The Second Circuit Court of Appeals upheld the conviction of former Goldman Sachs director Rajat Gupta for illegal tipping. Mr. Gupta was convicted of conspiracy and three substantive counts of securities fraud, centered on furnishing illegal tips to his long time friend and business partner Raj Rajaratnam. U.S. v. Gupta, Docket No. 12-4448 (Decided March 25, 2014).
Mr. Gupta’s challenge to his conviction focused on the admissibility of certain wire tap evidence involving two key transactions. The first concerned trades of Goldman Sachs shares on September 23, 2008 prior to the announcement that Warren Buffett would make a substantial investment in the investment bank as the market crisis was unfolding. At a telephonic Goldman board meeting during the afternoon of September 23, 2008 Mr. Gupta and the other directors approved a $5 billion investment by Mr. Buffett in Goldman. The announcement was to be made after the 4 p.m. close of trading on the New York Stock exchange.
Mr. Gupta was on the board meeting call until 3:53 p.m. One minute after terminating that call he telephoned Mr. Rajaratnam’s office. The men spoke briefly. Mr. Rajaratnam then directed that shares of Goldman Sachs be purchased immediately. Before the market close 1.5 million shares were acquired. After the deal announcement the Goldman share price increased 7%, yielding a $1 million profit.
The next morning Mr. Rajaratnam discussed the trade on the telephone in two calls with his chief trader Ian Horowitz. The two men reviewed the frenzied activity at the close of the market when the Goldman shares were purchased. Mr. Rajaratnam stated that he got a call two minutes before the close saying “something good might happen to Goldman.”
The second centered on the sale of Goldman shares on October 24, 2008. The day before that transaction Mr. Gupta participated in a Goldman Sachs conference call. At the time Wall Street analysts were projecting that the bank would continue to report profits as it had since becoming a public company. During a 33 minute call Mr. Gupta and the other board members learned that for the first time the investment bank would report a loss.
Mr. Gupta disconnected from the Goldman call at 4:49 p.m. At 4:50 p.m. he telephoned the direct office line of Mr. Rajaratnam. The call lasted for 12.5 minutes, ending at 5:03 p.m. The next morning Mr. Rajaratnam sold 150,000 shares of Goldman Sachs stock beginning 1 minute after the open.
Later that afternoon Mr. Rajaratnam spoke with David Lau, a Singapore based portfolio manager for Galleon International. During a taped telephone call Mr. Rajaratnam described the negative news he had received “from somebody who’s on the Board of Goldman Sachs” which “they don’t report until December.” That news was that “they are gonna lose $2 per share. The Street has them making $2.50.”
Goldman did not announce its disappointing fourth quarter results until December 16. By selling his shares Mr. Rajaratnam avoided a loss of over $3.8 million.
The district court rejected Mr. Gupta’s claims that the taped evidence was not admissible. The Second Circuit affirmed. First, the Court rejected claims that the wire tap authorization was obtained in violation of Title III of the Omnibus Crime Control and Safe Streets Act of 1968 with little comment other than to note that the same issue had been rejected in Mr. Rajaratnam’s appeal (here).
Second, the Court rejected claims that the conversations were inadmissible hearsay. The statements are admissible under Rule 801(d) which permits the introduction of such testimony if made by “the party’s coconspirator during and in furtherance of the conspiracy.” To admit a statement under this provision the court must find that there was a conspiracy, that its members included the declarant and the party against whom the statement is offered and that it was made during the course of, and in furtherance of, the conspiracy.
To be in furtherance of the conspiracy, the Court held, the statement must be more than “a merely narrative description by one co-conspirator of the acts of another.” At the same time statements which “provide reassurance, serve to maintain trust and cohesiveness among them, or inform each other of the current status of the conspiracy, further the ends of [a] conspiracy.” And, the fact that the statement was in furtherance of the conspiracy must be supported by a preponderance of the evidence.
Here the statements were in furtherance of the conspiracy, according to the Court. Mr. Gupta’s claim that the statements to Mr. Horowiz are part of another conspiracy is incorrect. The indictment here alleged that the conspiracy encompassed Messrs. Rajaratnam, Gupta and “other coconspirators at Galleon.” So long as the statement is 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.”
Similarly the statement of Mr. Rajaratnam to Mr. Lau was admissible as being in furtherance of the conspiracy. While the rule 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 be a member . . . Statements designed to induce the listener’s assistance with respect to the conspiracy’s goals satisfy the Rule’s in-furtherance requirement.” Here while Mr. Lau was not a member of the conspiracy, the statements of Mr. Rajaratnam, made just after the transactions, were by a member of it and offered are offered against a member.
Mr. Gupta’s claim that the statements to Mr. Lau are not admissible because he had to have more than a theoretical ability to actually place the trades, misses the mark. The goal here was to avoid losses which was accomplished by dumping the stock quickly for the U.S. Galleon entity. While Mr. Lau was the trader for Galleon International, an entity in which Mr. Gupta had a 15% ownership interest and which generally traded international stock “it was not precluded from investing in domestic securities . . . and, indeed, it had in the past owned stock in Goldman. . . In light of this evidence, Rajaratnam’s statements to Lau could have prompted Lau not to purchase Goldman shares for Galleon International in October 2008.”
Finally, the statements were admissible under Rule 804(b)(3). That Rule provides for the admission of statements made against pecuniary or penal interest if the declarant is unavailable as a witness. Here the statements to Horowitz and Lau were both self-incriminating and thus admissible. That point is supported by the corroborating evidence surrounding the timing of the telephone calls and the other evidence. Indeed, those facts undercut Mr. Gupta’s claims that there is insufficient indicia of reliability to admit the statements. Accordingly, even if the statements were not in furtherance of the conspiracy, they would be admissible.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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