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Megan McArdle

Megan McArdle - Megan McArdle is a senior editor for The Atlantic who writes about business and economics. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and The Economist. More

Megan was born and raised on the Upper West Side of Manhattan, and yes, she does enjoy her lattes, as well as the occasional extra-dry skim-milk cappuccino. Her checkered work history includes three start-ups, four years as a technology project manager for a boutique consulting firm, a summer as an associate at an investment bank, and a year spent as sort of an executive copy girl for one of the disaster-recovery firms at Ground Zero … all before the age of 30.

While working at Ground Zero, Megan started Live From the WTC, a blog focused on economics, business, and cooking. She may or may not have been the first major economics blogger, depending on whether we are allowed to throw outlying variables such as Brad Delong out of the set. From there it was but a few steps down the slippery slope to freelance journalism. She has worked in various capacities for The Economist, where she wrote about economics and oversaw the founding of Free Exchange, the magazine's economics blog. She has also maintained her own blog, Asymmetrical Information, which moved to The Atlantic, along with its owner, in August 2007.

Megan holds a bachelor's degree in English literature from the University of Pennsylvania and an M.B.A. from the University of Chicago. After a lifetime as a New Yorker, she now resides in northwest Washington, D.C., where she is still trying to figure out what one does with an apartment larger than 400 square feet.

Can You Be Guilty of Insider Trading Without Personal Gain?

By Megan McArdle
Oct 27 2011, 3:42 PM ET Comment

Rajat Gupta, formerly a director at Proctor and Gamble and Goldman Sachs, has been indicted on multiple counts of passing insider information about the companies he was supposed to be helping to oversee.  He is alleged to have delivered this information to Raj Rajaratnam, the hedge-fund manager who just got 11 years for insider trading.

Ho-hum! Yawn.  More corruption on Wall Street, right?

Not quite. This is a very interesting case, because Gupta is not accused of having directly profited from the tips.  He's accused merely of having used them to build his relationship with Rajaratnam.

Why is this interesting?

Well, for starters, because insider trading cases usually require proving that the insider who delivered the information did so for some gain.  That gain doesn't have to be immediate, or in cash, but it does have to be something that you can point to and say "That's what he got out of it".

"Rajaratnam's goodwill" is slightly more nebulous than I believe usually goes to trial.  And that's not just because you have to spend hours in court arguing about whether this is actually valuable.  It's also because without a gain, there's less in the way of a paper trail.

Yesterday I was on C-Span talking about congressional insider trading, and one of the questions that came up is how insider trading gets caught.  Contrary to popular belief, it's not all whistle-blowers and suspicious entries on disclosure forms.  In fact, the exchanges monitor trades very closely, and suspicious patterns get flagged for review by computer.  Most of those flags come to nothing--but if the timing of your trades is consistently too convenient, you may well get a visit from the SEC.  This is why it's not so easy to just "hide" the trades by having your sister or brother-in-law do them for you: their accounts will trigger the flags, and the connections will come up in short order.  (As I understand it, that is how the FDA chemist who used 7 different "friends and family" accounts to trade in advance of approval decisions got caught.)

If this guy had been trading for his own account as well as passing on the information--or getting checks from his good friend Raj--then it would be easy to prove that he passed on the information.  But though I assume the SEC went through his home and calendar with a fine-toothed comb, scrutinizing anything that might have constituted a gift, they haven't come up with anything.  And according to the Journal, they don't have wiretaps of the suspicious calls they've logged from Gupta to Rajaratnam.  That makes it harder to establish that the information came from Gupta; presumably, the defense is going to argue that Gupta was a happy idiot who liked to to unwind by calling his good friend Raj after board meetings.

But presume that they can establish that the information was passed.  What then?

It will be very interesting if they get a jury to agree that building one's friendships is a tangible enough gain to constitute insider trading--interesting most of all because these laws are ultimately enforced by Washington.  And Washington is a city built almost entirely on relationships that are fostered by a robust trade in confidential secrets.  As with the alleged crimes of Gupta, it's almost never done with a crass quid pro quo.  Instead, one builds a long-term partnership for mutual gain, with the accounting done only obliquely.

I'm no lawyer, but I suspect that this case will ultimately prove a stiff uphill slog.  Nebulous securities cases don't seem to do well in front of juries; either the jury gets mad at the prosecutor for boring them, or they err on the side of the defendant because the whole thing was too hard to understand.  (This is what a securities litigator told me, anyway.)  Much-lionized "tough on Wall Street" prosecutors like Spitzer and Giuliani tended to lose any case they took to trial.

But it will certainly be interesting to watch.


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