This week I spoke with Fox Business reporter Serena Elavia about the Second Circuit’s decision to grant a certificate of appealability in the Rajat Gupta insider trading prosecution. Gupta is the high-profile former McKinsey & Co. Managing Director and Goldman Sachs board member who was prosecuted and convicted for providing insider information to former Galleon Group hedge fund manager Raj Rajaratnam.
Gupta, who was first convicted in 2012 and whose direct appeal was denied in 2014, received another bite at the apple earlier this month. He now has an opportunity for the Second Circuit to determine whether his conviction should be vacated because the jury was erroneously instructed and whether any procedural default may be excused for cause and prejudice or actual innocence. This opportunity flows directly from the Second Circuit’s United States v. Newman decision, which altered the proof needed for the “personal benefit” to the insider that is required under Dirks v. S.E.C., 463 U.S. 646 (1983).
Newman held that merely “maintaining a good relationship” is not enough to prove the required “personal benefit.” Instead, the insider must be the beneficiary of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” Yet, at the time that Gupta was convicted, the district court instructed the jury that the benefit received did “not need to be financial or to be tangible in nature. It could include, for example, maintaining a good relationship with a frequent business partner, or obtaining future financial benefits.” Gupta did not object at the time to the instruction (Newman had not been decided). Gupta and others, including Bassam Salman, whose petition for certiorari the Supreme Court just granted, have argued that Newman did, in fact, change the personal benefit test and thus their convictions under the less stringent “relationship” test should be vacated.
For Gupta personally, the Second Circuit’s order agreeing to hear the appeal is a significant step, although, procedurally, the Second Circuit may have accepted the appeal to put it in a holding pattern. The Supreme Court will have the final say on this issue as it addresses Salman’s petition on the question of whether the personal benefit:
requires proof of “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit held in United States v. Newman, or whether it is enough that the insider and the tippee shared a close family relationship, as the Ninth Circuit held in this case.
Salman’s Supreme Court brief is due in May.