Rajat Gupta
Rajat Gupta (Sebastian Derungs/World Economic Forum)

The insider trading conviction of former Goldman Sachs’ board member Rajat Gupta for passing information to hedge fund boss Raj Rajaratnam will stand.

The U.S. Court of Appeals for the Second Circuit held Tuesday that the wiretapped statements of co-conspirators in telephone calls to which Gupta was not a party were properly admitted as evidence in his 2012 trial.

The decision affirmed the evidentiary ruling of Judge Jed Rakoff (See Profile), who in 2012 sentenced Gupta to two years in prison and fined him $5 million. (NYLJ, Oct. 31, 2012). Gupta must now begin serving that sentence.

Gupta, the former head of the McKinsey & Company consulting firm, was convicted in 2012 by a jury of three counts of securities fraud and one count of conspiracy to commit securities fraud.

Prosecutors persuaded the jury that Gupta, at critical moments during the financial crisis of 2008, passed confidential information about Goldman Sachs to Rajaratnam and his Galleon Group hedge funds,and that Rajaratnam traded on it.

The Goldman Sachs board convened on Sept. 23 2008, with Gupta participating by conference call, to discuss a $5 billion stabilizing investment in the bank by Warren Buffett.

The meeting ended at 3:53, and phone records showed that Gupta’s assistant dialed Rajaratnam one minute later, at 3:54, saying the call was “urgent.”

Within minutes, just before the markets closed, Rajaratnam instructed underlings to buy millions in Goldman stock.

Buffett’s investment was announced two hours later, and the next day, Sept. 24, Rajaratnam netted over $1 million in profits when the stock’s price increased almost 7 percent.

That same day, in two wiretapped phone calls with his principal trader, Ian Horowitz, Rajaratnam and Horowitz made incriminating comments about the Goldman information.

On Oct. 23, 2008, the Goldman board convened again, with board members learning the firm would suffer its first-ever quarterly loss. After attending by conference call for 33 minutes, Gupta hung up the phone at 4:49. At 4:50, his assistant dialed Rajaratnam’s direct line.

The next morning, on Oct. 24, at the first possible moment, Rajaratnam dumped 150,000 shares of Goldman stock, avoiding a loss of $3.8 million.

That same day, Rajaratnam was recorded on a telephone call with David Liu, a portfolio manager with one of his hedge funds, Galleon International, saying “Um, now I, I heard yesterday from somebody who’s on the Board of Goldman Sachs, that they are going to lose $2 per share, The Street has them making $2.50 a share.”

There was only one call on which Gupta and Rajaratnam were recorded actually speaking to each other—a July 2008 call in which the two, who were business partners in other ventures, discussed the possibility of Goldman buying a commercial bank.

Rajaratnam, convicted of multiple counts in 2011 and ordered to serve 11 years in prison, is the leading figure in a multi-year investigation by the Southern District U.S. Attorney’s Office that has netted convictions for 79 people. Gupta is the highest-ranking corporate official convicted in the probe.

The appeal in United States v. Gupta, 12-4448, was heard on May 21, 2013 by Judges Jon Newman (See Profile), Amalya Kearse (See Profile) and Rosemary Pooler (See Profile).

Southern District Assistant U.S. Attorney Richard Tarlowe argued for the government and Seth Waxman of Wilmer Cutler Pickering Hale & Dorr arguing for Gupta.

Kearse wrote the opinion, stating first that the court was rejecting, as it had with Rajaratnam, Gupta’s claim that no wiretapped conversations are admissible in an insider trading case and their admission thus violated both Title III of the Omnibus Crime Control and Safe Streets Act of 1968 and the Fourth Amendment.

Defeated on that front, Gupta claimed the telephone calls allowed into evidence were inadmissible hearsay.

Kearse, however said they were admissible under Rules 801 and 804 of the Federal Rules of Evidence.

“Rajaratnam’s statements in all three conversations were admissible both as nonhearsay statements in furtherance of the Rajaratnam-Gupta conspiracy and under the exception for statements against penal interest,” she said.

Under Rule 801, the statements in furtherance of a conspiracy, Gupta had argued on appeal Rajaratnam was only “bragging” about his sources but Kearse said “this was at best an argument for the jury.”

Turning to the statements against penal interest under Rule 804, the court cited the Horowitz calls. In the first call, Rajaratnam said, “I got a call at 3:58 … [s]aying something good might happen to Goldman.… [S]o, I told Ananth to buy some.”

In the second, he repeated some of the same information and then said, “Yeah at 3:58. I can’t, I can’t yell out in the f—ing halls.”

These statements, along with others, Kearse said, “were contrary to his penal interest because they exposed him to criminal liability for trading on the basis of inside information,” and “they were sufficiently reliable to be admitted in evidence under Rule 804(b)(3).

Similarly, the Lau call “clearly exposed him to criminal liability for trading on inside information,” she said.

Waxman, Gupta’s attorney, said in a statement, “We’re very disappointed in today’s decision, believe Mr. Gupta is entitled to a new trial, and are closely reviewing the opinion with an eye toward further review.”