Rajat Gupta trial begins today, wiretaps remain crucial

Rajat Gupta, a global corporate icon from India, charged with securities fraud and conspiracy, will go on trial on Monday in the Federal District Court of Manhattan.

The prosecution wants to put its case by playing phone conversations, secretly recorded by the US Federal Bureau of Investigation in 2008. The calls have Rajaratnam, co-founder of the Galleon Group hedge fund, talking to two employees about tips received on Goldman Sachs. Since 63-year-old Gupta's voice isn't on the wiretaps, the defence has called for their dismissal as hearsay. Just ahead of the trial, Judge Jed Rakoff gave a preliminary ruling to allow the wiretaps. But Rakoff warned these tapes would only be admissible as evidence if the US government lawyers could prove that a conspiracy existed between the two men. Failure to prove conspiracy could lead to a mistrial.

The US government lawyers claim that after a Goldman Sachs board meeting on September 28, 2008, Gupta immediately phoned Rajaratnam to tell him that the investment bank was going to receive $5 billion from Warren Buffett's company Berkshire Hathaway. This led to Wharton Business School-educated Rajaratnam buying Goldman Sachs shares just two minutes before the market closed that day, and reaping more than $800,000 as profit.

The US lawyers, however, only have a record of a call being made and proof of Rajaratnam's trades in its aftermath. There is no recording of what was said. So, the prosecution wants to play another wiretap in which Rajaratnam, the morning after the meeting, told Ian Horowitz, a Galleon trader: "I got a call at 3:58 …. saying something good might happen to Goldman."

The playing of wiretaps is a blow to Gupta's defence team. "Now the jury will hear Raj say that he had a source on Goldman's board who leaked him the critical information," says John Coffee, a law professor from Columbia University, who specialises in white-collar crime. "There is no other logical candidate for this role other than Gupta."

The case against Gupta is weaker than that against Rajaratnam, which was won largely because of wiretaps that had his voice discussing tips. Establishing a conspiracy is also tough since Rajaratnam isn't going to testify. But if the prosecution manages this, it can use the co-conspirator's out-of-court statements to convict the other. But failure to prove conspiracy, leading to a mistrial, could kill the case.

"I don't think they would take such a risk without being certain," says Eugene O'Donnell, a professor at John Jay College of Criminal Justice in New York. "They're going to have to connect the dots."

Gupta also allegedly phoned Rajaratnam 23 seconds after an October 2008 board meeting of Goldman Sachs to tell him that the investment bank would report a quarterly loss. This is based on a recorded call made the day after in which Rajaratnam says: "I heard yesterday from somebody who's on the board of Goldman Sachs that they are gonna lose $2 per share. The street has them making $2.50."

While Coffee sees Gupta as the "logical candidate," the defence has contended that other Goldman Sachs employees were leaking information. Gupta's corner has also argued that before the autumn of 2008, when the two alleged leaks occurred, friendship between the two men had already deteriorated over Rajaratnam's mismanagement of their joint investment fund, Voyager Capital Partners, which caused Gupta a $10 million loss.

Gupta's lawyer, Gary Naftalis, had also asked for barring the only recorded conversation between Gupta and Rajaratnam, in which they discuss a Goldman Sachs board meeting about acquiring a commercial bank. Naftalis argued that this information was already public. But Judge Rakoff is in favor of admitting this wiretap since it is concrete evidence of the two men communicating.

The tussle over the wiretaps is critical because recorded conversations have a deep impact on a jury's psyche. They provide a peek into the private dealings of wealthy corporate figures. Some experts even say that exposing insider trading, without wiretaps, would be impossible.

The four-year-long crackdown by the FBI on insider trading has led to more than 50 executives being convicted or pleading guilty since 2009. The extent of the malpractice has made judges more open to using wiretaps. "I think there is a shift with corporate executives now also being viewed as criminals," says O'Donnell. "These guys operate in a different stratosphere…They think they won't get caught."

The fallout of this crackdown is expected to become a deterrent, especially the fear of the government listening in. At the same time, there is the danger of insider trading becoming more sophisticated. 

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