Rajat Gupta & the Beneficial Penny of Insider Trading

This is the final post in our 5-part series on the most common types of financial fraud—Ponzi Schemes & ManipulationBackdating Stocks, Insider Trading, Short Selling, and Pump and Dump Schemes—and how due diligence investigators can protect your company’s assets and investments by tracking down fraudsters.

This week’s financial pages have been filled with news that the Second U.S. Circuit Court of Appeals in Manhattan refused to overturn former Goldman Sachs Group director Rajat Gupta’s 2012 insider trading conviction. Gupta served a 19-month prison sentence after being found guilty of tipping information about Berkshire Hathaway Inc.’s investment in Goldman Sachs as well as 2008 financial losses to Raj Rajaratnam—a friend who also happened to be a billionaire hedge fund manager and founder of the Galleon Group. At the time, Gupta was serving as chairman of Galleon International and had invested several million dollars in the funds.

In their decision, the court noted:

“There was ample evidence to permit the jury to find that Gupta intended Rajaratnam to trade on the basis of the confidential information Gupta passed to him and that Gupta personally benefited.”

Released from prison in 2016, Gupta has continued to declare his innocence, and sought to have the conviction cleared from his record, arguing he never “received even a penny” from tipping off Rajaratnam.

What About Rajaratnam?

Insider trading is the act of buying or selling a security with the foreknowledge of critical information not yet released to the public. The SEC explains that insider trading violations can include “‘tipping’ such information, securities trading by the person ‘tipped,’ and securities trading by those who misappropriate such information” such as “friends, business associates, family members.”

At the beginning of 2009, Rajaratnam was head of one of the world’s largest hedge funds, and his personal net worth was over $1 billion. But insider trading is fraudulent behavior, and his crimes began to catch up with him. By the end of 2009, he was under arrest and Galleon shuttered its operations.

After a wide-sweeping investigation, which included over 18,000 wiretap recordings, the FBI charged Rajaratnam with 14 counts of conspiracy and securities fraud. Found guilty of all charges in 2011, he was fined $10 million, sentenced to 11 years in prison, and had to forfeit $53 million. At the time, it was the longest sentence for insider trading. U.S. District Judge Richard Howell described Rajaratnam’s crimes as “a virus in our business culture that needs to be eradicated.”

Texas McCombs School of Business created a short cartoon about his crimes:

How Clear are the Laws on Insider Trading?

The SEC maintains that “insider trading undermines investor confidence in the fairness and integrity of the securities markets.” For the average investor, with little to zero ties to the financial world, would he ever be in a position to get an insider tip if he forever remains on the outside? Probably not. And that’s where fairness in the market comes into play. Regardless of your economic status, all men and women are held to be equal when investing in the market.

It’s not that black and white, however.

This past fall, former U.S. attorney Preet Bharara and SEC commissioner Robert J. Jackson, Jr. penned a New York Times Op-ed in which they described the need for updated, clearly defined insider trading laws, arguing that the Depression-era law that merely prohibits fraud creates:

“a legal haziness that leaves both investors and defendants unclear about what sorts of information-sharing or other activities by investors would be considered insider trading, and what are the acceptable forms of data-gathering and research that are part of any healthy, functioning financial marketplace.”

As in the case of Gupta, it was left up to the courts to determine whether he had benefited from insider tipping or whether it was an acceptable means of gathering information prior to a financial transaction. The trial and appeals courts have determined he clearly earned more than a penny.

Formed by Jackson and Bharara in October 2018, the Bharara Task Force on Insider Trading is charged with developing insider trading reforms that will better protect all American investors. Bharara will lead the task force, which is comprised of eight former regulators and prosecutors, judges, legal scholars, and defense attorneys.

But there are some who argue updating the laws isn’t necessary. On CNBC’s Closing Bell, Rebecca LeGrand, founder of LeGrand Law, and Jacob Frenkel, partner at Dickinson Wright, dismissed the need for reform, with LeGrand arguing that insider trading can be good for the markets.

It will be up to the SEC and Congress to consider adopting the task force’s recommendations.

Cynthia Hetherington, MLS, MSM, CFE, CII is the founder and president of Hetherington Group, a consulting, publishing, and training firm that leads in due diligence, corporate intelligence, and cyber investigations by keeping pace with the latest security threats and assessments. She has authored three books on how to conduct investigations, is the publisher of the newsletter, Data2know: Internet and Online Intelligence, and annually trains thousands of investigators, security professionals, attorneys, accountants, auditors, military intelligence professionals, and federal, state, and local agencies on best practices in the public and private sectors.

 

2019-01-10T14:04:36-04:00 January 11, 2019|Tags: , , , , |