The Times Of Rajat Gupta: India Edition
On June 15 Rajat Gupta was convicted by a Federal court jury on four of six counts of securities fraud and conspiracy. He now faces up to 25 years in prison. 63 year old Gupta retired global head of MCKINSEY and former board member of Goldman Sachs and P&G failed to convince the jury that he did not pass on price sensitive information to hedge fund trader Raj Rajaratnam. It was probably the saddest day of Gupta’s otherwise iconic career.
Doshi: Jury members say it was a very difficult decision. US attorney Preet Bharara says Rajat Gupta "achieved remarkable success and stature but he threw it all away". Why he did that and what exactly happened we will probably never know. But there are other questions, the answers to which determine the future of Rajat Gupta!
Rajat Gupta picked a jury trial, though under the US constitution he could have opted for a bench trail as well. Wouldn’t a judge have been more dismissive of the circumstantial evidence dominating the case?
Partner, Wachtell Lipton
Former Assistant, US Attorney - Southern District, NY
"Under the law there is no difference between direct evidence and circumstantial evidence. The Finders of fact whether it’s a judge or jury has to weigh all the evidence to determine whether the government has proven the clients charge. A judge is more likely to understand that and to weigh the circumstance of a particular case, not giving any greater or lesser weight to the fact that it’s a circumstantial case. The conventional wisdom is that a jury may be more likely to believe that a circumstantial case just isn’t enough."
By not taking the stand, did Rajat Gupta deprive himself of an opportunity to establish credibility, clear the air and convince the jury?
Joan E. McKown
Partner, Jones Day
Former Chief Counsel, SEC's Enforcement Division
"The Enron trial which was a very famous trial here in the United States where 'Skilling' the Chief Executive Officer of Enron took the stand and came across in a manner that was somewhat arrogant and was not credible to the jury. Many people believed that in large part he was convicted and others were convicted because he took that stand".
Partner, Wachtell Lipton
Former Assistant, US Attorney - Southern District, NY
"The trial against Bernie Ebbers the former of CEO of WorldCom, he chose to take the stand and I got the chance to cross examine him and he made the opposite decision and from that case it really looks like that the jury focused just on Mr. Ebber’s credibility, almost to the exclusion of other arguments that counsel had made".
Appeal he will, but on what grounds?
Joan E. McKown
Partner, Jones Day
Former Chief Counsel, SEC's Enforcement Division
"There was no wire tap of Mr. Gupta giving Mr. Rajaratnam a tip off regarding material non public information. There were some tapes that were allowed in, in which Mr. Gupta was talking to Mr. Rajaratnam about a particular deal. However Mr. Rajaratnam did not actually trade on that deal. So, there is a question as to whether that tape should have been allowed in. There were tapes that Mr. Gupta wanted to enter into evidence that would possibly show that the leak of information went to Mr. Rajaratnam through another individual. However the judge, the trial judge did not allow that tape in. So, which tapes were in and out is the likely issue on appeal".
For the Department of Justice and the US Attorney’s office, Rajat Gupta’s conviction serves as a warning to corporate America!
Partner, Wachtell Lipton
Former Assistant, US Attorney - Southern District, NY
"Insider Trading cases are circumstantial cases. Now having wire tap tapes, hearing the voices of the people who are involved in these schemes has given the government a huge advantage and that’s why they are pursuing these cases. So, I think the message ultimately is, if you are committing Insider Trading the government is going to try to prosecute you, no matter who you are".
Doshi: That message has rung out loud and clear, not just in the US, but in boardrooms across the world. Would a case like Rajat Gupta meet the same fate in India?
In the last few years the US Attorney’s office has mounted a large scale offensive against insider trading, netting 60 individuals since 2009. The last being the trophy case of Rajat Gupta. By simple comparison, India has had mediocre success in investigating and prosecuting insider traders. Would a case like Rajat Gupta’s meet the same fate in India? Amit Desai, Senior Advocate, Anil Singhvi, Founder of IIAS, Berjis Desai, Managing Partner at JSA and Sandeep Parekh, Founder, Finsec Law Advisors joins me to answer that question.
Doshi: You were legal and enforcement head at SEBI and I want to bring up the one most "sexy" talked about issue in both the Raj Rajaratnam as well as the Rajat Gupta insider trading cases and that’s the use of wiretaps and I know many people have tried to draw a comparison to India- we now suddenly have a series of media reports in the last week saying SEBI is asking for powers to wiretap. But, from what I understand, the power to wiretap was given to the Department of Justice in the US because they were initially investigating a case of money laundering against Raj Rajaratnam; they wiretapped and hit pay dirt. In insider trading, they do not have the power to wiretap. So is this a big power that the regulator is missing because SEBI itself has used phone records in several cases of insider trading; as recently as the VK Kaul one in the Ranbaxy case.
