Citi, to “neither admit nor deny” wrongdoing.
Bharara has charged 66 traders and executives with insider trading since 2009, and 60 of them have either plead guilty or been found guilty. All seven trials have yielded convictions.
The defense made the case that Goldman Sachs should actually be on trial for insider trading in the case, not Gupta, because sources at the firm fed tips to him. At one point, Gupta’s lawyer told the jury, “The wrong man is on trial.” It remains to be seen whether the investigation will lead in the direction of Goldman Sachs, or whether Bharara will stop with Gupta.
In this case, Bharara successfully used circumstantial evidence to show contacts between Gupta and Rajaratnam:
Prosecutors built their case around phone records, trading logs, instant messages and e-mails that showed a pattern of insider trading. Mr. Gupta would participate in Goldman board calls, and soon after disconnecting from those calls – sometimes within minutes – Mr. Gupta would call Mr. Rajaratnam. Mr. Rajaratnam would then trade shares in Goldman based on Mr. Gupta’s tips.
I think this ought to be remembered the next time we’re told how hard it is to build a case on financial fraud because of the need to show intent or have smoking-gun documentary evidence of the crime. That actually exists in many of the securitization cases, but it wasn’t even needed here, and convictions still were made.
Gupta could get up to 25 years in prison. Rajaratnam got 11 years.