When the Rajat Gupta’s sentencing was finally announced two days ago, corporate figureheads like Rahul Bajaj thought that the two-year jail sentence and accompanying $5 million fine was a fair one. Others thought it too stiff. Conflicting opinions swirling about in the wake of this celebrity-insider trading case only seem to grow with the passage of time.
A two-year sentence and the hefty fine that Gupta will end up paying, seems to suggest an open and shut case against him. Curiously, though, all of the evidence presented against Gupta was striking in its noticeable absence of a ‘smoking gun’—something, like a secretly recorded conversation where a tip was passed on to Rajratnam and then later acted upon, or a witness with first-hand knowledge of Gupta’s culpability.
Where’s the ‘smoking gun?’
Instead, the prosecution built its case on circumstantial evidence. It maintained that Gupta was guilty of passing on confidential information about Goldman Sachs to Mr. Rajaratnam on three different occasions in 2008. This, they assiduously strove to establish, happened through a pattern of phone calls, the brunt of their case resting on a call they say Gupta placed on Sept. 23, 2008, to Rajaratnam soon after a Goldman Sachs board meeting that Gupta had participated in via a teleconference.
In this meeting, a crucial $5 billion investment in the company made by Warren Buffett was discussed—a golden nugget of information, since banks were reeling under the onslaught of the world’s worst financial crisis and this injection would have given Goldman a near-term boost, and buouyed its stock. Prosecutors presented records that showed that seconds after the board call ended, Gupta called up Rajaratnam. Scant minutes later, Rajaratnam asked his traders to snap up Goldman shares. Then, prosecutors played a tape where the Galleon founder boasted to another employee of how he had just heard that something good was happening to Goldman. But that was it. The two other calls that the DA’s office added to its case against Gupta went pretty much like this.
Which means that Gupta’s entire case to date has largely been circumstantial, with no recorded tip-giving leading to trades, but instead, a presentation of a pattern of calls made and trades executed that was tantamount to malfeasance.
It is entirely possible that in the grand scheme of things, Gupta was breaching his fiduciary duties. Indeed, the only wiretap made public on the internet reveals Gupta clearly saying something that, as a board member of a company, he shouldn’t be revealing at all—where he discusses that both Wachovia and AIG are being looked at as possible targets by the Goldman board but which was information that Rajratnam didn’t act upon.
Yet, prosecutors could also not establish a single instance of when Gupta bought or sold a single share of Goldman or Proctor & Gamble, or where any payments were made to Gupta by Rajratnam, which would have made their case much stronger.
This is what Gupta’s lawyer Gary Naftalis had to say about the prosecution’s tactic: “If you put in a lot of paper, you give the illusion that you might have something more than you actually have — an illusion of making something out of nothing,” Mr. Naftalis said. “That is a gambit that can bamboozle people into thinking something was proven when it wasn’t. It is one of the oldest tricks in the book.”
Lying versus Cheating
The technique that Naftalis is referring to bears a striking resemblance to what happened after the fall of Enron, says Steven M. Davidoff, a professor at the Michael E Moritz College of Law at Ohio State University. Davidoff argues that even despite the rubble of Enron’s catastrophic collapse staring the American public in the face, “the case against Skilling was so amorphous that prosecutors found it difficult at first to weave the various threads into a cogent narrative.”
Davidoff brings our attention to a 2007 article in The American Criminal Law Review where John C. Hueston, the lead trial lawyer for the government in the Skilling prosecution, confessed that the case against the Enron executive had ''fundamental weaknesses,” was difficult to explain, had ‘no smoking gun’ and more bizarrely, that Hueston unearthed his trial strategy by watching ''The Smartest Guys in the Room,'' the documentary on the Enron fiasco.
Today, Jeff Skilling is serving out a jail term of 24 years that will make him an old man when he gets out. Yet Michael Milken, one of the pioneers of the junk-bond business in the 1980s at Drexel Burnham Lambart, who was firmly embroiled in the last, biggest insider trading scandal in history, and was indicted on 98 counts of racketeering securities fraud, was never convicted of racketeering or insider trading. The investigation into his activities and the insider-trading ring that he was allegedly part of along with arbitrageur Ivan Boesky and Dennis Levine amongst others, was a mammoth and intricate affair, far greater than the Rajratnam-Gupta affair .
