The fact pattern looks bad, very bad.
Seconds after Rajat K. Gupta, then a director of Goldman Sachs , finished up a board call during which he learned that Warren E. Buffett had agreed to invest $5 billion in the firm, he picked up the phone and called his friend Raj Rajaratnam, regulators contend. Minutes later, Mr. Rajaratnam placed bets on shares of Goldman Sachs that netted his firm, the Galleon Group, $900,000.
The Securities and Exchange Commission, which accused Mr. Gupta of insider trading last week, says this happened not once, but repeatedly. He did the same thing at Procter & Gamble , where he was also a director, the S.E.C. claims.
Exactly what was said on these phone calls remains unknown. But if the S.E.C. proves its case, then Mr. Gupta, a respected management guru who once ran McKinsey & Company and advised the Bill & Melinda Gates Foundation, was routinely “disclosing their most sensitive and valuable secrets.”
Yet there is something curious about the accusations against Mr. Gupta, which came just days before Mr. Rajaratnam’s criminal trial, which is set to begin on Tuesday.
Given the seriousness of the claims— insider trading by an executive who had reached the upper echelons of corporate America — why not bring criminal charges against Mr. Gupta?
Well, that’s where the facts of the case get a little mushy, and they are starting to raise some questions among lawyers about the S.E.C.’s motivations.
“This is very unusual. It’s a red flag,” Kip Weissman, a partner at Luse Gorman Pomerenk & Schick in Washington and a former S.E.C. enforcement lawyer, said of the case.
Not only has the Justice Department not brought a criminal case, at least not yet, but the S.E.C. decided to bring its case in front of an administrative law judge instead of in a Federal District Court, where a defendant has full discovery rights. The S.E.C. is using a new provision in the Dodd-Frank Actto bring the case this way.
“It’s a little easier from an evidentiary perspective,” Mr. Weissman said, for the S.E.C. to bring the case in front of an administrative judge. “The evidentiary standard is lower,” he explained. “It’s certainly noteworthy that the S.E.C. brought the case in this forum.”
Indeed, statistically, it is notable: of the 26 Galleon-related cases the S.E.C. has brought, all have been brought in federal court. None have been brought in front of an administrative judge. As Mr. Weissman asked, somewhat rhetorically, “Why?”
The S.E.C.’s laundry list of allegations against Mr. Gupta raises some important questions:
Since the government had tapped Mr. Rajaratnam’s phones, were any of the conversations with Mr. Gupta that were cited by the S.E.C. recorded? It appears not.
In one instance, the S.E.C. said “telephone records and calendar entries” indicated only that “Gupta and Rajaratnam very likely had a telephone conversation.” Since when has “very likely” been considered enough to make a civil allegation?
Stranger still, nowhere in the S.E.C.’s filing does it contend that Mr. Gupta received any form of compensation for passing along insider trading tips to Mr. Rajaratnam. If that’s right, why would Mr. Gupta pass the information? (The S.E.C. does not have to show that Mr. Gupta benefited financially to prove its case.)
None of this is to suggest that the circumstantial evidence isn’t powerful. But it does raise red flags among legal experts trying to handicap exactly what the government has up its sleeve.
The running narrative among defense lawyers is this: The S.E.C. brought its case in front of an administrative judge to discredit Mr. Gupta to help the criminal case against Mr. Rajaratnam. But you have to imagine that if the evidence was truly overwhelming against him, Mr. Gupta might have sought to become a government witness to save himself. (People close to the case suggest that such a settlement offer had been on the table.)
Having said all that, there is something mystifying in the statement that Gary Naftalis, Mr. Gupta’s lawyer, made the day he was sued. “Mr. Gupta has done nothing wrong,” Mr. Naftalis said. “There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo.”
Read those words again. He didn’t say Mr. Gupta didn’t pass on material nonpublic informationor that he didn’t breach his fiduciary duty. All he said was that his client wasn’t getting paid to do so. Maybe Mr. Naftalis was going only for a short sound bite, but it is odd.
In October, Alan Lafley, the former chief executive of Procter & Gamble, described Mr. Gupta thusly. “I think of him like Thomas Aquinas,” the philosopher and priest.
The S.E.C. allegations may make him seem less like a saint, but not much like a sinner — at least not yet.