Parekh: SEBI has no power to wiretap just like the SEC doesn’t have. We do have provisions in other Acts which allow for wiretapping including in cases of insider trading. It would be fairly rare to record because how often will you have an idea that the insider trading is going to happen– unless you have probable cause, you probably cannot.
Desai: Wiretap is not a normal tool of investigation because all our investigations –most of the criminal investigations are governed by the Criminal Procedure Code and interestingly, the Code itself doesn’t provide for wiretaps; it provides for all other methods- you can have summons, you can search, you can seize but it doesn’t provide for wiretap. Primary reason for that is because it constitutes an invasion of privacy and therefore you have the only provisions for wiretap in the Telegraph Act and the rules in the Telegraph Act where they said that based on national security issues, you could do it. But outside of the Telegraph Act, conceptually, in India the wiretap mechanism was used and statutorily provided for only in terrorist offences. So you had a statutory provision in the organized crime act, you had a statutory provision in terrorist legislations like the Terrorist and Disruptive Activities (TADA) or the Prevention of Terrorist Activities (POTA) but outside of these you didn’t have any provisions for wiretap though it was being used.
Doshi: So SEBI stands a very slim chance to get the powers and in fact I don’t we should be pushing for those powers either, should we? Because we have all argued in favor of wiretaps being used only in the rarest of rare instances where there is a national security issue at hand?
Parekh: I have argued in print saying that I don’t think SEBI should be given the powers to wiretap. I think it’s a very extreme power and it should be used in very extreme cases.
Berjis: Even SEBI wiretapping power - I agree with Sandeep - is not a very effective remedy for the simple reason that while it is in - USA Raj Rajaratnam and Rajat Gupta were caught by surprise by the use of wiretaps. In India, there is some kind of awareness for many years that it is not safe to talk on phone. Wiretapping, whether legal or illegal, or unauthorized happens all the time. So therefore I do not think that you will catch the big fish talking over the phone.
Desai: I view this slightly differently and I think the question is that is wiretap an important investigative tool- whether it is to be used by SEBI for capital market contraventions, whether it is to used for money laundering, whether it is to be used for other types of offenses apart from the serious national security offenses and I think there is a perspective and this is where I think the government is dealing with because they are trying to come out with a national policy on wiretapping in the light of all that has happened in the context of the Radia tapes and they are determining the question whether different investigating agencies should be given the ability to do a wiretap but with very stringent conditions. This is a matter of some debate, which is going on within the government.
Doshi: I am surprised a criminal lawyer is advocating wiretap.
A Desai: I am not advocating it, I am a defense lawyer and I have seen both sides of how these things matter but with passing time and the type of criminal activities that government does tend to see and the question is that these agencies and the question would be even in the context of SEBI – should there be, within very controlled, very rigid conditionalities ability to have the wiretap process for very serious cases. You are not talking about only insider trading-wiretapping is not only about insider trading. As Mr Singhvi rightly said, you are talking about the FUTP violations, there are probably far more cases of manipulative devices that are taking place in the market place. So the question is that is wiretap an investigative tool?
Doshi: Thankfully, we do not have to decide on this panel whether it should be allowed or not. The other point I want to draw from this wiretapping conversation is for the first time we have seen, at least from what I can remember, such seemingly concrete evidence at least in the Raj Rajaratnam case maybe not in Rajat Gupta’s case as much of insider trading whereas typically insider trading is characterized by circumstantial evidence making it that much more difficult for the prosecuting agency to go ahead and prove it. So I am just wondering, for instance if you look at India –we have had phone records being used, we have had trading analysis take place and one lawyer in the US noted that the shift in the US is from securities base trading analysis which has till now been the main stay of insider trading investigations to a trader based analysis. So they go after one guy, they find ways to tap his phone or keep a close watch on what he is doing and then through him develop a link of many other criminal activities. Is that something we are likely to see in India because we have had a very poor record of being able to prosecute here?
Berjis: I think the powers of SEBI for civil administrative action under 11B etc have been so widely interpreted and they have been so effective and there a SEBI officer can do virtually anything under those powers and therefore they are much more effective than launching a prosecution.
