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:

The Galleon Group hedge fund wasn't alone in piling into Goldman Sachs Group Inc. stock hours before the bank announced a $5 billion investment from Warren Buffett's firm at the height of the financial crisis, trading records show.

The last-minute purchases by Galleon founder Raj Rajaratnam on that day, Sept. 23, 2008, are expected to be a focus of the insider-trading trial of former Goldman director Rajat Gupta, who is accused of leaking news of the still-secret investment to Mr. Rajaratnam in a phone call just before the market closed.

But a quick run-up in Goldman stock that preceded Galleon's orders by several minutes — suggesting that others may have had early notice of the blockbuster Buffett investment — could also emerge as a key point in the defense of Mr. Gupta as his lawyers point to other possible leaks, people familiar with the case say.

So what is the supposed defense theory here? Here is the relevant bit of the call between Rajaratnam and his trader the next day:

 IAN HOROWITZ: Someone had this before us, someone, whatever went on, 
 something happened, someone, they ...
 RAJ RAJARATNAM: I got a call, right, saying something good's gonna happen.
 IAN HOROWITZ: We'll talk about, how 'bout this, we'll talk when you 
 come in.
 RAJ RAJARATNAM: Okay.
 IAN HOROWITZ: We'll talk when you come in, okay?
 RAJ RAJARATNAM: But I didn't do anything, you were not there, I asked 
 Anand to buy some.

So Rajaratnam got a call just before he started buying - and just after "someone had" something, according to Horowitz. Is the theory perhaps that the call Rajaratnam got was from someone other than Rajat Gupta? Mmmaybe. The timing is a bit tight though:

Mr. Gupta disconnected from the board call at 3:54 p.m. [on September 23, 2008] and called Mr. Rajaratnam 16 seconds later, according to phone records. Starting at 3:57 p.m., Mr. Rajaratnam ordered 350,000 shares of Goldman; he obtained 217,200, according to records from his trial.

Three minutes is not a ton of time for Raj to get other calls from other Goldman insiders telling him about Buffett. But maybe! (The call between Gupta and Rajaratnam was not, of course, wiretapped.)

Or is the theory literally "everyone was doing it"? That is, Horowitz had seen the market moving up before Raj got the call from Gupta - the Journal has a little chart showing a price move from sub-$120 at 3:52, to over $123 at 3:57, to hit $125.95 before closing at $125.05 - and so the news that Something Was Up was not in fact material, market-moving news, because it was not news to the market and the market had already moved? This is ... a theory, anyway.

Here's another theory I went off and imagined. Why was Gupta calling Rajaratnam on September 23? Well, maybe he was just giving his friend inside information to use for private profit because, hey, crime! Or maybe he was ... marketing a deal? The Journal describes the relevant maybe-inside information as "a $5 billion investment from Warren Buffett's firm," and the government does the same, characterizing the board meeting as one "during which the Board approved a $5 billion infusion of capital by Warren Buffett’s Berkshire Hathaway (which would be announced to the public later that day, after the market closed)." But what else happened that day?

Well here is the other call between Rajaratnam and his traders on the morning of September 24:

 RAJ RAJARATNAM: Yeah, I want to, yeah, I want go for two, to get 2 million
 shares of Goldman Sachs.
 MCCOWN SMITH: So make it a total of 2 million.
 RAJ RAJARATNAM: Right.
 ...
 MCCOWN SMITH: But I'll, I'll change our indication right now. I mean,
 you know, look, I get the sense this is a deal that is,
 you know, it's going pretty well, I mean, they just
 upsized it from 2-1/2 to 5 billion. Gonna [unintelligible]
 I mean, to me, this Buffett thing is somewhat of a
 game changer.

He wasn't just buying 217,200 shares - he was buying 2 million shares! (Actually he changed the order to 2.5 million later on the same call.) This was, of course, after the public announcement of the Buffett investment - but it wasn't a buy order in the public markets. Rather, it was an order in the $5 billion public equity offering that Goldman did at the same time. If Rajaratnam got his full size in that deal,* then he got $307.5mm worth of stock at $123, the offering price - 10x the size, and at a lower price, than the $27ish million worth at ~$123 - $126 that he picked up at the end of trading on the 23rd.

