Throughout Raj Rajaratnam’s trial, which could go to the jury as soon as Monday, there has been an elephant in the courtroom: Rajat K. Gupta.
Mr. Gupta, once one of the world’s most respected businessmen, is not being tried here nor has he been charged criminally. Yet hardly a day has passed when the jury in Mr. Rajaratnam’s trial — the government’s biggest insider trading case in a generation — has not heard about Mr. Gupta, the former head of the consulting firm McKinsey & Company.
Jurors listened to a wiretap on which Mr. Gupta, a former director at Goldman Sachs, told Mr. Rajaratnam, who ran the Galleon Group hedge fund, about the bank’s secret board discussions.
They heard a tape of Mr. Rajaratnam boasting to a colleague that a Goldman director had tipped him off to the bank’s earnings ahead of a public announcement. On another recorded call, Mr. Rajaratnam told his trader that he had received word that something good was going to happen at Goldman.
Prosecutors also presented phone bills and trading records establishing that Mr. Rajaratnam traded Goldman stock soon after his phone calls with Mr. Gupta.
Still, Mr. Gupta is not mentioned in the government’s indictment of Mr. Rajaratnam. The United States attorney’s office in Manhattan, which has been investigating Mr. Gupta’s role in the case for at least three years, has named him a co-conspirator of Mr. Rajaratnam’s but has not charged him criminally.
Instead, federal prosecutors have built their formal charges against Mr. Rajaratnam around five cooperating witnesses who have pleaded guilty to engaging in insider trading conspiracies with the defendant.
Legal experts say there are myriad reasons for prosecutors conducting a criminal investigation to indict some co-conspirators while not charging others.
“What drives these decisions is the strength of the evidence against each individual co-conspirator as well as tactical considerations,” said Anthony M. Sabino, a law professor at St. John’s University.
There was no indication that Mr. Gupta would play any role in Mr. Rajaratnam’s case in the months leading up to the trial. But in early March, a week before jury selection, the Securities and Exchange Commission sent shock waves through corporate America when it filed a civil administrative proceeding against Mr. Gupta. The agency accused him of leaking boardroom discussions to Mr. Rajaratnam from both Goldman and Procter & Gamble , where he also served as a director before resigning last month.
“The S.E.C. allegations are totally baseless,” Gary P. Naftalis, Mr. Gupta’s lawyer, said at the time. “Mr. Gupta’s 40-year record of ethical conduct, integrity and commitment to guarding his clients’ confidences is beyond reproach.”
Mr. Gupta, an Indian from Kolkata and a graduate of the Harvard Business School, is the most prominent executive ensnared by the government’s wide-ranging investigation into insider trading at hedge funds. His sudden fall from grace has stunned the business world.
As global managing director of McKinsey, Mr. Gupta, 62, was a trusted adviser to chief executives including Jeffrey R. Immelt of General Electric and Henry R. Kravis of the private equity firm Kohlberg Kravis Roberts. A prominent philanthropist, he held a senior advisory post at the Bill & Melinda Gates Foundation.
Over the last decade he grew close to Mr. Rajaratnam, a large financial supporter of the Indian School of Business, a highly regarded graduate school that Mr. Gupta helped start. Around the time of his retirement from McKinsey in 2007, he went into business with Mr. Rajaratnam, founding a private equity firm. Mr. Gupta also invested with Mr. Rajaratnam.
It was during that period — a nine-month stretch in 2008 — that the government wiretapped Mr. Rajaratnam’s cellphone. Those recordings helped the government bring charges against 26 people, 20 of whom have pleaded guilty.
Federal prosecutors appear to have weaker evidence against Mr. Gupta than against some of Mr. Rajaratnam’s other co-conspirators. For instance, two cooperating witnesses — Anil Kumar and Rajiv Goel — can be heard on multiple wiretaps swapping tips with Mr. Rajaratnam.
In Mr. Gupta’s case, federal prosecutors played only one wiretap on which Mr. Gupta divulged Goldman boardroom discussions to Mr. Rajaratnam. On a July 2008 call, Mr. Gupta told Mr. Rajaratnam that the bank’s board was contemplating a purchase of Wachovia or the American International Group .
Prosecutors did not present evidence, however, that Mr. Rajaratnam traded on this tip.
Certain rules could also prevent prosecutors from using against Mr. Gupta two of the most incriminating wiretaps played during the trial, legal experts say.
In one call, Mr. Rajaratnam tells a colleague, “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share.” In the other, Mr. Rajaratnam says to his trader, “I got a call saying something good is going to happen to Goldman.”
Because these conversations were between Mr. Rajaratnam and his employees, a judge could declare them inadmissible hearsay evidence, meaning it is too indirect or speculative to be used against Mr. Gupta.
But prosecutors could try to use the conversations against Mr. Gupta under what is known as the co-conspirator exception to the hearsay rule. The theory is that Mr. Rajaratnam’s statements about Goldman were made in furtherance of the suspected conspiracy between Mr. Rajaratnam and Mr. Gupta.
Without those two statements by Mr. Rajaratnam referring to tips about Goldman, prosecutors would be required to rely on circumstantial evidence like phone bills and trading records to establish Mr. Gupta’s guilt.
In the S.E.C.’s civil case, the agency has a lower burden of proof than federal prosecutors do in a criminal action. An S.E.C. administrative judge is also not subject to hearsay rules.
In an unusual twist, Mr. Gupta sued the S.E.C. last month, contending that an administrative proceeding had unfairly barred him from a jury trial in federal court. Mr. Gupta would have more protections there than in an administrative proceeding, including the right to review the S.E.C.’s evidence. A judge has not yet ruled on the issue.
If the S.E.C. prevails, a judge could impose financial penalties on Mr. Gupta and bar him from serving as an officer or director of a public company.