Doshi: So we are now talking about civil administrative action versus criminal prosecution, right, and you are saying SEBI is well equipped in that itself?
Berjis: Yes, and it has been; even the courts for instance Bombay High Court has very widely interpreted those powers and which is today good law and as a result these are wide powers- you can make a disgorgement of profits, you can charge up to three times the penalty, you can give any direction, you can debar from the capital markets.
Doshi: Mr Desai, we haven’t seen that many cases to be honest, right? I don’t want to draw again a comparison to the US but in 3 years, sixty-six people found guilty including high profile names. In India what has the record been of even civil administrative proceedings?
Berjis: Several civil administrative proceedings, I am sure Sandeep will bear me out, there have been a very good rate of success, consent terms have been filed, fines have been imposed.
Parekh: Let us throw some numbers. On average SEBI has been finishing 10-15 insider trading cases per year.
Doshi: You count that as a reasonable number?
Parekh: That is why I wanted to compare it to the US numbers, 30-50 per year. Now let’s compare the strength of the staff.
Doshi: You cannot have, oh the system is deficient, and so the outcome is deficient.
Parekh: We have a smaller regulator; clearly the numbers are going to be smaller. Five people are doing what a thousand people are doing there.
Doshi: Insider trading cases taken up by SEBI and these are numbers I shared with all of you, single digits from 1995-1996 onwards and I think the highest number has been 28 and I think that is 2010-2011. But there hasn’t been any higher number than that.
Desai: Let me take this slightly differently. Let us take this issue of circumstantial evidence and I just want to make a point here. If the wiretaps were not available in the Raj Rajaratnam and the Rajat Gupta case, what were the chance of success or the probability of success?
Doshi: I am not talking about success, I am saying taken up. I am not looking at the success numbers and saying oh, they failed in so many numbers. I am saying have you even reached the stage of investigation plus prosecution names.
Berjis: When you have such effective and expeditious civil administrative action.. (Interrupted)
Doshi: I am not talking about civil administrative action only; we haven’t even reached criminal prosecution as yet. The numbers for criminal prosecution come ..(Interrupted)
Singhvi: I have a point here. Just forgive me of asking this question, why are you looking so agitated on this? Insider trading in India is legal. Now let us debate on that. This is legal; this is not illegal, so why are you getting so charged up on this and saying no prosecution, nothing.
Doshi: Some aspects of what you call..(Interrupted)
Singhvi: Only 5% is illegal, 95% is legal in India. Under the companies regulation which allows you to get into insider trading.
Doshi: You are referring to the promoter’s ability to buy shares, in preferential allotments, warrants...(Interrupted)
Singhvi: Every joker in the capital market can get into insider trading and it is not termed as illegal so why are we having this debate, three lawyers are there this side.
Parekh: I don’t agree with that at all. I think this whole idea of saying all Indians are crook I completely disagree with that. Coming back to the whole point, let me throw the numbers where you interrupted me, SEC puts in 150 times the resources and they produced 3X the results.
Doshi: I am still not making the case that SEBI is a deficient regulator versus SEC. I am just saying..(Interrupted)
Parekh: You said fewer numbers, right, you are saying single digits.
Doshi: Yes, I am saying that we need to do what it takes to be able to bump those numbers up.
Parekh: You put infinite resources; put the entire GDP into SEBI.
Doshi: Which is not much nowadays!
Berjis: The rate of success of SEBI’s orders in insider trading being upheld by SAT, the Securities Appellate Tribunal, are extremely high as compared to other cases. As a matter of fact, SAT or the High Court has very little sympathy for insider – the moment you say insider trading, it is almost like child abuse; so there is no judicial sympathy.
Doshi: That is a very fair point to take and again I am not making the case against SEBI being a deficient regulator. I am just saying, look at what you can do when you go after something with a purpose and send a big message out, today I am sure every boardroom is discussing Rajat Gupta.
Parekh: We are talking about the regulator versus criminal prosecution. Criminal prosecution is the 100X the visibility.
Doshi: I am glad you made distinction that in both cases we are talking about criminal prosecution, the Raj Rajaratnam case and the Rajat Gupta case. All our conversations about SEBI has been civil administrative sort of processes in that sense, what about criminal prosecution here in India where someone goes to jail and doesn’t just get a wrap on his knuckles and pays the penalty. Where someone goes to jail when and how often has that happened, in your memory?
Desai: I might have to go back to my previous birth because in this current memory I have not come across any criminal prosecution ..(Interrupted)
Doshi: So we have had zero successful criminal prosecutions against insider traders in this country.
