Insider Trading Trial of Ex-Goldman Board Member Begins

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A federal prosecutor says a former board member for Goldman Sachs and Procter & Gamble gave inside information to a billionaire hedge fund founder.

Federal prosecutor Reed Brodsky told jurors Monday in his opening statement that Rajat Gupta shared board tips with his friend and co-investor.

Gupta's lawyer, however, told jurors that his client did not cheat anyone when he talked to a friend who ran a hedge fund.Gary Naftalis, says the case is based on guess work and suspicion. He argued that Gupta spoke to someone on the phone "and it turned out that person did something wrong."

The jury was empaneled Monday in federal court in Manhattan.

Prosecutors allege that on several occasions Gupta, who served on the board of directors at Goldman Sachs and Procter & Gamble, passed on confidential information to Raj Rajaratnam, the founder of the Galleon hedge fund.

One such tip from September 2008 was that Warren Buffett planned to purchase Goldman Sachs shares worth $5 billion, a move that was not publicly known. Rajaratnam then used the information to execute stock trades that would make money for Galleon.

The 63-year-old Gupta has pleaded not guilty to conspiracy and securities fraud charges that carry a potential for more than 100 years in prison.

Convincing a jury to convict Gupta may not be simple. While Rajaratnam was convicted of insider trading last year and is now serving an 11-year prison sentence, the evidence around Gupta is circumstantial. Investigators had wiretaps on Rajaratnam's phone lines, but it does not appear there are records of Gupta explicitly passing information to Rajaratnam. The government plans to play for the jury a 24-minute wiretapped call between Rajaratnam and Gupta, but the two men did not at the time discuss committing illegal acts.

Gupta's reputation may also play to his advantage, according to attorney Anthony Barkow.

"Here's a man who was at the top of his profession, who was very rich, who didn't need to do this," Barkow said, adding that it is not clear that Gupta was compensated for the information he allegedly shared with Rajaratnam. Some of Gupta's investments were managed by Rajaratnam.

However, a tipper need not profit in order to be guilty of insider trading under U.S. securities laws, he or she must merely share material, non-public information with someone in a position to trade on that information.

The judge in the case is Jed S. Rakoff, who is known for rejecting, in strong, clear language, recent proposed settlements between the Securities and Exchange Commission and major banks including Bank of America and Citigroup, because the terms were not beneficial to the public. It seems less likely that United States v. Gupta will provide him similar opportunities, Barkow said.

The trial could include the spectacle of major players in the world of finance taking the stand. Reuters reports possible witnesses include Lloyd Blankfein, CEO of Goldman Sachs, legendary investor Warren Buffett, and American Express CEO Kenneth Chenault, who is also a P&G director.

Dozens of other defendants have pleaded guilty or been convicted as a result of the FBI probe into Rajaratnam, known as "inside hedge."

With the Associated Press