If you were around during the 2000-2001 dot-com boom and bust you will remember the roller coaster Silicon Valley went through. You may even remember Frank Quattrone. Frank Quattrone was the lead at Credit Suisse Bank responsible for underwriting many of the dot-com IPOs. Frank was made to be the guy who pumped up the dot-com stocks during the IPO and responsible for creating the bust that came after the boom. The federal government in attempt to placate the rising public opinion against the downturn, went after him. They presented limited proof and hearsay as evidence. I – as someone who lost a lot during that 2000-2001 – remember seeing Quottrone’s name in the press. I knew convicting him was not going to reverse any my losses but still got some perverse glee out of seeing someone, just anyone take the fall -regardless of whether they were responsible or not. The first trial resulted in hung jury. The second trial convicted him. Subsequently he won on appeal when the Appellate court ruled that the presiding judge in the second trial had given the jury erroneous instructions and if there are to be any subsequent trials a different judge should be presiding.
Today Frank Quottrone is an adviser to Eric Schmidt of Google, Andreesen Horowitz and many prominent startup and technology firms.
Is there a parallel between Frank Quattrone and Rajat Gupta?
Rajat Gupta was a director of Goldman Sachs, former head of McKinsey and generally a storied life which took him from an orphaned childhood to Harvard Business School, rising through the ranks at McKinsey (one of the highest rated organizations) and being nominated to the boards of some largest/well-known corporations i.e. Goldman-Sachs, American Airlines, Proctor and Gamble to name a few. In the midst of career building he found time to work on “human causes” eradicating malaria and host of other philanthropic causes and organizations.
He was swept up in an insider-trading ring involving Raj Rajaratnam and his Galleon Hedge Fund. Rajaratnam was convicted and sentenced to 11 years in prison, evidence i.e. wire-taps and document trail clearly pointed to wide-spread insider information.
Rajat Gupta was the highest ranking person and friend of Rajaratnam. The media has largely taken the prosecution’s stance i.e. here’s another high roller who deserves to be thrown in prison, largely for being connected with Rajaratnam. Even the former government prosecutors say in order to set an example the government is going after “highly visible” individuals in order to change behavior.
Lets look at the evidence of wire-taps. The calls indicate Rajat Gupta calling his “friend” Raj Rajaratnam right after Goldman-Sachs board meeting to say there was “some discussion” about about a bank being bought and some other career related advice, see here. The tone and content of the call is plainly casual and does not come across as sinister. The real “connection” between Gupta and Rajaratnam are the wiretaps between Rajaratnam and his traders at his fund where Rajaratnam refers to his “contact” at Goldman telling him things that would help make significant gains. The conclusion is, this contact must be Gupta, after all who else would a “board member” refer to. Technically “beyond a reasonable” doubt could mean it was Gupta but there is finite probability that it could be someone else. Specifically when another ex-Goldman employee was giving Rajaratnam tips.
Lets assume Rajat Gupta was indeed having “generic” conversations with Rajaratnam, some or all of which involved confidential information. In such case the intent and actual trades would decide whether insider-trading occurred. The instructions jury were given were not the definition of insider trading but what the Prosecution wanted it to be i.e. instead of “there has to be a material gain” to “there could be a modest gain” – with the definition of the word “modest” being left open i.e. anything (What was the judge thinking here ?). This pretty much convicted Gupta then and there since having a phone call with someone unknowingly using that information to make trades is implicating the caller regardless of whether the caller made a personal gain or not. That is not the definition of insider-trading. Indeed the only juror in the case who had some background in financial services dissented with the rest of the jury on the guilty verdict.
The second thing about this trial is that prior to this criminal lawsuit against him, Rajat Gupta was fined by the SEC for insider-trading. Personally given the facts in this case I think the SEC fine was perhaps justified. However Gupta counter-sued the SEC and won when SEC withdrew the case after the judge agreed he was unfairly targeted.
Think about this one – a case where defendant won a civil trial for the same case and got convicted a criminal trial! Burden of proof in a criminal trial is much more because being convicted basically takes away the person’s life. Burden of proof in a civil trial is less because the most a person can loose are their assets.OJ Simpson got away in the criminal trial for murder because burden of proof was too high but was convicted in the civil trial for liability. Imagine the other way around “Hey OJ – you’re going to the death-chamber but you can keep your riches/property”.
Furthermore the “less visible” people in the “Rajaratnam” ring that actually did commit the crimes ( crimes for which the evidence is clear and present, including gobs of money they made ) went away without any jail time or fine. Three such people were Arun Kumar (the former McKinsey partner ) , Rajiv Goel (former Intel executive) – both of whom did pass secrets to Rajaratnam in return for money - and Adam Smith (Galleon employee) the self-confessed insider trader. Turning a state’s witness should be beneficial but what whatever happened to justice and fairness? The guilty get away in return for tattling on a “higher visibility” person so Feds can score some points?
The aftermath this trial raises couple of questions:
How aggressive was the prosecution in “setting an example” and in doing so may have convicted a someone not-guilty
The second question is what happens from here. If I’m on the board of a company (even a startup) and make a “generic” call to a professional/friend/associate talking about things that are borderline confidential and that person misuses such information unbeknownst to me, will I go to jail, even though my intent was clean ? I realize that laws applying to public corporations are different than startups but regardless given the tools available to prosecution (unlimited wire taps etc. ) and their zealousness to show themselves as “throwing a few guys in jail” – where does this lead to ?
If yes, this could mean that I couldn’t even discuss someone’s qualifications/suitability for a job if that information ended up being used for used for insider-trading (“Hey – I got a call asking me whether Marissa Mayer would make a good CEO at Yahoo – I better load up on Yahoo stock” )
There is additional issue of vested interests. Attorney Generals are supposed to be neutral but in reality they are looking to build their own careers. Nothing burnishes their credentials for public office as having put a few “famous” people beind bars. Few months back it was Dominique Strauss-Khan, wrongfully charged for attempted sexual-assualt by New York DA. Ultimately charges were dropped but damage was done – he had to give up his bid to run for President of France. Last Attorney general of NY built a stellar reputation on Wall Street by supposedly bringing to justice bunch of excesses from the 2001 dot-com and Telecom bubble. Remember Elliot Spitzer ? Was planning to run for Governor of NY – before being caught with a prostitute. Many of the ones he sent to jail e.g. Bernie Ebbers of MCI/Worldcom, Enron guys deserved it but others like Frank Quattrone didn’t.