What You And Your Acquaintances Say Can Hurt You: Affirmance of Gupta Conviction Offers Lessons on Insider Trading Investigations

April 7, 2014 Advisory

The U.S. Court of Appeals for the Second Circuit recently affirmed the admissibility of wiretap evidence in upholding the insider trading conviction of former Goldman Sachs director Rajat Gupta. In this closely-watched case, the Second Circuit found that wiretapped telephone conversations between Raj Rajaratnam, founder of the Galleon Group, and other Galleon employees to which Gupta was not a party were admissible against Gupta as either the non-hearsay statements of a coconspirator, or, alternatively, within the hearsay exception for declarations against penal interest. This ruling serves as an important reminder that not only can one's own statements be used to prove criminal liability, but also that the statements of individuals other than the defendant are strong tools for prosecutors to establish criminal liability.

Gupta was convicted on three substantive counts of securities fraud, as well as conspiracy to commit securities fraud, for his role in disclosing to Rajaratnam on at least two occasions inside information Gupta obtained during Goldman Sachs board meetings. Rajaratnam shared and acted on this information with other coconspirators at Galleon. All of the government's evidence that Gupta passed confidential information to Rajaratnam was circumstantial and included testimony from non-coconspirator employees of Galleon or Goldman Sachs, wiretapped calls between Rajaratnam and other Galleon employees, records of calls made to, or phones used by, Gupta or Rajaratnam, and records of the timing of trades by Galleon in Goldman Sachs stock.

One issue on appeal was the admissibility of two wiretapped telephone calls between Rajaratnam and his principal trader, Ian Horowitz, on September 24, 2008. Rajaratnam recounted to Horowitz the events of the previous day whereby Galleon purchased Goldman Sachs stock on the basis of a call Rajaratnam received just minutes before the markets closed, and two hours before the announcement of Warren Buffet's $5 billion investment in Goldman Sachs. Rajaratnam told Horowitz that "I got a call at 3:58…saying something good might happen to Goldman." United States v. Gupta, 12-4448, 2014 WL 1193411, at *3 (2d Cir. Mar. 25, 2014). Rajaratnam also remarked to Horowitz that Leon Shaulov, another Galleon trader and portfolio manager, was upset with him, apparently for not sharing information about Goldman Sachs. Rajaratnam explained to Horowitz that "if it was one o'clock, I am always good with him, I always call him in, I tell him everything, you know? AMD, IBM, everything, right?" Id. at *4.

Also at issue was a call between Rajaratnam and David Lau relating to a trade in Goldman Sachs on October 24, 2008. Galleon executed that trade one day after Gupta and Rajaratnam spoke immediately following a Goldman Sachs board meeting that Gupta attended. Rajaratnam told Lau, a Singapore-based portfolio manager for one of Galleon's hedge funds, that "I heard yesterday from somebody who's on the Board of Goldman Sachs, that they are gonna lose $2 per share. The Street has them making $2.50 … So what he was telling me was that uh, Goldman, the quarter's pretty bad." Id. at *6.

On appeal, Gupta argued that the wiretapped calls were inadmissible hearsay because "Lau was not alleged to be a coconspirator and that Rajaratnam's statements to Horowitz were in furtherance only of a separate conspiracy between Rajaratnam and Shaulov." Id. at *8. In rejecting these arguments, the Second Circuit concluded that Rajaratnam's statements to both Horowitz and Lau were non-hearsay statements made in furtherance of a conspiracy under Federal Rule of Evidence 801(d). For a statement to qualify as non-hearsay under this rule, courts must find "‘(a) that there was a conspiracy, (b) that its members included the declarant and the party against whom the statement is offered, and (c) that the statement was made during the course of and in furtherance of the conspiracy.'" Gupta, 2014 WL 1193411, at *9 (quoting United States v. Maldonado–Rivera, 922 F.2d 934, 958 (2d Cir.1990)).

