Summer Suits


By: Jared Sorin

Although summertime is normally characterized by beaches and swim suits, this past June has seen a number of significant developments in lawsuits concerning big names in the financial industry. While the rest of us have been enjoying the sunshine, the United States government has continued to work tirelessly to pursue suits against insider trading and fraud.

On June 15th jurors found Rajat Gupta, a former director at Goldman Sachs and Proctor & Gamble Co., guilty of insider trading. Gupta was convicted on three counts of securities fraud and one count of conspiracy for sharing non-public information with Raj Rajaratnam that directly lead to millions of dollars in profits for the hedge fund manager. Gupta was found guilty of passing information concerning a $5 billion investment by Berkshire Hathaway in Goldman Sachs. This case marks a significant victory for the U.S. government in its campaign against insider trading at hedge funds. Gupta will be sentenced on October 18 and could face up to 25 years in prison.

The verdict in this case is especially interesting because the prosecution’s evidence against Gupta was almost entirely circumstantial. Most recent insider trading cases, specifically the Rajaratnam case, have relied heavily on wiretapped conversations between the tipper and the tippee. In this case, however, the court proved that wiretaps were not a requisite to convince a jury of guilt. This case was built primarily on evidence like the timing of phone and trading records, with no hard evidence actually proving Gupta shared inside information. This opens the door for prosecutors to be even more aggressive in punishing hedge fund traders and tippers, as they no longer need to have the “smoking gun” of a wiretapped phone call in order to land a conviction.

This past week, on June 27th, the Securities and Exchange Commission filed another high profile lawsuit, this time against Philip Falcone, the founder of the hedge fund Harbinger Capital Partners, LLC. The suit alleges that Falcone misappropriated client assets, favored selected investors, and manipulated bond prices. In 2009, Falcone took a secret $113 million personal loan from the fund on preferential terms without investor approval. The SEC alleges that after one law firm refused to approve the loan for Falcone, he misled a second law firm and obtained approval on false pretenses. Moreover, at the time Falcone took this loan he had also taken action to restrict investors from being able to redeem their interests in the fund, but did allow certain large investors to withdraw money while others could not. In the lawsuit the SEC is asking for the disgorgement of any gains, financial penalties, and an industry wide bar preventing Falcone from being able to serve as an officer or director of any public company.

These lawsuits represent important steps in the government’s continuing efforts to curb abuses and illegal practices in the financial sector, as prosecutors are no longer shying away from tackling big names and big funds in the court room. The Gupta decision may have a significant impact on the government’s ability to hold guilty parties accountable even in the absence of concrete evidence. It will take a long time to effectively change the culture on Wall Street and to prosecute those guilty of crimes, but the government is actively making a statement this summer that no one is so big or so important that they will not be targeted and convicted for failing to play by the rules.


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Fordham Journal of Corporate & Financial Law