Rajat Gupta, a former Goldman Sachs director, was found guilty on June 15 of feeding confidential information to a corrupt hedge fund manager, becoming the most prominent defendant convicted so far in a wide-ranging probe conducted by investigators armed with wiretaps.

Defense attorneys suggested that the result would embolden prosecutors to aggressively pursue financial crime in an environment where the public is skeptical of Wall Street practices.

Gupta—born in India, educated at Harvard Business School and well known in corporate America—was convicted by a jury after less than two days of deliberations of conspiracy and three counts of securities fraud, and acquitted of two other securities fraud counts.

The trial of Gupta, 63, and the one last year for former billionaire Raj Rajaratnam, revealed how the two longtime friends and Wall Street titans navigated the 2008 economic meltdown.

The pair had “public sides of success,” Southern District Assistant U.S. Attorney Reed Brodsky said at closing arguments at the closely watched white-collar trial (NYLJ, June 14). “But concealed from the public was a different side—a side that committed crimes.”

Outside court, defense attorney Gary Naftalis said he was disappointed in the guilty verdicts.

“We believe the facts of this case demonstrate that Mr. Gupta is innocent,” Naftalis said. “He always acted with honesty and integrity.”

Later, Naftalis issued a statement in which he said, “We are pleased that the jury acquitted Mr. Gupta on a number of significant charges, including the only charge related to Procter & Gamble” and noted that the guilty verdicts with regard to the other counts are based on “the hearsay wiretaps of Mr. Rajaratnam.”

Mr. Naftalis reiterated that his client was innocent.

“This is only Round One,” he said in the statement. “We will be moving to set aside the verdict and will if necessary appeal the conviction.”

The conviction was a coup for Southern District U.S. Attorney Preet Bharara, who has ridden a crusade against insider trading to the cover of Time Magazine.

“Rajat Gupta once stood at the apex of the international business community,” Bharara said in a statement. “Today, he stands convicted of securities fraud. He achieved remarkable success and stature, but he threw it all away. Having fallen from respected insider to convicted inside trader, Mr. Gupta has now exchanged the lofty board room for the prospect of a lowly jail cell. Violating clear and sacrosanct duties of confidentiality, Mr. Gupta illegally provided a virtual open line into the board room for his benefactor and business partner, Raj Rajaratnam.”

Bharara said the case puts into “stark relief” his claim almost two years ago that insider trading is “rampant” on Wall Street. With Gupta’s conviction, his office has achieved guilty pleas or guilty verdicts before juries in 60 cases.

Legal observers contacted after the verdict on June 15 were particularly impressed that the conviction achieved by Bharara’s office was based entirely on circumstantial evidence.

“We should recognize that it was a gutsy call to go to a criminal trial with evidence that was circumstantial,” said Columbia Law professor John Coffee, a Law Journal columnist. “His judgment was correct.”

Coffee said he was surprised the verdict came so quickly,

“It appeared the jury really had no doubt on his guilt,” he said. “You can only reach a decision that quickly if you have no doubt by the end of trial.”

Coffee commented that Naftalis had raised so many issues, “I thought the jury would be a week pondering them.”

Bradley Simon of Simon & Partners, a former Eastern District prosecutor, said he could see the verdict coming.

“Even though there was no real direct evidence that the government put conclusively establishing that he was disseminating [insider] information, there seemed to be enough circumstantial evidence,” he said.

Given that “the government can put a lot of resources into a case like this,” he and his fellow defense attorneys “face an uphill battle,” Simon said.

Their task has been made all the harder, he added, by the climate of opinion created by the financial crisis.

There is “a lot of anger and disenchantment with Wall Street and Wall Street executives, and even though the evidence was largely circumstantial, I think there was enough evidence establishing that inside information was disseminated,” he said.

Simon predicted that the verdict will “have a somewhat chilling effect on Wall Street. I think people will be very nervous about who they are talking to.”

Amy Walsh, a partner at Kostelanetz & Fink and a former Eastern District prosecutor, said cases like Gupta’s have increased the public awareness of insider trading.

“It will result in higher enforcement and more of a likelihood of conviction because the general public has a much better understanding of the nature of the charges and may be more likely to convict someone,” even when the evidence is only circumstantial, she said.

