Bailout

Why isn?t Rajat Gupta facing criminal charges?

By Felix Salmon

Andrew Ross Sorkin examines the weirdnesses surrounding the Rajat Gupta case today, and comes to the conclusion that the government “appears” not to have recorded any of Gupta’s phone calls after all. That’s a reversal from what things looked like on Friday, but the one thing we can be sure of in this case is that the whole thing is very murky.

Sorkin also raises the question of criminal charges:

Given the seriousness of the claims ? insider trading by an executive who had reached the upper echelons of corporate America ? why not bring criminal charges against Mr. Gupta? …

Not only has the Justice Department not brought a criminal case, at least not yet, but the S.E.C. decided to bring its case in front of an administrative law judge instead of in a Federal District Court, where a defendant has full discovery rights. The S.E.C. is using a new provision in the Dodd-Frank Act to bring the case this way…

Statistically, it is notable: of the 26 Galleon-related cases the S.E.C. has brought, all have been brought in federal court. None have been brought in front of an administrative judge.

I think the question of discovery rights is a bit of a red herring here: I doubt they’re all that important to Gupta’s defense. And personally I like the fact that the SEC is making use of new provisions in Dodd-Frank. Fully-fledged lawsuits are time-consuming and expensive things to put together, and if it’s easier to bring something in front of an administrative law judge instead, let’s see more of that. I mean, no one has suggested that Gupta will get anything other than a fair trial.

Of course there’s a question as to why Gupta in particular got this treatment, rather than anybody or everybody else. It’s a good question, and I look forward to getting the answer. But someone needs to be first.

More generally, if Gupta is guilty, it’s in the public interest that we be able to convict him. One of the problems with insider trading is that it’s so hard to prove, people do it with impunity. Maybe a few more cases like Gupta’s will help on that front.

Where I disagree with Sorkin is when he says that the SEC case doesn’t make Gupta look “much like a sinner.” Actually, that’s exactly what it makes him look like. It’s true that Gupta might not have made money personally on these trades. But that’s clearly not the only reason he’d pass on information to Rajaratnam. It might, on the other hand, be the reason the SEC is going to an administrative law judge. Maybe they reckon that insider dealing for purposes of showing off is somehow a lesser crime than insider dealing for personal profit. After all, if Gupta had just shown off to Sorkin instead of Rajaratnam, he probably wouldn’t have committed a crime at all.

Update: John Carney reckons that there are tapes, but that the SEC wasn’t entitled to have access to them.

Full post as published by Macroprudential on March 08, 2011 (boomark / email).