Insider trading cases are never easy to prove whether in the global or Indian context. Even if a company ‘insider' does pass on information, the key question that arises is of whether he actually made a profit from it.
Now, after two years of investigation, the US Federal Bureau of Investigation pressed charges against Rajat Gupta, former head of bellwether consulting firm McKinsey on conspiracy and securities fraud.
The charges are based on allegations that he passed on ‘material' information on Goldman Sachs and Procter and Gamble (P&G), on whose boards he was a member, to Galleon hedge fund manager Raj Rajaratnam.
The charges, to which Gupta has pleaded not guilty, include three instances where Gupta tipped off Rajaratnam on a sizable investment by Warren Buffett in Goldman and on unprecedented weak performances by both Goldman and P&G in late 2008.
The hedge fund manager is said to have profited by buying into Goldman on the eve of the Buffett deal announcement. Similarly, exiting positions in Goldman prior to the announcement of week-quarterly results helped Rajaratnam avoid losses.
Rajaratnam has been found guilty of trading based on insider information and been sentenced to 11 years in prison.
COMPLICATIONS
Where things get tricky with the insider trading charges is that the prosecution does not have any actual recordings of Gupta providing the information to Rajaratnam. What they do have are records of Gupta contacting Rajaratnam shortly after learning of Buffett's investment in, and the quarterly loss of, Goldman.
They also have a recording of Rajaratnam telling an employee that he heard from someone on the board of Goldman about its quarterly loss.
This ‘circumstantial' evidence is being touted as evidence of guilt.
However Gupta's simple defence: He did not make a single penny nor did he trade.
In fact, he lost his entire investment in one of Galleon's funds. Therefore, the profit motive in the alleged insider trading is not all that clear.
Gupta's lawyer claims that his conversations following the Goldman board meets were legitimate and not intended for Rajaratnam to profit from.
CONVICTION
The prosecution team is also not backing down. They allege that Gupta's position was to serve shareholders and the companies of whose boards he was a member.
This is a function which Gupta did not serve to the best of his ability. The prosecution is expected to argue that Gupta provided information to Rajaratnam to enhance his standing with him.
The outcome of the trial is eagerly watched. If Gupta is found guilty on the charges, it would set new ground for insider trading rules that don't require the ‘insider' to profit from such leaked information. Gupta has paid $10 million.