Desai: But that is because as Mr Parekh mentioned, he says that in relation to insider trading cases, the SEBI generally has not prosecuted criminally, so you just have a large number of administrative actions and you would have virtually no criminal prosecution…(Interrupted)
Doshi: What is the maximum penalty in an administrative action?
Parekh: It can be huge, it can be 3X or 25 crore or so.
Doshi: In your memory, what is the maximum penalty that has been imposed in a civil administrative action in the case of insider trading in the last few years, ten years, whatever?
Parekh: Number is reasonably large.
Berjis: Rs 50 crore in a recent case by consent terms.
Doshi: That was not insider trading.
Berjis: It was a kind of –..(Interrupted)
Parekh: It was classified under insider trading.
Singhvi: There was only one case in India where it has been Rs 50 crore.
Parekh: The highest I can remember is around 40 lakh. But that is my memory, so it could be higher.
Doshi: I know the case you are referring to and that does not strictly qualify under insider trading.
Berjis: The charge was of insider trading.
Singhvi: No, one among many charges was insider trading.
Doshi: Yes, there were many other charges that amounted to Rs50 crore; insider trading was maybe 2 crore out of that 50 crore.
Berjis: SEBI is inclined to- they make you disgorge the profits plus charge three times the penalty.
Doshi: So since you have spoken about the SEC’s resources, answer my question to this, why does SEBI only take civil administrative action and not push many of these cases to the criminal prosecution route?
Parekh: I think you have answered this question with your previous question, which is India has a 3% conviction rate that is regular, we are talking about economic offenses, I will give you an example.
Doshi: Because it takes too long and because people don’t get convicted, we should not push to prosecute them in criminal courts?
Parekh: No, 3% conviction out of which economic offenses, I am serious about this, convicted Rs 5,000 penalty- these are the criminal courts and that is the reality you are living in. What is the point going for an eight year long trial?
Doshi: Does the law in insider trading allow for the penalty and the punishment including imprisonment to be higher if you were to criminally prosecute them versus a civil administrative action that may yield Rs 40 lakh as the maximum, does it?
Parekh: 10 years and Rs 25 crore.
Doshi: Has anyone being sent to jail because of insider trading in this country ever?
Desai: I think one has to be prosecuted before you can deal with the question of..(Interrupted)
Doshi: So that’s what I am saying, why not?
Desai: Probably today when you are dealing with such serious offenses and that’s a question of how prosecutorial discretion has to be exercised. I don’t know how SEBI would view it but typically if there is an element of willfulness, if the magnitude of the transaction is such that it justifies a prosecution and they’ll probably initiate prosecution. From what Sandeep has been mentioning the current insider trading cases typically have been offered relatively smaller amount and therefore possibly the SEBI felt that it’s not a case which is worth prosecuting. But if the investigating and they are able to find such cases then I am sure that the SEBI would really take…(Interrupted)
Doshi: Can I ask you this reverse question and may be it’s a simplistic question, it has nothing to do with the law but has to do with perception. If two people go to jail for 10 years for insider trading, don’t you think that sends out a stronger message to the entire system as opposed to two people paying some money and getting off lightly?
Desai: That’s right but I think the question is that the two correct people must go to jail. When you deal with a case of insider trading there are cases which you might say will be sufficiently dealt with in the context of administrative action where a civil penalty is sufficient to deal with the problem and effective. There may be some cases where you might have habitual offenders where you say that I am sorry we will now prosecute these people and we will also send them to jail.
Singhvi: But aren’t you then allowing this thing to happen again because you are giving such a pittance in terms of punishment
Berjis: Let not the spate of very high profile cases in US lead to make you believe, in US also as a matter of rule, its civil administrative action. Even against Rajat Gupta it was a civil administrative action which SEC started. He filed a suit against it. SEC withdrew. He made a charge of mallified intent against SEC saying you are differentiating against me. It was after SEC withdrew that their institutional ego was hurt and they went hammer and tongs against him.
Doshi: But they wouldn’t go to court with a case simply because of a hurt ego. So they probably thought they had a good chance at it and they didn’t want to let it go?
Berjis: Yes indeed, point is that in US also as a matter of rule prosecutions are rare. 99% cases would be civil.
Doshi: Rare and zero, big gap.
