On Friday afternoon, CNBC Senior Editor John Carney reported that the insider trading allegations against former McKinsey & Co. chief Rajat Gupta reportedly led to a bitter dispute between federal prosecutors and securities regulators.  Gupta has been accused by the SEC of leaking confidential information about Goldman Sachs and P&G, companies on whose boards he sat as a director.  He's denied any wrongdoing.

The SEC and the U.S. attorney's office in New York reportedly were at odds over the timing of the allegations.  The SEC wanted to file a civil complaint against Gupta using its newly acquired authority under Dodd-Frank Reform Act.  Federal prosecutors worried that filing charges so close to the start of the insider trading trial of Galleon founder Raj Rajaratnam, might be viewed as prejudicial to the criminal case against Rajaratnam.  Accordingly, prosecutors attempted to pressure the SEC into holding off on filing a complaint against Gupta until after a jury had been selected in the Rajaratnam trial.

The SEC, conversely, wanted to press forward with its case against Gupta, with SEC Enforcement feeling "somewhat overshadowed" by the insider trading probe lead out of the office of Preet Bharara, the U.S. attorney based in Manhattan, according to one of the people familiar with the matter. The SEC looked at the charges against Gupta as a chance to show that it was taking a pro-active stance against insider trading, the person said.

As time passed, the dispute grew more acrimonious.  Some at the SEC began to see the attempt by the prosecutors to delay their case as an encroachment on their independence and authority. Shouting over the phones followed.  The dispute reached such high levels that SEC Chairman Mary Schapiro interceded.

    What the SEC Had.   Two weeks before the trial of Rajaratnam was to begin, Gupta made a submission of evidence to the SEC, a person familiar with the situation said.  The nature of that evidence is not clear, although people familiar with the matter say Rajaratnam's defense attorneys viewed it as exculpatory. Rajaratnam's defense attorneys requested that the SEC hold off on charges against Gupta until after the trial, one person said. They mentioned that they might call Gupta as a witness in the trial.

The SEC filed its complaint against Gupta on 3/1, a week before jury selection for Rajaratnam's trial was set to begin.  Lawyers for Raj Rajaratnam almost immediately accused the government of a deliberate effort to taint the jury pool.  Rajaratnam defense attorney Attorney John Dowd said that the SEC's claims against Gupta had generated “overwhelming publicity” that jeopardized Rajaratnam's right to an unbiased jury and a fair trial.

A jury for the Rajaratnam trial was selected on 3/8 after attorneys questioned potential jurors about their familiarity with the case.   For further details, go to:   [NetNet, 3/11]