Milken eventually pled guilty to six securities and reporting violations, ponied up $1.1 billion in fines and was sentenced to ten years in jail, which was then reduced to two. He ended up serving 22 months. Martin Siegel, a banker at Kidder Peabody, who was also part of the ring, pleaded guilty, cooperated with the government and ended up serving just two months in jail and according to a Washington Post article “returned to a waterfront mansion in Florida.” Guess who his defence attorney was? If you said Jed Rakoff, today the judge one on the Gupta case, you would be right.
How should one reconcile Milken’s sentence and his accompanying crime with Skilling’s? Or with Rajaratnam’s, who benefitted from far less a financial gain than Milken, but will serve out 11 years, making it five times Milken’s sentence? Of course, Skilling strove hard to hide the true nature of the beast at Enron, causing thousands of people to lose their life-savings and their jobs, and presided over tens of billions of dollars in stock market losses, so that’s one rationale for the tough sentence. But is the judgement legally consistent? He did not, for instance, steal money like Madoff, say critics. Still, does that make what he did less of a crime? Or pretty much the same thing? Again, Davidoff points to New Yorker writer Malcom Gladwell, who controversially argued that Skilling’s shenanigans were there in the public domain for everyone to see—all they had to do was look closely and ask the right questions. And then someone did.
The fickle hand of justice
Clearly, Gupta, like Siegel in the 1980s, should have plead guilty if he wanted to avoid a jail term. Look what happened to the rest of his cohorts: Anil Kumar, also a McKinsey partner—in fact, a protégé of Gupta’s—and a Rajratnam tipster, pleaded guilty and helped the DA painstakingly build a case against Rajartnam for which he got no jail time. Ditto Rajiv Goel, a middle-manager at Intel and a former classmate of Rajratnam at Wharton and one of his tipster. Add to the list, a Harvard graduate and former Galleon fund manager with the deliciously ironic name of Adam Smith who also cooperated with the DA and got off. But, for Gupta, pleading guilty would have meant a public acknowledgement of his deeds.
Funny thing is, another era, another prosecutor, and things may have turned out a bit different. According to a Wall Street Journal study, prison terms for insider trading convictions have become lengthier. After compiling data from 108 insider trading cases, the paper revealed that “from 2009 to 2011, the median jail sentence was 30 months, up from a median term of 18 months during the 2000s. From 1993 through 1999, the median length of prison terms was only just under a year. Also, from 2009, the United States attorney's office in Manhattan has charged 70 people with insider trading out of which 64 have either pleaded guilty or been convicted.
The man to thank for this stepped-up vigilance on insider-trading is, Preet Bharara, also of Indian heritage, who has tackled the Gupta case with zeal, and consequently made a name for himself as an uncompromising crusader. Curiously, none of the firms involved in the sub-prime mortgage fiasco that brought the world economy to its knees—many of them clearly, knowingly packaging and selling toxic securities—have as yet been indicted. Derivatives are a complex business and the prospect of unraveling them in front of a jury is not something that any DA would relish. Instead, insider trading, with its human drama and clear-cut scenarios of right and wrong, is an easier win. Reports suggest that Bharara has now moved on from insider trading and has since set his sights on a new crime-fighting horizon—cyber crimes.
It is likely that Gupta, eventually, may end up serving less than the sentence he has been awarded by Judge Rakoff, a man who a few decades ago ironically said “there was a human being here who had to be salvaged because he was not an evil man,” referring to his convicted client, Martin Siegel, whom he was defending at the time. Just yesterday, Rakoff in judge mode, called Gupta’s actions “disgusting in its implications,” and that “He is a good man…but the history of this country and the history of the world is full of examples of good men who did bad things.” What a difference twenty odd years can make.