Second Circuit Re-Affirms Insider Trading Conviction of Rajat Gupta
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  • Second Circuit Re-Affirms Insider Trading Conviction Of Rajat Gupta
    On January 7, 2019, the United States Court of Appeals for the Second Circuit affirmed — for the second time — the insider trading conviction of Rajat Gupta.  Gupta v. United States, No. 15-2707 (2d Cir. Jan. 7, 2019).  In a collateral attack to his conviction, Gupta argued that the jury instructions in his case were infirm given the Circuit’s decision in United States v. Newman (since abrogated).  There, the Circuit held that to the extent a personal benefit may be inferred through a personal relationship between a tipper and tippee, there must be a “meaningfully close personal relationship.”1 The Second Circuit denied Gupta’s appeal on two grounds — that his failure to preserve his objection to the jury instructions was not excused, and that the instructions did not prejudice Gupta.

    By way of background, in 2012, Gupta, a former board member of numerous companies, was convicted of various insider trading counts.  The charges related to Gupta’s alleged “tips” of inside information obtained from company Board meetings to hedge fund manager Raj Rajaratnam, who separately was convicted of insider trading in 2011.2

    This was Gupta’s second appeal to the Second Circuit.  In his first appeal, Gupta challenged the admission of wiretapped conversations on evidentiary grounds, along with the exclusion of evidence allegedly supporting his defense. See United States v. Gupta, 747 F.3d 111 (2d Cir. 2014).  Although Gupta’s counsel objected to the court’s jury instructions at trial, Gupta did not raise this issue on his direct appeal.  The Circuit rejected Gupta’s challenges and affirmed his conviction in all respects.

    Following affirmance, Gupta sought to vacate his conviction pursuant to a habeas corpus petition, see 28 U.S.C. § 2255.  This challenge was based on the Second Circuit’s subsequent decision in Newman.  Specifically, Gupta contended that the jury instructions in his 2012 trial were invalid because they included language that a personal benefit need not be “financial or … tangible in nature” and could be satisfied through “maintaining a good relationship” with the tippee, Rajaratnam.  The district court denied the petition in 2015, finding that Gupta procedurally defaulted his claims by failing to challenge the jury instructions on direct appeal and that the instructions were consistent with Newman. United States v. Gupta, 111 F. Supp. 3d 557 (S.D.N.Y. 2015).

    The Second Circuit affirmed the district court’s denial of the habeas petition.  The Circuit first held that Gupta procedurally defaulted his challenge to the jury instructions, since Gupta did not challenge them on his direct appeal, and also failed to show “cause-and-prejudice” or “actual innocence,” either of which are necessary showings to permit habeas relief on grounds that were not raised on direct appeal.  As to “cause,” the Circuit held that Gupta did not justify his failure to challenge the jury instructions on direct appeal, particularly when it had been raised at trial, noting that defendants in other insider trading prosecutions around the same time were contending that juries should be given narrower definitions of the personal benefit element. As to “prejudice,” the Circuit ruled that the 2012 jury instructions were not so flawed as to deny Gupta due process.  Recognizing that Gupta’s brief failed to cite the full jury instruction that Judge Rakoff provided at trial — i.e. that  a personal benefit could be established through “maintaining a good relationship with a frequent business partner” — the Court concluded the full jury instruction was consistent with the Supreme Court’s decision in Dirks v. SEC, which held that a pecuniary or reputational benefit may be inferred when there is a “relationship between the insider and the recipient that suggests a quid pro quo.”  463 U.S. 646, 664 (1983).  The Court stated that “[w]here the recipient of the tip is the tipper’s ‘frequent’ ‘business’ partner, the tipper’s anticipation of a quid pro quo is easily inferable.” Gupta v. United States, No. 15-2707, at *6 (2d Cir. Jan. 7, 2019).

    The Court also concluded that the jury instructions were not prejudicial because they were in fact correct: although the Circuit acknowledged that the instructions were “contrary to the formulation given in Newman,” it also recognized that Gupta’s cited portion of Newman’s holding — requiring a financial or tangible benefit — had been rejected by Salman v. United States, 137 S. Ct. 420 (2016), which held that a tipper need not receive something in return that is of a “pecuniary or similarly valuable nature.”  The Court emphasized its prior statement that in the wake of Salman, “it is settled law that personal benefits may be indirect and intangible and need not be pecuniary at all.”  Martoma, 894 F.3d at 75.  Finally, the Court also rejected Gupta’s claim of actual innocence.

    1 U.S. v. Newman, 773 F.3d 438 (2d Cir. 2014), abrogated by Salman v. United States, 137 S. Ct. 420 (2016);  see also United States v. Martoma, 894 F.3d 64, 78 (2d Cir. 2018) (holding that it was not necessary to decide if Salman specifically abrogated Newman’s “meaningfully close personal relationship” test, and that the test can be satisfied if the relationship suggests that the tip was part of a quid pro quo relationship, or that the tipper intended to benefit the tippee with the insider information).

    2 Gupta was sentenced by Judge Jed Rakoff to two years in prison, of which he served nineteen months, along with a $5 million fine and $6 million in restitution.  He also was subject to a $13.9 million judgment in a separate civil case brought by the SEC.