Former Goldman Sachs Group Inc board member Rajat Gupta departs Manhattan Federal Court after being sentenced in New York, October 24, 2012. Fallen Wall Street insider Gupta was sentenced to two years in prison on Wednesday for leaking Goldman Sachs  boardroom secrets to the hedge fund manager at the center of the U.S. government's crackdown on insider trading, a much lighter sentence than prosecutors had sought. REUTERS/Lucas Jackson (UNITED STATES - Tags: BUSINESS CRIME LAW) - RTR39JGV

Former Goldman Sachs Group Inc board member Rajat Gupta departs Manhattan Federal Court after being sentenced in New York, October 24, 2012. Fallen Wall Street insider Gupta was sentenced to two years in prison on Wednesday for leaking Goldman Sachs ... boardroom secrets to the hedge fund manager at the center of the U.S. government's crackdown on insider trading, a much lighter sentence than prosecutors had sought. REUTERS/Lucas Jackson (UNITED STATES - Tags: BUSINESS CRIME LAW) - RTR39JGV

Rajat Gupta Found Guilty of Insider Trading

FBN's Adam Shapiro breaks down details of Gupta's conviction.

Can Rajat Gupta Restore His Innocence and Reputation?

By Markets

The U.S. Court of Appeals in Manhattan has agreed to review the 2012 insider trading conviction of former three-time McKinsey & Co. Managing Director and Goldman Sachs (GS) board member Rajat Gupta.

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Gupta was convicted of providing insider information to former Galleon Group hedge fund manager Raj Rajaratnam about Berkshire Hathaway’s (BRK.A) $5 billion investment in Goldman Sachs at the height of the 2008 financial crisis.

Gupta previously tried to appeal his conviction on the basis that he did not receive any benefit from Rajaratnam, but this appeal was denied by U.S. District Judge Jed Rakoff and the appeals court in December 2015 did not overturn him.

But in light of the Newman insider trading conviction that was overturned by the U.S. Court of Appeals for the Second Circuit, Gupta might have another chance at restoring his reputation and dignity.

In United States v. Newman, hedge fund managers Todd Newman and Anthony Chiasson were convicted of trading on insider information in a case led by Wall Street-crusading U.S. Attorney for the Southern District of New York Preet Bharara. But in December 2014, the Court of Appeals for the Second Circuit overturned their conviction on the basis that neither Newman nor Chiasson knew that the tipper was receiving any personal benefit. The Appeals Court interpreted a 1983 Supreme Court ruling that said that insider trading could only be prosecuted if the tipper received a personal benefit, like money, other than just maintaining a friendship.

Gary Naftalis, Gupta’s lawyer, successfully argued to the Appeals Court that Gupta did not receive any tangible benefit from Rajaratnam, other than nurturing a friendship.

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The consequences of overturning Gupta’s conviction could be monumental for the future of insider trading cases. “People tend to be very suspicious of Wall Street and insiders and this case has that front and center. By the nature of the defendant, there will be a lot of eyes on this case” says Lathrop Nelson, a partner in the white collar and government investigations unit at Montgomery McCracken.  

However, if the Appeals Court rules in Gupta’s favor, Nelson says that this won’t necessarily be a death nail for insider trading cases particularly for those that can prove that tippers receive a tangible benefit. And if SCOTUS goes against the Appeals Court and concludes that prosecutors do not need to prove a tangible benefit in order to prosecute for insider trading, then the success of Newman and the potential overturning of Gupta’s case might be short lived.

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According to Nelson though, Gupta has a good shot at winning his appeal especially after the Newman overruling and that the Supreme Court has agreed to hear an insider trading case involving trades that Bassam Salman made based on mergers between clients of Citigroup (C), where his brother-in-law worked. Bassam’s lawyers have argued that his brother-in-law Maher Kara did not receive any tangible benefit in exchange for tips.

If Gupta’s conviction is overruled though, reputation wise, he will have quite a ways to go. “A court overturning his conviction will not restore his reputation overnight but it’s an important first step. Depending on what the court says in its ruling, Gupta may need to do more to rebuild it” says Jon Haber, President of Cascade Strategy, a communications consultancy, and former special counsel in President Bill Clinton's administration.