A US appeals court has dismissed a lawsuit brought against former Goldman Sachs director Rajat Gupta by a shareholder of the firm who sought that the Indian-American repay profits made after hedge fund founder Raj Rajaratnam traded in shares based on insider tips passed by him.
The lawsuit brought by Goldman investor James Mercer was dismissed by the Second Circuit Court of Appeals in New York which said that Mercer had failed to prove that Gupta was a "beneficial owner" of Goldman Sachs shares.
"Plaintiff has failed to allege that defendant Gupta had 'pecuniary interest' in Goldman Sachs shares that would make him a 'beneficial owner' of the shares," the three judge panel ruled.
The India-born former McKinsey head had been sentenced to two years in prison last year for passing insider tips about Goldman Sachs to now jailed Galleon founder Rajaratnma.
Gupta is fighting his conviction on the insider trading charges.
Rajaratnam is currently serving an 11 year prison term after being convicted of running one of the largest insider trading schemes in US history.
In his suit, Mercer had said Gupta repeatedly shared information about Goldman's share price with Rajaratnam whose hedge fund then engaged in "short-swing trading" of Goldman shares, earning profits or avoiding losses.
Gupta had an interest in sharing information with Rajaratnam as he was a director of and had a balance of over $16 million in the Voyager fund that invested in other Galleon hedge funds.
Mercer further said that Gupta knew that Rajaratnam paid former McKinsey executive Anil Kumar in exchange for insider information.
Mercer said Gupta is a beneficial owner of Goldman Sachs shares since Rajaratnam made quid pro quo payments to him in exchange for insider information and Gupta had the "opportunity to profit" in Galleon due to his close business relationship with Rajaratnam.
Mercer alleged that Gupta profited from Galleon's Goldman Sachs transactions due to his close business relationship with Rajaratnam.
Mercer's suit had been rejcetd by US district court in December 2011 and the appeals court upheld that decision.
The court said Mercer has failed to adequately allege that Gupta received profits from Goldman Sachs shares as opposed to payment for insider information.
Mercer said Rajaratnam gave Gupta the "opportunity... to profit" in the Goldman Sachs transactions by giving him an interest in Voyager in exchange for insider information.
"We have held that the 'presumption' that a defendant 'derived some pecuniary benefit' from another's shortswing transactions is not enough to establish pecuniary interest. Business dealings alone do not establish beneficial ownership," the court ruled.