The conspiracy count for which Gupta was convicted carries a maximum sentence of five years in prison and a maximum fine of the greater of $250,000 or twice the gross gain or loss from the offense. Each of the securities fraud counts carries a maximum sentence of 20 years and a fine of $5 million.

However, Gupta probably will receive substantially less than the maximums once federal sentencing guidelines are applied. His sentencing is scheduled for Oct. 18.

Howard Goldstein, a partner at Fried, Frank, Harris, Shriver & Jacobson, suggested that the fact that “Gupta held such responsible positions will hurt him in the sentence.”

“Most judges do feel that people who violate the law who are in positions of responsibility should be treated harshly for that,” he said, adding that the judge who presided over Gupta’s trial, Southern District Judge Jed Rakoff, gives fair sentences.

Robert Fink, a partner at Kostelanetz & Fink, said insider trading and other financial crime cases are being vigorously pursued.

“You can kill someone and get a lesser sentence,” he said, noting the financier R. Allen Stanford of Houston last week was sentenced to 110 years in prison.

Secret Recordings

At trial, prosecutor Brodsky argued that secret recordings of phone calls between Gupta and Rajaratnam showed that Gupta was so brazen about sharing Goldman board secrets it sounded like “he was talking about what happened at a Yankee game yesterday.”

Defense attorney Naftalis countered that the FBI wiretaps, phone records and other evidence presented by the government had only created the “illusion” that legitimate business dealings were somehow sinister.

“That is a gambit that can bamboozle people into thinking something was proven when it wasn’t,” Naftalis told the jury.

Rajaratnam, founder of the $7 billion Galleon hedge fund, was sentenced last October to an 11-year prison term on an insider-trading conviction, which he is appealing (NYLJ, Oct. 14, 2011). Less than one month later, Gupta was charged in a separate case built on some of the same wiretap and other evidence (NYLJ, Oct. 27, 2011).

Gupta was accused of conspiracy and five individual criminal acts covering four incidents in which he allegedly passed on information gleaned from his positions on the board of Goldman Sachs and Procter & Gamble.

The defendant is a former chief of McKinsey & Co., a highly regarded global consulting firm that zealously guards its reputation for discretion and integrity.

During the trial that began on May 20, the government highlighted a Sept. 23, 2008, call it said was made from Gupta to Rajaratnam (NYLJ, May 22). It came only minutes after Gupta had learned during a confidential conference call that Warren Buffett’s Berkshire Hathaway planned to invest $5 billion in Goldman—a blockbuster deal that wouldn’t be announced until the stock market closed at 4 p.m.

“That news was going to be very good news for Goldman Sachs,” Assistant U.S. Attorney Richard Tarlowe said in closing arguments. “The average ordinary investor had no way of knowing that… Until the announcement, it was confidential.”

Records showed that moments after the call ended at 3:55 p.m., Rajaratnam purchased $40 million in Goldman stock—an 11th-hour trade that ended up making him nearly $1 million.

Rajaratnam’s assistant, Caryn Eisenberg, testified at trial that it was the only call her boss received on his private line that day between 3 p.m. and 4 p.m.

“That evidence is devastating for the defendant… If you believe Ms. Eisenberg, it’s over—the defendant is guilty,” Tarlowe said.

Also played at trial was a wiretap of a July 2008 call during which Rajaratnam grilled Gupta about whether the Goldman Sachs board had discussed acquiring a struggling bank, like Wachovia, or an insurance company.

“Have you heard anything along that line?” Rajaratnam asked Gupta.

“Yeah,” Gupta responded. “This was a big discussion at the board meeting.”

In another recorded call in 2008, Rajaratnam told one of his traders that he got a tip “from someone who’s on the board of Goldman Sachs” that Goldman was facing an unexpected quarterly loss.

Prosecutors argued the sequence of events—the phone calls, the subsequent trades and Rajaratnam’s boasting about his inside connection—could not be dismissed as mere coincidence. Gupta, they said, was motivated to help Rajaratnam because he had a financial stake in some of the hedge fund manager’s business ventures.

“What was good for Raj Rajaratnam was good for Mr. Gupta,” Brodsky said.

Naftalis countered that most of the evidence was specific to the “secret world” of Rajaratnam and not about Gupta.

“I sometimes wondered whether Raj Rajaratnam was the man on trial,” he said. His client, he added, was a victim of “pure guilt by association.”