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From Securities Regulation Daily, February 5, 2016

Gupta appeal given new life

By Matthew Garza, J.D.

A Second Circuit panel reversed course and granted Rajat Gupta’s motion for a certificate of appealability, giving him another opportunity to argue that Southern District of New York Judge Rakoff erred in making instructions to the jury on personal benefit in light of U.S. v. Newman. The key factor in the reversal appeared to be an assertion made through his counsel Gary Naftalis that a similar case against another insider trading defendant resulted in a grant of a certificate of appealability, while Gupta’s was denied (Gupta v. U.S., February 4, 2016).

Rajaratnam. Gupta, a former board member of Goldman Sachs and Proctor & Gamble, was convicted of insider trading for passing inside information to hedge fund manager Raj Rajaratnam on a number of occasions. Rajaratnam’s Galleon Funds profited over $1.2 million after Gupta tipped him in September in 2008 that Warren Buffett was about to make a $5 billion investment in Goldman Sachs. A month later he tipped Rajaratnam that Goldman was about to report a quarterly loss; information Rajaratnam used to avoid a $3.8 million loss.

During sentencing, Judge Rakoff said that Gupta did not receive one penny of monetary gain “in any direct sense” and noted his extensive charitable work while handing him a relatively modest prison sentence of 24 months. Rakoff wrote that the sentencing guidelines required him to assess Gupta’s punishment almost exclusively on the basis of how much money Rajaratnam made by trading on the information. The court also fined him $5 million and ordered him to pay $6.2 million in restitution.

Appeals. Gupta’s appeals went nowhere. The Second Circuit affirmed the criminal conviction. An SEC action that resulted in a $13.9 million penalty and permanently barred Gupta from acting as an officer or director of a public company was also unsuccessfully appealed, and the Supreme Court denied certiorari in that case. Certiorari was also denied in his criminal case. The Southern District denied his motion for a certificate of appealability in August 2015, and the Second Circuit did the same in December.

Whitman. Gupta’s January 11 motion to the Second Circuit for reconsideration of the appealability denial argued that he should get a new look after an appeal in a similar case, Whitman v. U.S, was granted. A procedural default pinned on Gupta’s failure to raise the Newman issue on appeal was also present inWhitman, and Whitman had sought the same relief, before the same district judge, with the same arguments, argued the motion. Both defendants argued that the procedural default was excused because Newman had altered the law with a novel holding on benefit. The standard for granting a certificate of appealability was also “easily met,” the motion argued, and he need only show that the issues are debatable among jurists of reason. “There is no warrant for these contrary results,” argued Gupta.

Salman. The Supreme Court may put to rest questions raised by Newman about the definition of personal benefit when it decides the case of Salman v. U.S., which it agreed to hear in January. The case presents the question of whether the personal benefit to the insider that is necessary to establish insider trading requires proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

The case is No. 15-2712.

Attorneys: Gary P. Naftalis (Kramer Levin Naftalis & Frankel LLP) for Rajat K. Gupta. Michael A. Levy, Assistant U.S. Attorney, for the United States.

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