The Trial of Rajat Gupta (Opening Arguments)

There is some good coverage of the trial of Rajat Gupta who is accused of engaging in insider trading.  The Deal Book in particular looks like it will provide some detailed coverage.  An early example is here.   We will comment on the case from time to time from afar, relying on the strength of this commentary.  Had the case been in Denver, there is no doubt that the staff of the Race to the Bottom would have blogged the trial as we have for other important cases (the trial of Joe Nacchio and the trial of Ward Churchill). 

This is a case where the government wants it to be simple (and indeed, the prosecution described the matter as a "straightforward case of insider trading.").  Mr. Gupta gave information to others (out of friendship or in return for some benefit) and they traded on it.

Gupta's side will to some degree simply deny the charges.  Suggestive evidence (the taped phone calls that do not refer to Mr. Gupta by name) will be disputed.  But in addition, his side appears to be raising a more complicated defense:  As the Deal Book reported:

Mr. Naftalis also hinted at another defense strategy: portraying Goldman Sachs as a sieve of information. He noted that Galleon was a top customer of Goldman and hinted that Mr. Gupta was not the only Goldman insider with valuable information. Three executives from the company are under investigation by the federal authorities for possibly leaking illicit information.

This is a high risk defense.  A defense that others do it does not absolve Mr. Gupta.  To the extent the defense is that others provided the information, this is premised around the acknowledgment that, in fact, material inside information was conveyed but that someone other than Mr. Gupta conveyed it.  In other words, a crime was committed but not by Mr. Gupta.  Any hint that in fact the law was violated may make it easier for the jury to lean toward a conviction. 

Whatever happens with the defense, one thing seems clear.  Goldman will not come out of this looking particularly good.  The firm already appears to have a credibility problem with clients after some of the behavior, alleged by regulators, occurred during the financial crisis.  To the extent that the trial of Mr. Gupta suggests that there was widespread favoritism (including tips that provided trading advantages) to favored clients, this may not be well received by the less favored clients. 

J Robert Brown Jr.