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Is Rajat Gupta Going for the Frenemy Defense?

Friday, 4 Mar 2011 | 4:20 PM ET
Rajat Gupta
Umesh Goswami | The India Today Group | Getty Images
Rajat Gupta

Rajat Gupta has sent an email to the dean of the Hyderabad-based Indian School of Business, which he co-founded, describing his relationship with Raj Rajaratnam as "strained," according to the Times of India.

According to Gupta, the "business relationship between Mr Rajaratnam and I were strained" (sic) at the time the SEC alleges he shared confidential information with Rajaratnam.

Few people probably realize that this has significant legal consequences. Since Gupta didn't trade on the information himself, he can only be found liable for insider trading if he expected to benefit from tipping Rajaratnam. But there's nothing to suggest he thought he'd get a share of the profits from Raj's trading. Or that Raj would do him some favor in the future.

Lacking any concrete benefit, the SEC will have to rely on the more nebulous benefit that one gets by maintaining a good relationship with a friend. That's a pretty thin "benefit" but courts accept it.

By denying he was friendly with Raj at the time of the tipping, Gupta may be setting up a legal defense that would undermine even that alleged benefit. And if there's no benefit for the tipster, there's no legal liability under securities laws.

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