Rajat Gupta's rise from a teenage orphan to a member of the highest echelons of corporate America seemed like a fairy tale, even to some of the jurors who, on June 15, found Gupta guilty of insider trading. The jury foreman told Reuters that Gupta had led a “storybook life” and that he wanted to believe the allegations against him weren't true.

Gupta once headed the global management consulting firm McKinsey & Co. and served as a director on the boards of companies including Goldman Sachs Group Inc. and Procter & Gamble. He was a devoted father, husband and philanthropist. No matter how well-respected and sympathetic a figure he was, in the end a federal jury in the Southern District of New York (SDNY) found Gupta guilty of one count of conspiracy and three counts of securities fraud for passing confidential Goldman Sachs financial information to Galleon Group hedge fund co-founder Raj Rajaratnam. The jury found Gupta not guilty on two counts of securities fraud, including the sole charge related to passing Procter & Gamble inside information to Rajaratnam.

A jury convicted Rajaratnam in May 2011 of securities fraud and conspiracy for his role in a seven-year insider-trading plot that prosecutors said gained him $63.8 million and involved other directors, executives, bankers, consultants and traders. In contrast, Gupta was not accused of making a dime through the scheme but of passing information to a friend with shared business interests.

“Rajat Gupta once stood at the apex of the international business community. Today, he stands convicted of securities fraud,” Preet Bharara, U.S. attorney for the SDNY, said in a statement following the verdict. “He achieved remarkable success and stature, but he threw it all away.”

Gupta's role and stature in the business world, as well as the nature of the evidence used to convict him, make his a landmark conviction for the government, one that may portend new approaches to inside-trading cases.

Sterling Stature

Gupta's remarkable climb and fall in the business world is one of the reasons his case is so high-profile.

“They got the highest-up person that I'm aware of in a contested case,” says Peter Henning, a professor at Wayne State University Law School who worked in enforcement at the Securities and Exchange Commission (SEC) and in the Fraud Section of the Criminal Division of the Department of Justice. “In that sense, it's a signature conviction for the Justice Department. This is one they'll tout. This was a very highly regarded corporate director—a member of the 1 percent.”

Gupta's role as a corporate director sets his case apart from the bulk of high-profile insider-trading cases of the past few years, which mostly targeted professional traders, such as hedge fund manager Rajaratnam. Gupta's case signals that prosecutors are reaching into the boardroom in the war on insider trading. That's a very different kind of message than previous cases have sent, says Thomas Gorman, a partner at Dorsey & Whitney and former senior counsel for the SEC's Division of Enforcement.

“Before, a lot of corporate America may have shrugged off those cases as involving professional traders,” Gorman says. “This case ought to have a chilling effect on everyone because corporate directors and officers are routinely privy to this kind of information. The case here says, 'If you misuse it, even if you're not profiting from it in terms of dollars, we will still prosecute you.'”

Wiretapping Inroads

Gupta's sentencing is set for Oct. 16. He faces up to 16 years in prison but likely will receive a far lesser sentence in light of the 11-year sentence of Rajaratnam, who made millions off trades connected to the insider-trading scheme. Rajaratnam was found guilty on 14 counts and faced up to 25 years.

Gupta's subsequent appeal is likely to challenge the admissibility of wiretap evidence prosecutors used in his case. The Rajaratnam case and the cases that flow from it, including Gupta's, mark the first time federal prosecutors have used wiretap evidence in insider-trading cases.

In Gupta's case the wiretap evidence in play was indirect, comprising taped phone calls in which Rajaratnam discussed receiving tips from an unnamed Goldman Sachs board member. U.S. Senior District Judge Jed Rakoff of the SDNY ruled that the evidence was admissible despite the defense's argument that it was hearsay. Previously, an SDNY judge in the Rajaratnam case rejected defense arguments that the government lacks the authority to use wiretaps to investigate insider trading and allowed prosecutors to present evidence the government gathered by taping Rajaratnam's phone calls over a nine-month period in 2008.

“That really was a groundbreaking, breakthrough prosecution tactic,” says Michael Weinstein, a former DOJ trial attorney and chair of the white-collar practice at Cole Schotz. “The Gupta case and the Rajaratnam case are really the test cases for whether the courts are going to allow wiretaps to be used in future insider-trading cases. If the 2nd Circuit or, ultimately, the Supreme Court allow the use of wiretaps [in this context], the Justice Department will roll out this template in insider-trading cases throughout the country” (see “Lasting Impact”).

Circumstantial Evidence

Although the wiretap evidence was central to Rajaratnam's conviction and the government linking Gupta to the scheme, the case against Gupta still was largely one of circumstantial evidence, albeit one that created a clear case against him. There were no tapes of Gupta leaking tips to Rajaratnam. Instead, prosecutors developed timelines connecting Goldman Sachs board meetings or posting calls that Gupta participated in with phone records that showed Gupta calling Rajaratnam and subsequent records of Rajaratnam directing trades in Goldman Sachs stock that allowed him to illegally profit or avoid losses.

Gorman says circumstantial insider-trading cases have been the bread and butter of the SEC, which faces a lower burden of proof in its civil enforcement cases.

“It's hard enough to prove a circumstantial case in an SEC civil case,” Gorman says. “In a criminal case, it's a real statement on what they can do with this evidence that they were able to get that conviction. One of the less well-recognized takeaways from the Gupta case is the impact on the SEC. This is a real selling point for them to say, 'If prosecutors can do this in the criminal context, where the burden of proof is very high, you can rest assured that we can do this.' It's really going to propel that program forward.”

Lasting Impact

Michael Weinstein, a member at Cole Schotz and former Department of Justice trial attorney, says that through the Rajat Gupta and Raj Rajaratnam insider-trading cases, prosecutors are trying to expand the scope of the wiretapping statutes of the 1970s, which took aim at activities such as racketeering and organized crime.