Desai: Where SEBI went wrong is they attempted to do it with the HLL case and I think they picked up the wrong case to do it. HLL was not the case for prosecution. HLL may have been a case for administrative action at the most but I think they wanted to pick up this big name and send a message in the system. I think that’s where SEBI went and probably realized that they now should not be given the powers because if they are going to pick up these kind of examples and I don’t think HLL was a fit case, you need to collect evidence in the right case against the right group of the right promoter and then take action.
Doshi: Have they done it since HLL?
Desai: They need to have probable cause, they need to have probable course. If they have probably cause and they have closed a case administratively then you may be right in saying that they have closed it.
Doshi: But if they have enough cause to succeed in a civil administrative action against that person and penalize him then why do they think they don’t stand a good chance in court? Because their case is going to be appealed in SAT anyways. So they are going to have to reprove themselves.
Parekh: Let me put it in a single sentence. Economic offences by Indian courts, economic offenders are never put into jail. Never.
Singhvi: But it will change, very clearly things are changing and last two years most…(Interrupted)
Doshi: I have not seen enough instances of insider traders being tried and not being put into jail to be convinced by your answer- saying 50 of them got tried, 50 of them escaped imprisonment and therefore I agree with you. I am saying zero or 1-2 may have gotten trial.
Desai: Let me come back to this issue about why I would see hardly any prosecutions in insider trading or for that matter FUTP and other such regulations. I think it goes back to the first question that you raised about the investigative tools. The burden of proof in a civil administrative action is much lower than in a criminal action. When you go to a criminal court, those same circumstances which may be sufficient for the purpose of an administrative action would not stand up in a criminal court.
Berjis: But I think insider trading in India we must understand that unlike the rest there is also a culture issue here. The system of Benami Transactions is so prevalent in India which is not prevalent in the west. Even in cases like Jeffery Archer where insider trading convictions were made, ultimately the money was routed in his own bank account. This seldom happens in India because the Benami Transaction as a cultural issue is routed in the system. Plus accounts are settled with huge amounts of cash which is not what happens in USA or UK. So this makes it even harder or more difficult for a criminal prosecution to be launched. And I think somehow I do tend to agree with Anil that it is very much a letter issue in boardrooms; never a spirit issue.
Singhvi: I have one point here and we will compare US with India and I completely differ on this and lets not take that how many cases US has prosecuted because our shareholding pattern- where promoters are predominantly the larger shareholders which is not the case in US- so if insider trading is there by the CEO, CFO or some board members, here the man himself he starts the day with insider trading. So there is a very different situation.
Doshi: And by saying that you are referring to the promoter’s ability to buy his own stock?
Singhvi: I have an occasion in one of the boardrooms where a promoter wanted to buy the shares. Now whose approach should he be taking as per insider trading court?
Doshi: I would imagine there would be some sort of compliance committee that he would have formed and disclosures to make thereafter which have all been strengthened.
Singhvi: All comprising of the company secretary and their own department. How they can say no?
Parekh: I have a final point to make. I think the reason why you don’t see large numbers in Indian insider trading cases because most of them are under the radar because there are 5000-10000 shares because they are probably doing it in the names of 2000-5000 peoples names.
Doshi: So how do you crack this? It can't be enough to explain it away and say well that’s the reason why we don’t have a better …(Interrupted)
Parekh: You do catch people but you catch them for much lower numbers, one. …(Interrupted)
Doshi: That shouldn’t be your problem. You catch people for much lower numbers, you catch people even if they haven’t benefited monetarily like the case of Rajat Gupta, yet you catch people and you make examples of them. You can't explain it away. How do we improve this?
Desai: If it’s a policy view of the government that these kind of offenses must be dealt with very strictly and I think that the authority must be given better investigative tools to do with it but you could go down the road and the worry that we have in the system is you know what happened during the FERA (Foreign Exchange Regulation Act) regime and why we had to bring in the FEMA regime. The FERA regime had to go because of the misuse of power of arrest, misuse of the investigative tools that were given to the authorities. In fact it’s a matter of debate in the parliament and that the reason why what they did was they took away prosecution powers and made it only civil. If you believe that the policy of the law should be that these kind of offenses must be dealt with seriously… …(interrupted)
Doshi: We know SEBIs position on this because SEBI has taken insider trading out of consent orders now. So they are very clear this is very serious, we don’t want to settle these matters.
Desai: But they may not settle but they will still deal with it administratively.
Doshi: Fair enough but they think it’s serious enough for it not to be settled. So we understand where it ranks in SEBIs priorities.
Desai: So they need to then figure out that do they have the tools to be able to take this to this level of prosecuting effectively.
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