The Second Circuit explained that not every statement made by a coconspirator will be in furtherance of the conspiracy. Thus, the statement at issue must be more than a "mere narrative description by one coconspirator of the acts of another" or "idle chatter between coconspirators." Id. (internal quotation marks and citations omitted). However, statements between coconspirators, which "provide reassurance, serve to maintain trust, and cohesiveness among them, or inform each other of the current status of the conspiracy, [have been found to] further the ends of [a] conspiracy."' Id. (quoting United States v. Simmons, 923 F.2d 934, 945 (2d Cir. 1991)).

The distinction drawn by the Second Circuit does not provide defendants with a strong basis to keep statements like those by Rajaratnam away from a jury. "Mere narrative" or "idle chatter" can be easily characterized as statements of "reassurance," "trust," and "cohesiveness." In practice, the threshold for finding a statement to be in furtherance of a conspiracy is a relatively low one.

The Second Circuit found that Rajaratnam's statements to Horowitz were in furtherance of a single conspiracy which included Horowitz, Shaulov and Gupta, among others. In reaching this conclusion, the Second Circuit emphasized that the indictment alleged, and the evidence confirmed, the existence of a single conspiracy that encompassed other coconspirators at Galleon besides Rajaratnam. In addition, "so long as a coconspirator 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 coconspirator." Id. at *10. Thus, the fact that Gupta did not participate in or benefit from the information conveyed in the wiretapped calls had no bearing on its admissibility against him under Rule 801(d). In addition, Rajaratnam's statements to Horowitz explaining why the purchases of Goldman stock were made served to "further the conspiracy by informing Horowitz, and eventually Shaulov, of the status of that conspiracy, reassuring them of its continuity, and preserving trust and cohesiveness among the coconspirators." Id. at *11.

The Second Circuit similarly concluded that Rajaratnam's statements to Lau were in furtherance of the conspiracy despite the fact that Lau was not a member of the alleged conspiracy. This was so because while Rule 801 "requires that both the declarant and the party against whom the statement is offered be members of the conspiracy, there is no requirement that the person to whom the statement is made also be a member." Id. (internal quotation marks and citations omitted) (emphasis omitted). Thus, "[s]tatements designed to induce the listener's assistance with respect to the conspiracy's goals satisfy the Rule's in-furtherance requirement." Id. Accordingly, the Second Circuit found that Rajaratnam's statements to Lau could have prompted him to not purchase Goldman shares for Galleon which would have served a principal goal of the conspiracy to use inside information to avoid losses.

Lastly, the Second Circuit found, in the alternative, that Rajaratnam's statements qualified as statements against penal interest within the meaning of Rule 804(b)(3) as a reasonable person in Rajaratnam's shoes would have perceived the statements as detrimental to his or her own penal interest. Id. at *13. In these statements, Rajaratnam admitted to trading after receiving inside information. Thus, the statements exposed him to criminal liability for insider trading, making them contrary to his penal interest and therefore admissible as an exception to the hearsay rule.

The Second Circuit's decision in Gupta serves as an important reminder that circumstantial wiretap evidence is strong evidence for the Government to build a compelling case for criminal liability. Indeed, wiretapped calls are often the most persuasive evidence put before a jury. Having the jury actually hear the contemporaneous words of defendants or coconspirators can have a much stronger impact than live testimony recounting events or conversations that occurred years earlier. This is all the more so in conspiracy cases because statements made in furtherance of the conspiracy, by their nature, are made by people on the inside who are privy to the intimate details of the conspiracy. And, although not a requirement for admission, frequently, the statements are made to other trusted members of the conspiracy and the speaker may speak freely and in detail to his coconspirators. Even when a coconspirator makes statements in furtherance of the conspiracy to a non-member, these statements can be very powerful corroboration of the activities and/or goals of the conspiracy. U.S. v. Gupta is a perfect example of a strong case built entirely on circumstantial evidence as Gupta was convicted largely on statements that others made to each other in conversations to which Gupta was not even a party. The case is a reminder that a defendant's statements in his own emails, text messages, and telephone calls can be used against him, but so too can the statements of others with whom the defendant is acquainted in a conspiracy.

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