Cat-and-Mouse Game in the Gupta Prosecution

We often think of prosecutions as involving a single crime that took place at a particular moment, so that the charges are fixed and the information that will be presented in court fairly clear-cut. In white-collar prosecutions, that is rarely the case, as prosecutors refine their case after filing charges, sometimes finding new violations, while defendants try to pry evidence from the government that can help their defense.

The insider trading prosecution of Rajat K. Gupta is a good example of the cat-and-mouse game that takes place in the lead-up to a trial in a white-collar case, as each side tries to gain the upper hand. With the case scheduled to go to trial on April 9, the jockeying between the two sides was on display last week, and will only increase over the next three months.

At a pretrial conference on Thursday, DealBook reported that a Justice Department prosecutor indicated it was “more likely than not there will be a superseding indictment” identifying additional inside information that Mr. Gupta is accused of leaking to Raj Rajaratnam, the former head of the Galleon Group hedge fund. The information related to Procter & Gamble’s sale of its Folgers Coffee brand for about $3 billion to J.M. Smucker in June 2008, a deal that Mr. Gupta learned about as a P.&G. director.

It is unclear why prosecutors did not include this alleged violation in the original indictment of Mr. Gupta that was returned in October. Mr. Rajaratnam was recorded on a wiretap discussing a source at P.&G. who he said told him about the deal, so the tipping was certainly known for at least the last three years as the Justice Department prepared its securities fraud case against him.

Adding a new charge this close to trial makes life more difficult for Mr. Gupta because his lawyers will have to determine how to fit this into the defense strategy. The indictment already alleges two instances in which Mr. Gupta is accused of disclosing information about Goldman Sachs that he learned as a member of its board and led to a trade by Mr. Rajaratnam, along a purported tip about P.&G.’s quarterly earnings in January 2009 As the government adds to the number of disclosures, it becomes more difficult for the defense to argue that contacts between the two men were innocuous.

Mr. Gupta filed a number of motions last week to try to shape how the case would unfold. Like Mr. Rajaratnam, Mr. Gupta has challenged the wiretaps as having been improperly obtained, asking the court to preclude the government from using them at trial. That argument was rejected in Mr. Rajaratnam’s case, and Judge Jed S. Rakoff, who will preside over Mr. Gupta’s trial in Federal District Court in Manhattan, indicated he would take the same course when he said at the pretrial conference that “if I were the defense, I would not be optimistic on this particular motion.”

Even if Mr. Gupta has little chance of succeeding in having the wiretaps suppressed, he has to raise the issue now in order to preserve it for a subsequent appeal if he is convicted. The United States Court of Appeals will consider the wiretaps in Mr. Rajaratnam’s appeal later this year, so Mr. Gupta is pinning his hopes on a favorable ruling in that case.

A second filing by Mr. Gupta that seeks additional information from the government gives a preview of how his lawyers plan to defend against the insider trading charges at trial. The government has already provided Mr. Gupta with almost 2.5 million pages of documents, so while it is hard to believe there could be much more evidence out there, it is often the case that what a defendant believes has not been furnished is most important.

Unlike civil cases, in which the oft-described “liberal” discovery rules allow each side access to all the opponent’s information and witnesses, federal criminal prosecutions offer a defendant much more limited discovery that does not include depositions or broad requests for documents in most cases. Nevertheless, a powerful tool for the defense is the Supreme Court’s requirement, announced in the seminal decision in Brady v. Maryland, that prosecutors must provide the defendant with all “exculpatory” information that might negate evidence of a person’s guilt or mitigate the severity of the punishment.

In his motion, Mr. Gupta asked the government to turn over any exculpatory evidence showing that Mr. Rajaratnam is untrustworthy and prone to exaggeration in describing his sources of information. The wiretaps do not record Mr. Gupta directly disclosing inside information to Mr. Rajaratnam for his trading, but do have Mr. Rajaratnam boasting about having a highly placed source inside Goldman and P.&G. If prosecutors believe Mr. Rajaratnam was a liar, then the defense can question whether his statements on the wiretaps are reliable.

There is no clear definition of what constitutes exculpatory evidence, and it is generally viewed as information that undermines the strength of the government’s case. In his filing, Mr. Gupta argues that prosecutors should be required to turn over any evidence “in which the government expressed its own doubts about Rajaratnam’s veracity – or simply that he is not to be trusted, even if stopping short of calling him a liar – [because it] would obviously be helpful to the defense, and equally obviously is known to the government.”

So Mr. Gupta is happy to piggyback on Mr. Rajaratnam’s challenge to the wiretaps while assailing the credibility of statements recorded by the government.

By making it clear that the defense plans to attack Mr. Rajaratnam’s credibility with the government’s own evidence, it could also make it more difficult for prosecutors to try to reach a deal with Mr. Rajaratnam so he can testify against Mr. Gupta in exchange for a potential reduction in his 11-year prison term. Putting Mr. Rajaratnam on the witness stand to testify against his old friend would be a risky maneuver if the government has also assailed his truthfulness.

Mr. Gupta also asked Judge Rakoff to order prosecutors to provide him with a “bill of particulars” specifying the benefits he is alleged to have received from providing inside information to Mr. Rajaratnam. To prove Mr. Gupta committed securities fraud, the government must show that there was a quid pro quo arrangement between the two men in which Mr. Gupta realized some personal or pecuniary benefit.

The indictment is vague about what Mr. Gupta received in exchange for disclosing the confidential information, only stating that he “benefited and hoped to benefit from his friendship and business relationships with Rajaratnam in various ways, some of which were financial.” To the extent the defense can pin down exactly what prosecutors believe was the quid pro quo, the easier it will be to dispute the claim. The government no doubt prefers to keep the allegation as broad as possible so that a wide range of evidence can support a jury finding of a quid pro quo exchange between the two men.

Just as trials are a type of theater, so the pretrial phase is about seeking out advantages that can be used to help shape the story that will be told to the jury.