Great expectations

Past success against insider traders might actually hurt not help the case against Rajat Gupta. US prosecutors took down Galleon Group founder Raj Rajaratnam with wiretaps and nailed arbitrageur Ivan Boesky with a cooperating witness. But they may have neither to support their case against the former McKinsey boss and Goldman Sachs director. Circumstantial evidence could be enough to win, though juries also could just as easily be conditioned now to expect more.

The case against Gupta isn't weak. Phone records, for instance, show him calling Rajaratnam minutes before the convicted fraudster made a lucrative trade in Goldman shares. And expanded charges filed this week include suspicious conversations as far back as 2007.

But there appears to be no smoking gun that Gupta passed tips during those chats. That's a gap rarely found in successful insider trading cases.

Wiretaps caught Rajaratnam boasting on the phone about valuable scoops from others. And investment banker Dennis Levine blabbed to prosecutors in 1986 about selling Boesky inside information. Without wiretaps or a witness, an insider trading case can easily crumble.

In 2010, a judge tossed a suit in part because the Securities and Exchange Commission couldn't prove a Deutsche Bank salesman passed 'nefarious content' to a hedge fund manager during calls shortly before a questionable trade. Last December, the SEC lost again after failing to show what an investor may have learned from an insider before buying suspicious call options on stock of Potash Corp.

In both cases, the regulator appears to have been a victim of raised expectations. Circumstantial evidence used to be the standard in insider trading cases. Boesky changed that and Rajaratnam may have upped the ante. Without wiretaps or strong witnesses, juries and even judges have understandably become skeptical.

A decade ago, TV law-and-order procedurals seemed to make convictions harder by conditioning jurors to expect the kind of fanciful forensic evidence they saw on the screen. Named for the 'CSI: Crime Scene Investigation' program, it came to be called the 'CSI effect' in legal spheres. Prosecutors may encounter a similar phenomenon in the Gupta case. Call it the 'Raj syndrome.'