Two points. First of all, if you were arguing for Gupta's defense, you might want to suggest that Gupta's motives in calling Raj were not to tip Raj and allow him to buy in the market just before the close, so that he could make his friend some money and make him feel loved by Gupta so he would make Gupta rich or whatever. Rather, maybe his motives were to make his friend feel loved by Goldman so that he'd support Goldman's stock offering later that day. And that he didn't want Rajaratnam to trade in the market - after all, markets were almost closed - but rather to come into the deal.

On that theory, Gupta wasn't selling out Goldman for the private gain of himself and his friend. Rather, he was working in the best interests of Goldman shareholders by drumming up interest for - let's remember - a pretty important capital raise at the height of the financial crisis. Sure he screwed it up a little - best practices would involve, at the very least, waiting for markets to close before telling Rajaratnam about the offering - and probably that screw up is illegal, maybe even criminal. But it's less criminal if he told and expected Rajaratnam not to trade on the information, but rather just to put an order in to the deal. And motive - or at least, violation of a duty to the firm - matters in insider trading law, and Gupta looks better if he was acting ham-handedly on behalf of the firm than if he was acting deviously on behalf of his friend.**

There's maybe another point too. I may have expressed skepticism before at the notion that Insider Trading Harms Faith In The Fairness Of Our Capital Markets And Keep A Level Playing Field And Think Of The Children Etc. This case is a nice illustration. Per the Journal, "According to prosecutors, Mr. Rajaratnam's purchases that afternoon earned Galleon a profit of $840,990." Purchases of 217,200 shares at various prices in the $123-$126 zip code, remember. Let's say he got allocated half of his order in the Goldman public offering, 1.25mm shares at $123. The stock opened on September 24 - just after allocations in that deal were released - at $128.44, making Rajaratnam (in this hypothetical) $6.8mm of profit at the open. If he sold at the $133 close he made $12.5mm in ~20 hours.

Retirees and day traders did not have the chance to buy GS at $123 between 4pm on the 23rd and 9:30am on the 24th. If you were a smart and/or tipped off individual who knew to trade at 3:57 on the 23rd, when Rajaratnam got his call, you got a price in the high $123s to the high $125s. If you were a big institution who had a chance to buy in the public offering, you got $123 flat. And much more size - the Journal shows ~750,000 shares changing hands in the last four minutes of trading on September 23, versus 40 million in the equity offering. Not much to be done about that - companies need to be able to raise money and, occasional puffing from Facebook aside, they don't generally feel obligated to offer the same opportunity to invest to big institutions and retail investors. But when Raj Rajaratnam made millions of dollars because he had the chance to buy hundreds of millions of dollars of GS stock at below-market prices in the morning of September 24th, it's kind of funny that his making thousands of dollars off his purchases of tens of millions of dollars of GS stock at market prices a few hours earlier are the evidence that the equity-market playing field is uneven.

New Ripples for Gupta Case [WSJ]
Government's Motion in Limine for the Admission of Certain Statements
Raj Rajaratnam - Ian Horowitz call, September 24, 2008, 7:56am
Raj Rajaratnam - Ian Horowitz call, September 24, 2008, 7:09am
Raj Rajaratnam - David Lau call, October 28, 2008, 12:12pm

* Did he get allocated his full order? Unclear, probably not - as of the 7:56 call allocations weren't done and the deal was clearly in demand - but on the transcript the Galleon folks are looking to call in favors from their Goldman sales coverage as well as from David Heller and others at GS. And Galleon was a big fund with - obviously! - a lot of contacts at Goldman. So he probably did okay.

** You're welcome, Gupta defense team. I cannot however help with this, from October 28, when Rajaratnam dumped GS stock in advance of weaker than expected earnings:

 RAJ RAJARATNAM: Um, now I, 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
 DAVID LAU: Really.
 RAJ RAJARATNAM: You know. Yeah. Now I can get that number, you know, one,
 they don't report until December, they, I think their 
 quarter ends in November, but [unintelligible] one more, but 
 you know they have these huge marks in ICBC and all of that 
 stuff right. That uh is getting absolutely clobbered. You know.
 DAVID LAU: Right.
 RAJ RAJARATNAM: So what he was telling me was that uh, Goldman, the 
 quarter's pretty bad. They have zero revenues because their 
 trading revenues are offset by asset losses, and to date they 
 have lost $2 per share, they just announced a 10% cut and uh 
 you know, the basic business is ok but uh you know this is 
 uh tough for them. I don't think that's built into Goldman 
 Sachs stock price.

Maybe there were other tipsters on the board?