Insider Trading Enforcement

Rajat Gupta’s conviction by a New York court for
insider trading has sparked off a debate about the state of insider trading
enforcement in India. While several cases have been pursued by SEBI in the last
two decades since insider trading has been prohibited by regulation, the rate
of successful convictions or regulatory sanctions has been minimal.
An editorial
in the Business Standard states that while “Mr Gupta will join some 40-odd
insider traders who have been successfully prosecuted in the last three years
by Preetinder Singh Bharara, the US attorney for the Southern District of New
York (which includes Wall Street)”, the position in India operates in
stark contrast:
Insider trading, price manipulation and rigging have
always been rampant on Dalal Street. In the past three fiscal years alone
(until December 2011), the Securities and Exchange Board of India (Sebi)
investigated … 57 [cases] pertain[ing] to insider trading …. Of these, 28
insider trading cases were solved …. There were some suspensions and
prohibitions. Some warnings were issued. In [some] cases, Sebi ordered the
disgorgement of issue proceeds, and it issued many consent orders. But nobody
went to jail.
As we have earlier observed, regulatory enforcement in
insider trading cases is a tall order, particularly given the unavailability of
direct facts and evidence to prove charges. SEBI has recently relied on
circumstantial evidence to initiate action on two cases (discussed on The
), but it remains to be seen whether they will be upheld if taken up on
In any event, efforts are being initiated to strengthen
the evidentiary aspects of insider trading. As this report
in the Economic Times (ET) observes:
Soon after the Raj Rajaratnam-Rajat Gupta insider
trading case became public, Sebi had approached the government for powers to
tap phone calls for suspected insider trading and other securities frauds.
However, the government did not agree, although some recent reports said
that Sebi may finally get access to phone call records of people suspected of
insider trading and other market-related illegal activities. The need of the
hour, according to market players, is not only the use of the latest tracking
technologies to crack down on such unscrupulous people on the Street, but also
to set some reasonable timeframe to close these cases.
The ET report also has a summary of the leading cases
investigated by SEBI and the current outcome of those.

At the same time, it is not as if SEBI lacks
adequate enforcement powers. Somasekhar Sundaresan has previously demonstrated
as to how SEBI has greater powers than the US SEC on several counts.
Ultimately, what matters is the effective use of the powers rather than their availability
in the statute books.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • Contrary to popular perception (and SEBI’s perception too!), the SEC does not have any specific power to tap phone calls for investigation of insider trading. Any govt. Authority is required to obtain judicial authorization for the same under Title III of the Omnibus Crime Control and Safe Streets Act of 1968. And this is possible for investigation of certain offenses only, and securities fraud (let alone insider trading specifically) is not one of those! In this case, the govt. Sought wiretap authorization for investigation of possible wire fraud. The application must establish both `probable cause’ (in line with Fourth Amendment protections against unreasonable search and seizure) as well as `necessity’. The defendant can oppose admission of evidence gathered thru wiretaps by way of what’s called a `Franks hearing’, both on lack of probable cause and lack of necessity grounds. This is exactly what Rajaratnam did, unsuccessfully. (

    Mangesh Patwardhan

  • From what I remember of the Rajaratnam case the use of wiretap was on grounds of a suspicion of money laundering. The outcome was an insider trading conviction!!!


  • That’s right. The wiretap authorization was obtained for both wire fraud and money laundering, both of which are covered by Title III. However, the govt. also candidly noted that the evidence would also establish probable cause of the defendants’ participation in securities fraud, although that crime was not an authorized predicate offense under Title III. The statute recognizes that “a law enforcement officer lawfully engaged in a search for evidence of one crime” may happen upon evidence of another crime not specified in the court’s authorization order—and perhaps not specified in (Title III) either. Masciarelli, 558 F.2d at 1067. When that happens, “the public interest militates against [the officer’s] being required to ignore what is in plain view.” Id.

    In view of this, there is no constitutional or legal infirmity in the government using wiretap evidence for insider trading prosecution, without charging Rajratnam with either wire fraud or money laundering. However, it is widely expected that Rajratnam, on appeal, will again argue vigorously against admissibility of wiretap evidence..

    Mangesh Patwardhan

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