The Caravan – August 2019

88 THE CARAVAN

insidestory· books

heard him say a bad word about the

British or his jailors. He embodied for-

giveness, always. I don’t want to hold

anything against [Rajaratnam]. I don’t

like that.”

insider trading is the practice of us-

ing confidential, “insider” information

to make profits on the stock market.

For example, if a director on the board

of a company lets slip to his gardener

the news of a soon-to-happen lucrative

merger, the gardener can then leverage

this information to buy up shares in the

company at current prices and make a

profit once the stock rises, after the in-

formation is made public.

This garden variety of insider trading

is a felony under US securities law. It

implicates both parties: the tipper and

the tippee. The gardener, the tippee,

is guilty of using material, non-public

information to make a profit, which is

unfair to other investors. But the direc-

tor, the tipper, is also liable so long as

two conditions are met—first, that he

has violated his fiduciary duty of trust

and confidentiality to the board by dis-

closing non-public information; second,

that he has benefitted in some way,

such as if his gardener has been gener-

ous enough to compensate him for the

information.

These conditions come from the

Dirks test, which emerged from the

seminal 1983 insider-trading case, Dirks

vs SEC, and two subsequent cases. Ray-

mond L Dirks was a securities trader

and analyst at the Equity Funding

Corporation of America, who passed on

inside information in order to expose

an accounting fraud. However, because

some of his confidants used this infor-

mation to avoid losses, he was charged

with insider trading. He was eventually

acquitted, establishing the precedent

that one had to receive some personal

benefit in order to be found guilty of

insider trading.

By March 2008, federal authorities

had gathered sufficient evidence of il-

legal profiteering by Galleon to procure

a 30-day wiretap on Rajaratnam’s cell

phone. It threw up enough incrimi-

nating material to justify extensions

running well into the next year. Dur-

ing Rajaratnam’s trial, the prosecution

submitted over eighteen thousand

recorded conversations with over five

hundred people. Among these was an

18-minute phone call between Gupta

and Rajaratnam, on 29 July 2008. The

recording was repeatedly played at

both their trials, but Gupta was not

charged for it.

There were four other phone calls

for which Gupta was formally charged.

The first took place on 12 March 2007,

when he participated in a Goldman

Sachs board meeting from the New Silk

Route office, which was located in the

same IBM building in Manhattan that

housed the Galleon Group. Twenty-

five minutes after the meeting ended,

Rajaratnam told his traders to buy

350,000 Goldman shares. Due to insuf-

ficient evidence, Gupta was acquitted

of this count, but it was important in

peter foley / bloomberg / getty images