The Justice Department and the Securities and Exchange Commission apparently do not have the evidence to assert a classic insider-trading case against former Goldman Sachs and Procter & Gamble director Rajat Gupta. Typically, the government brings insider-trading cases against people who profited directly from trades based on confidential information. Gupta doesn't fall into that category. Neither the SEC nor the DOJ claims that he realized any direct profits from the trades Galleon Group chief Raj Rajaratnam allegedly made based on his tips. Indeed, Gupta's lawyer, Gary Naftalis of Kramer Levin Naftalis & Frankel, has said many times that Gupta "lost his entire investment" in Rajaratnam's hedge fund. "[Gupta] did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo," Naftalis told Reuters in a statement.

But while the absence of a direct profit motive complicates the Justice Department and SEC cases against Gupta, it doesn't preclude them. The government doesn't have to show that Gupta directly profited by tipping Rajaratnam, only that he benefited in some way from passing along inside information. "It's not your standard model, but it's not unprecedented," said Thomas Gorman of Dorsey & Whitney, who represented an Ohio State business-school professor convicted in a no-profits insider-trading case in 2005.

The government, in fact, has broad leeway to define the benefits a tipster derived from disclosing confidential information, Gorman said. Benefits can be as amorphous as enhancing a friendship or angling for future favors. In the Gupta case, the SEC and the Manhattan U.S. Attorney are so far offering only vague motives for his alleged insider trading. The SEC's new complaint asserted that Gupta received indirect profits from Rajaratnam's illicit trades, since he was an investor in Galleon funds. The complaint also refers to Gupta's "variety of business dealings with Rajaratnam," and alleges that the former McKinsey chief "stood to benefit from his relationship with Rajaratnam." Similarly, the U.S. Attorney's indictment said Gupta revealed inside information to Rajaratnam to deepen his relationship with the Galleon chief. "Gupta benefited and hoped to benefit from his friendship and business relationships with Rajaratnam in various ways, some of which were financial," the indictment said.

But in a twist, Gupta's best defense may turn out to be the close relationship with Rajaratnam that's at the heart of the government's allegations against him. That defense relies on an SEC rule and a September 2011 ruling by the U.S. Court of Appeals for the Second Circuit in a previous insider trading case, U.S. v. Gansman.

James Gansman, a former Ernst & Young lawyer, was, like Gupta, accused of passing inside information to someone who subsequently used it to make money. In Gansman's case, he allegedly gave his lover details of M&A deals E&Y was working on. Gansman didn't make money from her trades, but the government implied that he gave her the information in order to prolong their affair.

At Gansman's 2009 trial, his lead defense lawyer, Barry Bohrer of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, focused on an SEC rule enacted in 2000 to address when family members or close personal friends owe a duty of confidentiality or loyalty to someone who has disclosed inside information. The rule was intended to specify when the people who receive confidential information can be prosecuted for misusing it, but Bohrer turned the rule into a defense. He argued that Gansman had a right to tell jurors that he expected his girlfriend to keep the inside information confidential, because they had a history of sharing work-related disclosures. Over the government's objection, Manhattan federal judge Miriam Cedarbaum agreed to instruct Gansman's jury that he contended "any material non-public information that [his girlfriend] may have received from him was shared with her as part of a relationship in which they shared work and personal confidences."

The jury convicted Gansman, who appealed to the Second Circuit. In appellate filings here and here, Bohrer argued that the jury instruction Cedarbaum delivered didn't go far enough. He contended Gansman was entitled to tell jurors that he disclosed inside information to his girlfriend only "as part of a relationship of trust and confidence, in which they had a history and practice of sharing work and personal confidences," so he "reasonably expected that [she] would keep any confidences he shared with her confidential and would not use those confidences to buy or sell securities."

The Second Circuit denied Gansman's appeal, concluding that the jury instruction Cedarbaum delivered wasn't far enough from the one Gansman wanted to warrant overturning his conviction. (The appellate panel also pointed to evidence that Gansman knew his girlfriend was trading on the information he provided.) But, crucially, the appeals court ruled it's appropriate for accused tipsters to argue that they trusted the people who received their inside information not to trade on it.

"The SEC has recognized a number of situations ... in which a tippee, but not the tipper, may be liable for insider trading on the theory that the tippee owed a duty of trust or confidence to the tipper and the tipper conveyed confidential information without intending to have it used for securities trading purposes," the Second Circuit opinion said. "Here, it was perfectly appropriate for Gansman to seek to present to a jury a defense that his relationship and interactions with [his girlfriend] exemplified just such circumstances. That is, Gansman was entitled to support his general defense that he lacked the intent to commit securities fraud by showing, in particular, that he shared 'a history, pattern, [and] practice of sharing confidences' with [her] sufficient to create a duty of trust running to Gansman."

The Gansman appellate ruling, said Gorman, could certainly be extended to the Gupta case, in which, according the government's indictment, the tipper and tippee maintained "a personal relationship and friendship." "Gupta could argue, 'I didn't think he'd trade on it,'" Gorman said. "If Gupta believed Rajaratnam would keep the information confidential, based on the facts of circumstances of their longstanding relationship, that could be an effective defense."

There are risks for Gupta in that defense, of course. To show that he trusted Rajaratnam to keep his disclosures to himself, he would have to show a history of exchanging confidences with the now-convicted Galleon chief. That might not go over well with jurors, who, in the government's criminal case, would ultimately decide whether Gupta was justified in believing Rajaratnam wouldn't trade on his disclosures.

Michael Kendall of McDermott Will & Emery, a former federal prosecutor who's not involved with Gupta's defense, said Gupta would have a hard time convincing jurors that he believed Rajaratnam wouldn't trade on confidential information. "It wasn't like [Gupta] was telling his priest or rabbi," said Kendall.

(Reporting by Alison Frankel)