Maybe Rajat Gupta Just Wanted Raj Rajaratnam To Console Him Over Goldman's 3Q2008 Loss, Not Go And Trade On It

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Rajat Gupta was arrested today for maybe telling Raj Rajaratnam some stuff that he wasn't supposed to tell him, and thus putting in motion a complex chain of events that has ruined the lives of many a man, woman, and dog. You can have two broad categories of theory about why Rajat Gupta went around telling Raj Rajaratnam inside stuff about Goldman and P&G board meetings:*

1.He expected Raj to trade on that information and make money, and he was cool with that because (1) they were some sort of sinister South Asian cabal intent on bringing down the WASP financial system, (2) he was going to make money off of it, or (3) they were friends, and friends want to see their friends succeed in business/crime. Or

2.He did not expect Raj to trade on that information and just thought neat stuff was happening and wanted to share it with his friend. “Whee, Raj, we’re getting money from Buffett! Bet you’ve never done that.” Or, as his lawyer put it, "There were legitimate reasons for any communications between Mr. Gupta and Mr. Rajaratnam – not the least of which was Mr. Gupta’s attempt to obtain information regarding his $10 million investment in the GB Voyager fund managed by Mr. Rajaratnam."

What matters is that #1 is probably a crime and #2 is probably not, because the crime of insider trading depends not only on what you did but on what was in your heart when you did it. If you did it for gain - even the vague gain of winning your friend's gratitude - then it's a crime. If not, not. :robably. It's hard to get direct access to a man's heart, particularly if he was trained by McKinsey. And Raj isn't about to sell out friends to these choots in the US Attorney's office.

So they've set out to prove it in other ways. Because people like money, and juries understand it, they start with the fact that Gupta apparently invested around $2.5mm in Galleon, along with more money in other, more intimate, Raj-n-Rajat ventures. So Gupta had financial incentives to give Raj inside information. For example, Galleon made $800,000 on leaked news that Buffett was planning to invest in GS; based on a $2.5mm investment Gupta's share of that was something like $250. Which he's not gonna turn down or anything but ... I'm not sure it's slam dunk evidence that his financial incentives were to tip Raj to trade, rather than to check his account balances as his lawyer claims.

Given that, the fallback is basically "he was friends with Raj, and wanted his friend to like him more, so he gave him inside information." Which seems like a pretty weak "gain" to hang a criminal charge on, but it's how the law works.

But insider trading isn't really a thing, it's a symbol of a different, unrelated thing. Lots of peoplewant the government to be prosecuting big fish for the financial crisis, and this is an easy way to throw them a bone. Insider trading is fun for prosecutors. You get to run wiretaps like the big cops on TV. And you get rules that make it relatively easy to win cases. CDO cases are harder and require reading complicated documents and explaining them to juries. "At first they were like 'we're solvent,' but then they were like 'bankrupt'" cases are also hard to make criminally. And don't hold your breath for the "yeah, I did it, I just decided to bring down the global financial system because I don't like middle-class people, what are you gonna do about it?" case any time soon.

Insider trading, though, is easy and fun. They were investigating Raj anyway, and snaring a Goldman director** is a neat bonus. And they are milking it for all it's worth. Listen to Preet Bharara pretend this is about something other than it is:

“Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders," Manhattan U.S. Attorney Preet Bharara said in a statement. "As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr. Gupta's breach of duty," Bharara said.

The great word here is "instead" - Gupta was too busy having occasional 1-minute phone calls with Rajaratnam to pay attention to any bad things going down in the P&G (okay, okay, Goldman) boardroom. This caused the crisis.

Or not. But the key thing is for prosecutors to milk their biggest post-2008 get so far. A guy who "broke his trust" with public company investors and sold out his companies for $250 and the gratitude of his shady friend is a good story. A basically honorable guy who wanted to chat with a smart friend about the markets - which sounds a little implausible, but is kind of what the wiretapped calls sound like - doesn't give you enough of a villain to work with.

* Or you could reject the premise and say “he never gave Raj inside information.” This is somewhat hard to square with the pattern of (1) Gupta does board call where big thing happens, (2) Gupta hangs up, (3) inside of 30 seconds later Gupta calls Raj, (4) Raj trades immediately afterwards. But, yeah, go for it. Those calls weren't recorded, apparently, and the recorded calls are kind of weakevidence of insider trading.

** And P&G! Occupy P&G! Also he may have had something to do with McKinsey, not sure.

Related

Rajat Gupta's Lawyers May Try The "Everybody Was Doing It" Defense

There is much to like in this morning's Journal article about the Rajat Gupta insider trading prosecution, including a nice illustration of how the inside information that Gupta allegedly passed to Raj Rajaratnam actually seems to have been out in the market already. But let's start with the transcript of the call between Raj Rajaratnam and his trader Ian Horowitz, which the Journal has redacted not for confidentiality but for saltiness: Just so you can see Raj Rajaratnam saying "fuck" a lot, the full transcript of that call is here. But, anyway, the Journal story: