Solidifying Business Contacts or Insider Trading? - Why Compliance With Confidentiality Policies is Important in the Race to Get Ahead
Jana C. Volante writes:
On Monday, May 21, 2012, in the Southern District of New York, Rajat Gupta’s trial began. Gupta is charged with six criminal counts all related to insider trading, more specifically five counts of securities fraud and one count of conspiracy. If convicted, Gupta faces up to 25 years in prison. Barnini Chakraborty, "High-Profile Rajat Gupta Trial Underway; Blankfein, Buffett Could Be Called to Testify", FOXBusiness, May 21, 2012.
The prosecution of Gupta -- a former director at Goldman Sachs and Proctor & Gamble and as the former managing director at McKinsey & Co. -- by the U.S. Attorney’s Office shows that no corporate director or officer is “untouchable” in the government’s crusade against insider trading.
Gupta allegedly committed securities fraud and conspired to commit securities fraud when he leaked confidential – not to mention valuable – information about Goldman Sachs and Proctor & Gamble to the founder and former manager of the Galleon hedge fund, Raj Rajaratnam, who has already been convicted of related insider-trading charges and is currently serving an 11-year prison sentence. "Gupta Trial: A Who's Who of Those Who Will Come Up", Deal Journal, Wall Street Journal Blogs, May 22, 2012.
The government’s theory of prosecution indicates that, shockingly, Gupta was not paid for any of the insider tips that he allegedly provided. Although in the long term money may have played a part in his thinking, it may not have been his most prominent motivation. So, what motivated Gupta? Climbing the corporate ladder? He had already done that. Moving in elite social circles? He was already a part of those circles, counting Bill Clinton and Bill Gates among his many powerful business contacts.
Could the charges against Rajat Gupta be the result of his well-intentioned, but reckless, attempt to maintain and deepen those business contacts and relationships? Gupta and Rajaratnam were, by all accounts, good friends and frequently discussed business, sharing confidential details and improper tips which arguably should have remained in the Board room. Michael Rothfeld, "Gupta Case Targets Inside Culture", Wall Street Journal, Oct. 27, 2011. In fact, the U.S. Attorney’s Office for the Southern District of New York seems to be proceeding on the theory that Gupta was motivated not by greed or profit, but by his desire to further his friendship, as well as his investing partnership, with Rajaratnam who was himself a billionaire. Gupta would allegedly share nonpublic, corporate information with Rajaratnam as soon as he received it, including information that Berkshire Hathaway, led by Warren Buffett, would soon be investing $5 billion in Goldman Sachs.
Although his motivation was undoubtedly complex, at least in part it seems that Gupta was confiding in a friend, peer, and colleague. And, in that case, it seems that if Gupta would have exercised a bit more discretion and if he would have better minded the confidentiality policies of Goldman Sachs and Proctor & Gamble, then he would not be facing criminal charges and, if convicted, an extended stay in prison. Supporting this theory, as speculated in a Wall Street Journal’s blog, Lloyd Blankfein as Chairman and CEO of Goldman Sachs as well as A.G. Lafley as former Chairman, President and CEO of Proctor & Gamble, among others, are expected to testify regarding the policies of each of their companies on confidentiality and inside information and how these policies apply to their respective Boards of Directors.
There is a lesson to be learned here for all corporate directors and officers: keep your friends close, but not so close that they are privy to confidential communications.
(Jana C. Volante, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Pittsburgh, PA office. Her practice concerns white collar criminal defense and commercial litigation)