In a setback to India-born former Goldman Sachs director Rajat Gupta, a US court today sentenced him to two years in prison and denied his bid for a new trial after upholding his conviction on insider trading charges, ruling that there is no merit in his appeal.
The three-judge bench of the US Court of Appeals for the Second Circuit said in its order said that the earlier ruling by Judge Jed Rakoff of the US District Court for the Southern District, convicting 65-year-old Gupta of securities fraud and conspiracy to commit securities fraud, is "affirmed."
"We have considered all of Gupta's arguments on this appeal and have found them to be without merit. The judgement of the district court is affirmed," the order said.
Gupta, the former head of McKinsey & Co, the global consulting firm, was found guilty in June 2012 of passing confidential information about Goldman Sachs to his friend and business associate hedge fund founder Raj Rajaratnam just minutes after Gupta exited Goldman's board meetings.
The prosecution had presented as evidence telephone records that showed that calls were made to Rajaratnam's direct line from the conference room telephones where Gupta had participated in Goldman Sachs board meeting.
The connection between Rajaratnam's line and the telephone Gupta used lasted approximately 30 to 35 seconds.
Gupta was sentenced to two years' imprisonment, to be followed by a one-year term of supervised release, and was ordered to pay a fine of $5,000,000. Gupta had been free on bail pending decision on his appeal.
In an amended judgement entered in February 2013, Gupta was also ordered to pay restitution to the amount of $6.22 million, an order that is the subject of a separate appeal that has been held pending decision of the present appeal.
In the present appeal, Gupta had challenged his conviction, contending that he is entitled to a new trial on the grounds that the trial court erred by admitting statements of a co-conspirator, recorded in wiretapped telephone conversations to which Gupta was not a party, and by excluding relevant evidence offered by him.
The appeals court said it "disagrees" with Gupta's argument that the trial court was wrong in allowing at his trial an October 24, 2008 wiretapped conversation between Sri Lanka-born Rajaratnam and David Lau, a Singapore-based portfolio manager at Galleon and a September 24 conversation with his trader Ian Horowitz.
The appeals court said in the 51-page ruling the government's "circumstantial evidence" that Gupta passed confidential information to Rajaratnam on September 23 and October 23, 2008 - at the time of financial crisis - was "strong".
In the October call, Rajaratnam told Lau that he "heard yesterday from somebody who is on the board of Goldman Sachs, that they are going to lose two dollars per share." Gupta's lawyers said there was no evidence that Lau had ever traded in Goldman stock. They also say that Gupta was never a participant in these calls.
"On appeal, Gupta argues principally that Rajaratnam's wiretapped conversations with Horowitz and Lau were inadmissible hearsay; that the trial court erred in curtailing evidence proffered by Gupta in his defence; and that the errors, either singly or in combination, entitle him to a new trial....We disagree," the appeals court ruled.
Judges said that evidence was supported by Rajaratnam's statements in the wake of those trades, to Horowitz and Lau.
They concluded that under Federal Rules of Evidence, Rajaratnam's statements in conversations with Lau and Horowitz were admissible both as non-hearsay statements in furtherance of the Rajaratnam-Gupta conspiracy and under the exception for statements against penal interest.
"We see no error or abuse of discretion in the district court's admission of the statements by Rajaratnam in his two telephone conversations with Horowitz," they said.
"The Indictment did not allege a conspiracy only between Rajaratnam and Gupta; it alleged that the conspiracy also encompassed 'other co-conspirators at Galleon'. Second, so long as a co-conspirator statement was in furtherance of the conspiracy, there is no requirement that it have been in furtherance of the interests of the defendant himself or of any particular co-conspirator," the judges said.
Gupta had also challenged the district court's decision to exclude "classic state of mind testimony" from Gupta's eldest daughter Geetanjali that would have shown that Gupta was "furious" at Rajaratnam for cheating him out of millions of dollars through a joint investment fund Voyager.
In a conversation with his daughter on September 20, 2008 - just three days before he supposedly tipped Rajaratnam with information about Goldman and a month before the second tip - Gupta said he was angry at Rajaratnam for cheating him out of $10 million.
Gupta's daughter had testified about certain conversations Gupta had with her about Rajaratnam.
However, the appeals court said that the trial judge was not wrong in curtailing the testimony of Gupta's daughter at trial.
Gupta is the most prominent corporate executive convicted in the government's sweeping investigation into insider trading.
The case, which caps a wave of successful insider trading prosecutions over the past years, is a significant victory for the government, which has penetrated some of Wall Street's most vaunted hedge funds and reached into America's most prestigious corporate boardroom.
"We see no basis for a conclusion that, if Geetanjali had been allowed to testify that Gupta believed Rajaratnam's actions with respect to Voyager had cheated him - rather than to testify (as she was allowed to) that Gupta was quite upset over Rajaratnam's treatment of the Voyager investment - that testimony would have had any substantial influence on the jury.
"If it was error for the court to limit Geetanjali's testimony as it did...,we conclude that the error was entirely harmless," the judge said.
Gupta contended that the district court erred in not allowing him to question witnesses about his "integrity," arguing that his honesty was not at issue in the case because he was not charged with making any false statement. The judges reject this contention of his as well.
Gupta had sought a new trial on the grounds that the district court unduly limited evidence proffered by the defence to show that any communication by Gupta of inside information to Rajaratnam in the fall of 2008 was improbable. "We conclude that none of the challenged rulings constituted an abuse of the court's discretion and that a new trial is unwarranted," the ruling said.
The prosecutors had presented evidence at trial that Gupta and Rajaratnam had a close relationship, with Gupta describing Rajaratnam as a "close friend indeed, "a very close friend" and was in frequent communication with him.
Rajaratnam's address book noted Gupta as a "Good friend." Rajaratnam had even instructed his secretary that there were only five people she was authorised to connect with him near the end of the trading day and Gupta was one of them.
During his 2012 trial, Gupta had called several character witnesses in his defence who testified that they believed Gupta to be an honest person. Gupta also sought to have them testify that he had "integrity" and so would not have been inclined to share inside information with Rajaratnam.
Gupta also sought to introduce documentary evidence suggesting that a different Goldman Sachs insider was giving Rajaratnam confidential information about Goldman Sachs, and that Gupta contemplated leaving a substantial portion of his wealth to charity.
