Tuesday, July 07, 2015

Newman No Help to Gupta; No Quid Pro Quo Required for Tipper Liability

By Lene Powell, J.D.

Newman did not add a requirement for tippers to receive a “quid pro quo” from tippees, so Rajat Gupta lost his bid to have his two-year sentence for insider trading vacated. According to Judge Rakoff, Newman did not change the “personal benefit” standard as it applied to Gupta’s case, so it would not have been futile to raise the issue on appeal and Gupta did not establish that he was actually innocent. Moreover, even if an element of a pecuniary benefit from tippee to tipper was required, as Gupta argued, such a benefit was proved against Gupta at trial (U.S. v. Gupta, July 2, 2015, Rakoff, J.).

Background. In 2012, former Goldman Sachs board member Rajat K. Gupta was sentenced to two years in prison for giving material non-public information about Goldman to Raj Rajaratnam of The Galleon Group, in violation of the insider trading prohibition under Exchange Act Section l0(b). In March 2014, a Second Circuit panel upheld Gupta’s conviction and denied his request for a new trial, ruling that the district court properly admitted, limited, or excluded wiretap and character evidence. On April 20, 2015, the Supreme Court denied certiorari on Gupta’s petition.

No futility under previous law. Gupta brought a motion for post-conviction relief under 28 U.S.C. § 2255 to vacate the sentence and judgment against him, arguing that, in light of the Newman decision, the court’s instruction to the jury concerning the "personal benefit" element of an insider trading violation was wrong and that not enough evidence of such a benefit was proved at trial to sustain his conviction.

In a Section 2255 motion, the defendant must demonstrate either cause for failing to raise the issue and resulting prejudice, or actual innocence. One way a habeas petitioner can establish cause is by showing that that it would have been futile to raise or preserve the issue, due to prior case law that consistently rejected the particular claim. Here, however, Gupta’s argument was not futile. Although Newman may have narrowed the range of evidence that would support an inference of “benefit,” it did not purport to overrule any binding precedent. Also, belying the claim that it was futile, at trial Gupta objected to the description of the benefit element in the jury instructions, but then decided not to pursue the argument on appeal. Because the argument was not futile—then or now—it should have been raised on appeal.

No actual innocence. Gupta argued that if the Newman standard of benefit had applied at the time of his trial, the evidence against him would not have been sufficient. According to Gupta, Newman requires that the tipper (Gupta) receive a “quid pro quo” from the tippee (Rajaratnam) in the form of a “potential gain of a pecuniary or similarly valuable nature.”

This was a misreading of Newman, said the court. That case was concerned with the liability of a remote tippee, and turned on whether the tippee knew that the information was the result of a breach of fiduciary duty by the tipper. Information about personal benefit went to whether evidence could reasonably support an inference of knowledge on the part of a remote tippee. However, Gupta was the tipper, so what Rajaratnam knew was irrelevant to Gupta’s own liability. Both before and after Newman, a tipper is liable for securities fraud if he takes sensitive market information provided to him in a fiduciary capacity and exploits it for some personal benefit. That is how the jury was instructed in Gupta’s case.

“A tipper's intention to benefit the tippee is sufficient to satisfy the benefit requirement so far as the tipper is concerned, and no quid pro quo is required,” said the court.

Even if the personal benefit element did apply to tippers, the burden of proof was satisfied in Gupta’s case. Gupta and Rajaratnam had a “meaningfully close relationship” because they were close friends and Gupta was on a short list of people allowed to speak with Rajaratnam at the end of the trading day. Moreover, they were close business associates with a “considerable history” of exchanging financial favors. The tips, which conveyed non-public information about a $5 billion investment in Goldman as well as an unprecedented quarterly loss, were "objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." Further, because Gupta was a Galleon investor, any tips on which Rajaratnam traded had the potential to increase the value of Gupta's shares.

Motion denied. Because Gupta did not show either futility or actual innocence, the court denied the motion for post-conviction relief.

The case is No. 11 Cr. 907 (JSR).

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