Gupta’s Efforts To Overturn Insider Trading Convictions Rejected

by Dorsey & Whitney LLP
Contact

The Second Circuit Court of Appeals upheld the conviction of former Goldman Sachs director Rajat Gupta for illegal tipping. Mr. Gupta was convicted of conspiracy and three substantive counts of securities fraud, centered on furnishing illegal tips to his long time friend and business partner Raj Rajaratnam. U.S. v. Gupta, Docket No. 12-4448 (Decided March 25, 2014).

Mr. Gupta’s challenge to his conviction focused on the admissibility of certain wire tap evidence involving two key transactions. The first concerned trades of Goldman Sachs shares on September 23, 2008 prior to the announcement that Warren Buffett would make a substantial investment in the investment bank as the market crisis was unfolding. At a telephonic Goldman board meeting during the afternoon of September 23, 2008 Mr. Gupta and the other directors approved a $5 billion investment by Mr. Buffett in Goldman. The announcement was to be made after the 4 p.m. close of trading on the New York Stock exchange.

Mr. Gupta was on the board meeting call until 3:53 p.m. One minute after terminating that call he telephoned Mr. Rajaratnam’s office. The men spoke briefly. Mr. Rajaratnam then directed that shares of Goldman Sachs be purchased immediately. Before the market close 1.5 million shares were acquired. After the deal announcement the Goldman share price increased 7%, yielding a $1 million profit.

The next morning Mr. Rajaratnam discussed the trade on the telephone in two calls with his chief trader Ian Horowitz. The two men reviewed the frenzied activity at the close of the market when the Goldman shares were purchased. Mr. Rajaratnam stated that he got a call two minutes before the close saying “something good might happen to Goldman.”

The second centered on the sale of Goldman shares on October 24, 2008. The day before that transaction Mr. Gupta participated in a Goldman Sachs conference call. At the time Wall Street analysts were projecting that the bank would continue to report profits as it had since becoming a public company. During a 33 minute call Mr. Gupta and the other board members learned that for the first time the investment bank would report a loss.

Mr. Gupta disconnected from the Goldman call at 4:49 p.m. At 4:50 p.m. he telephoned the direct office line of Mr. Rajaratnam. The call lasted for 12.5 minutes, ending at 5:03 p.m. The next morning Mr. Rajaratnam sold 150,000 shares of Goldman Sachs stock beginning 1 minute after the open.

Later that afternoon Mr. Rajaratnam spoke with David Lau, a Singapore based portfolio manager for Galleon International. During a taped telephone call Mr. Rajaratnam described the negative news he had received “from somebody who’s on the Board of Goldman Sachs” which “they don’t report until December.” That news was that “they are gonna lose $2 per share. The Street has them making $2.50.”

Goldman did not announce its disappointing fourth quarter results until December 16. By selling his shares Mr. Rajaratnam avoided a loss of over $3.8 million.

The district court rejected Mr. Gupta’s claims that the taped evidence was not admissible. The Second Circuit affirmed. First, the Court rejected claims that the wire tap authorization was obtained in violation of Title III of the Omnibus Crime Control and Safe Streets Act of 1968 with little comment other than to note that the same issue had been rejected in Mr. Rajaratnam’s appeal (here).

Second, the Court rejected claims that the conversations were inadmissible hearsay. The statements are admissible under Rule 801(d) which permits the introduction of such testimony if made by “the party’s coconspirator during and in furtherance of the conspiracy.” To admit a statement under this provision the court must find that there was a conspiracy, that its members included the declarant and the party against whom the statement is offered and that it was made during the course of, and in furtherance of, the conspiracy.

To be in furtherance of the conspiracy, the Court held, the statement must be more than “a merely narrative description by one co-conspirator of the acts of another.” At the same time statements which “provide reassurance, serve to maintain trust and cohesiveness among them, or inform each other of the current status of the conspiracy, further the ends of [a] conspiracy.” And, the fact that the statement was in furtherance of the conspiracy must be supported by a preponderance of the evidence.

Here the statements were in furtherance of the conspiracy, according to the Court. Mr. Gupta’s claim that the statements to Mr. Horowiz are part of another conspiracy is incorrect. The indictment here alleged that the conspiracy encompassed Messrs. Rajaratnam, Gupta and “other coconspirators at Galleon.” So long as the statement is in furtherance of the conspiracy there is no requirement “that it have been in furtherance of the interests of the defendant himself or of any particular coconspirator.”

Similarly the statement of Mr. Rajaratnam to Mr. Lau was admissible as being in furtherance of the conspiracy. While the rule requires that both the declarant and the party against whom the statement is offered be members of the conspiracy “there is no requirement that the person to whom the statement is made be a member . . . Statements designed to induce the listener’s assistance with respect to the conspiracy’s goals satisfy the Rule’s in-furtherance requirement.” Here while Mr. Lau was not a member of the conspiracy, the statements of Mr. Rajaratnam, made just after the transactions, were by a member of it and offered are offered against a member.

Mr. Gupta’s claim that the statements to Mr. Lau are not admissible because he had to have more than a theoretical ability to actually place the trades, misses the mark. The goal here was to avoid losses which was accomplished by dumping the stock quickly for the U.S. Galleon entity. While Mr. Lau was the trader for Galleon International, an entity in which Mr. Gupta had a 15% ownership interest and which generally traded international stock “it was not precluded from investing in domestic securities . . . and, indeed, it had in the past owned stock in Goldman. . . In light of this evidence, Rajaratnam’s statements to Lau could have prompted Lau not to purchase Goldman shares for Galleon International in October 2008.”

Finally, the statements were admissible under Rule 804(b)(3). That Rule provides for the admission of statements made against pecuniary or penal interest if the declarant is unavailable as a witness. Here the statements to Horowitz and Lau were both self-incriminating and thus admissible. That point is supported by the corroborating evidence surrounding the timing of the telephone calls and the other evidence. Indeed, those facts undercut Mr. Gupta’s claims that there is insufficient indicia of reliability to admit the statements. Accordingly, even if the statements were not in furtherance of the conspiracy, they would be admissible.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.