Saturday, November 19, 2011

Insider Trading Laws in the U.S.: The Case Against Rajat Gupta

(The following post has been contributed by Karan Tyagi, who is an associate with Gide Loyrette Nouel in Paris. After obtaining his law degree from GLC (Mumbai), Karan went on to do his LL.M. from Harvard Law School last year. He can be contacted at
Yesterday’s Financial Express has a piece authored by me on Rajat Gupta's insider trading trial in the US. The piece, titled 'What Rajat Gupta's case hinges on' can be accessed here.
The highly publicized Galleon insider trading case has brought to the forefront questions about liability in insider trading cases in the US. Rajat Gupta, former McKinsey CEO and founder of the Indian School of Business, was recently charged with tipping insider information related to Goldman Sachs and Procter & Gamble to Raj Rajaratnam. He has since pleaded not-guilty to insider trading and conspiracy charges, and will face trial. In the write-up, I look ahead at Rajat Gupta's insider trading trial, and flag a few interesting issues that may arise. Especially in the wake of Raj Rajaratnam's conviction, the piece analyzes related US insider trading laws, and criminal and evidence rules that will be at play in Gupta's case. Rajaratnam was sentenced in October 2011 to 11 years in prison and fined $10 million. It was described as the longest ever-prison sentence for insider trading, and a watershed moment in the US government's aggressive two-year campaign to root out the illegal exchange of confidential information on Wall Street.
The discussion focuses on the personal benefit test (expounded by the US Supreme Court in Dirks v.SEC), which is designed to ensure that insider trading laws ensnare only the culpable, i.e. those who seek to use inside information for their personal advantage. The Galleon insider trading trial represents the vigorous enforcement of laws against insider trading in the US, and the decision in the Galleon cases would be a significant milestone in defining the scope of insider trading prohibitions in the US.
In India, while SEBI has been given the mandate to protect our investors and keep our markets free from fraud, the Galleon case serves as an important lesson in the need to strengthen enforcement of our insider trading regulations. More importantly, the case provides a nuanced understanding of insider trading liability. 
- Karan Tyagi

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