Question A.Fact Pattern:Raj Rajaratnum, founder of the hedge fund Galleon, was on trial for insider trading, in one of the most extensive cases in recent history.One of the charges involves Rajat Gupta, a former member of the Board of Directors at Goldman Sachs.He, apparently, made calls to Raj Rajaratnam on a regular basis.The focus, at trial, was on two such calls.

The first took place on September 23, 2008.At a late afternoon call between the Goldman Board of Directors, Lloyd Blankfein, Goldman's CEO, informed the board that Warren Buffet would be investing $5 billion in Goldman Sachs (TARP had not yet been passed by the government, so Goldman was looking to shore up its financial position).Almost immediately after hanging up from that phone call, Rajat Gupta placed a call to Raj Rajaratnam (3:58 pm) after which Raj Rajaratnam indicated that he wanted "to go for, get 2 million shares" of Goldman Sachswhen the market opened ("I mean, you know, look, I get the sense this is a deal that is, you know, its's going pretty well, I mean, they just upsized it from 2-1/2 to 5 billion.Gonna...I mean, to me, this Buffett thing is somewhat of a game changer.":McCown Smith, the trader, to Raj Rajaratnam after being told to get 2 million shares.)

The second call was after a Goldman board meeting call in October of 2008, when it was revealed that Goldman Sachs was going to report its first quarterly loss as a public company (with a loss of $2.00 per share at a time when the Street had them making $2.50 per share.)There is evidence to show that Rajat Gupta called Raj Rajaratnam immediately after the meeting and passed on the confidential information, allowing Mr. Rajaratnam to sell his Goldman position and avoid losses before the public earnings announcement from Goldman Sachs.

Assume the truthfulness of the allegations (not hard to do given the transcripts of the wiretaps).

What are the two insider trading theories that allow outsiders to be held liable for insider trading?Which of the two seems likely to be most successful in this case?Discuss why you think that.

Provide a definition of insider trading and discuss the requirement of materiality under the securities laws.Raj Rajaratnam's primary defense is that none of this information, by itself, rises to the level of importance necessary to show materiality under the securities laws but, rather, forms a mosaic which, when put all together, provides insight into the market.Discuss the line between unlawful insider trading and good research methods.

Discuss the liability the Rajat Gupta could face under ordinary corporate governance standards.That is, other than liability under the securities laws for insider trading, are there any alternate theories under which he can be held liable and to whom.

Question B.Fact Pattern:Bedlam, Inc., a publicly traded company, was negotiating with Beautiful Corporation regarding a potential merger, starting in September of 2005 through January of 2006.During that same time period a number of financial commentators wrote about the potential merger.In response to these articles, Bedlam, Inc. issued three statements denying that a merger was in the works.In February of 2006, a merger between the two companies took place and the stock price of Bedlam, Inc. went up significantly.James was one of many Bedlam, Inc. shareholders who sold stock at the lower price after the denial, but before the merger.However, he was friendly with an officer of Beautiful Corporation and an e-mail that he sent to his friend has surfaced indicating that he knew about the potential merger before he sold his stock (he had to sell his stock early because he needed the money to buy a new guitar.)

The Bedlam, Inc. shareholders who sold their stock after the public statements denying the merger negotiations but before the merger was announced filed a class action lawsuit against Bedlam, Inc. for securities laws violations.These shareholders alleged that they were injured by selling Bedlam, Inc. shares at artificially depressed prices in a market affected by Bedlam, Inc.'s misleading statements and in reliance thereon.James is included in this class action.

Discuss the likely result, paying particular attention to:

Which law would most likely govern this dispute and how has that law been interpreted?

Discuss both Basic v. Levinson and Halliburton Co. v Erica P. John Fund, Inc.

Whether the information was "material" and what that means?

Who can successfully bring a cause of action?