Rajat Gupta: Will circumstantial evidence be enough?

The insider-trading prosecution of former Goldman Sachs Group director Rajat Gupta is built on circumstantial evidence that may be less persuasive than the wiretaps that sealed the fate of his friend Raj Rajaratnam.

Unlike the case against the Galleon Group LLC co-founder and hedge fund tycoon, which included his own words in calls with leakers, prosecutors will seek to convict Gupta based on the timing of his phone calls and the Rajaratnam trades that immediately followed, said Peter Henning, a law professor at Wayne State University in Detroit. Wiretaps likely to be used at Gupta’s trial involve Rajaratnam boasting of a source he doesn’t name. The government said that source is Gupta.

Prosecutors “don’t have the wiretaps, the smoking gun evidence,” Henning said in an interview following Gupta’s surrender to the FBI yesterday in Manhattan. “I wouldn’t call it a weak case, but there are some challenges that weren’t featured in the Rajaratnam case.”

Gupta, 62, who previously led McKinsey & Co, became the highest-ranking executive to be charged in a four-year probe by the Federal Bureau of Investigation that led to a nationwide crackdown on insider trading. Prosecutors on Wednesday unsealed a sixcount indictment accusing him of leaking inside information to his business partner Rajaratnam.

Rajaratnam, 54, was sentenced on October 13 to 11 years in prison, the longest term for insider trading in American history, following his conviction in May.

If convicted, Gupta faces up to 20 years in prison on each of five securities fraud counts and as long as five years on a conspiracy charge. Gupta, who also served on the board of P& G, the world’s largest consumerproducts company, pleaded not guilty in an appearance in Manhattan federal court.

“The government’s allegations are totally baseless,” defense attorney Gary Naftalis said in a statement.

“Gupta is innocent of any of these charges and that he has always acted with honesty and integrity.” Gupta’s indictment cites at least three instances in which he allegedly leaked tips to Rajaratnam.

He’s accused of telling Rajaratnam about Berkshire $5 billion investment in Goldman in September 2008, about the bank’s unexpected Q4 loss that year, and about P&G’s poor performance in late 2008.