The insider-trading defense of former Goldman Sachs director Rajat Gupta became clearer last week when Gupta's lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel suggested in open court that another Goldman Sachs insider might have been tipping Raj Rajaratnam, the now-convicted Galleon Group founder. Gupta's defense might have even become a tiny bit stronger. But the chance for Gupta and Naftalis to score a real game-changing win won't come for several weeks.
As Grant McCool of Reuters reported, Naftalis disclosed at a pretrial hearing last Friday that an unidentified Goldman employee, who has not been charged, was caught on a wiretap leaking secrets about Apple and Intel to Rajaratnam. The disclosure of another Goldman source for Rajaratnam could muddy the government's narrative in Gupta's case. Naftalis has insisted from the beginning that the evidence against his client is circumstantial, and in the absence of smoking-gun proof that Rajaratnam's tips came from Gupta, Naftalis could make a plausible argument that they came from someone else who has turned up on the infamous Raj wiretaps. Naftalis said he planned to use the information to show that the "wrong man is on trial."
In response, the government has made it clear that its evidence indicates Gupta is the only person who tipped Rajaratnam about the companies and events cited in the indictment, including Warren Buffet's investment in Goldman Sachs and earnings forecasts for Goldman and Procter & Gamble.
In any event, the alternative tipster fight may just be a sideshow. The real battle could be over the admissibility of recordings captured from wiretaps on Rajaratnam's cell phone.
In January, Naftalis filed a motion to suppress that evidence. He argued, among other things, that the government hadn't shown that the wiretaps were necessary or that prosecutors were allowed to investigate insider trading under the wiretap act known as Title III. That motion is likely to suffer the same fate as Rajaratnam's failed effort to do the same before his trial. U.S. District Judge Jed Rakoff of federal court in Manhattan, who is overseeing the chase, has already indicated he's not likely to favor the motion.
But Naftalis will have another opportunity to keep out some of the phone tap evidence that arguably alludes to Gupta but does not feature him speaking. Naftalis is likely to argue that such conversations are inadmissible hearsay.
One such example was played in Rajaratnam's trial. "I just heard from somebody who's on the board of Goldman Sachs, they are gonna lose $2 per share," Rajaratnam was heard saying to a Galleon colleague in the fall of 2008, before Goldman reported its first quarterly loss. "So what he (the board member) was telling me was that, uh, Goldman, the quarter's pretty bad."
Naftalis could argue that the jury should not be permitted to hear Rajaratnam's second-hand account of what he was told. Pace Law School professor Bennett Gershman said Naftalis has a tough fight, since Rakoff is likely to permit the wiretap evidence so long as "the government can show that the evidence has some bearing, some relevance to their prosecution."
But if Gupta can keep out evidence like that, the government may have to rely more on witnesses. And it likely won't have Rajaratnam at its disposal. He is, after all, planning to appeal his conviction. After his conviction, in fact, Rajaratnam told The Daily Beast that he refused the government's request that he wear a wire and record conversations with Gupta.
"I am not going to do what people did to me," he told the Daily Beast.
(Reporting by Andrew Longstreth)
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