Former Goldman Sachs Director Gupta Charged by U.S. With Securities Fraud
By Patricia Hurtado, David Glovin and Chris Dolmetsch – Oct 27, 2011 12:01 AM ET
Rajat Gupta, the former Goldman Sachs Group Inc. (GS) director accused of feeding tips to Galleon Group LLC co-founder Raj Rajaratnam, was charged in an indictment that made him the highest-ranking executive arrested in a nationwide crackdown on insider trading.
Gupta, who also sat on the board of Procter & Gamble Co. (PG) and led McKinsey & Co., was charged with five counts of securities fraud and one count of conspiracy to commit securities fraud in an indictment unsealed yesterday in Manhattan federal court.
The indictment alleges that Gupta, 62, of Westport, Connecticut, was a close friend and business associate of Rajaratnam’s who made multimillion dollar investments with him and also passed him inside information after attending board meetings from 2008 through January 2009. The tips generated “illicit profits and loss avoidance” of more than $23 million, the U.S. Securities and Exchange Commission alleged in a lawsuit filed yesterday.
“Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel,” said Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case.
The case shows that corruption has “insinuated itself into the boardrooms of elite companies,” Bharara said.
Gupta, who surrendered to the FBI in New York shortly after 8 a.m. yesterday, pleaded not guilty at his arraignment before U.S. District Judge Jed Rakoff. He appeared in court in wearing a salmon Hermes necktie, blue shirt and navy blue suit.
Assistant Manhattan U.S. Attorneys Reed Brodsky, who prosecuted Rajaratnam, told the judge the government’s case included “wiretapped audio calls.”
Rakoff set an April 9 trial date.
Gupta was ordered released on $10 million bond secured by his home after a federal magistrate ordered him to surrender his passport and barred him from leaving the continental U.S.
Gupta and his lawyer, Gary Naftalis, declined to comment on the charges after court.
Naftalis said in a statement that Gupta had “legitimate reasons” for communicating with Rajaratnam, including a $10 million investment that Gupta had in a fund that Rajaratnam managed.
“The government’s allegations are totally baseless,” Naftalis said in the statement. “The facts in this case demonstrate that Mr. Gupta is innocent of any of these charges and that he has always acted with honesty and integrity,” he said.
‘Did Not Trade’
“He did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo,” Naftalis said.
Rajaratnam, the central figure in what prosecutors have called the largest crackdown on insider trading at hedge funds in U.S. history, was arrested and charged in October 2009. He was convicted of conspiracy and securities fraud by a Manhattan federal jury in May. He was sentenced this month to 11 years in prison, the longest term for insider trading in U.S. history, and was also ordered to forfeit $53.8 million and pay a $10 million fine.
Gupta, whom Rajaratnam described on FBI wiretaps as a friend and business associate, is the 56th person charged in the probe. Fifty people have pleaded guilty or been convicted at trial.
Gupta faces as long as 20 years in prison if convicted on each of the securities fraud charges and as long as five years if convicted of conspiracy, Bharara’s office said. He also faces a fine of as much as $5 million, prosecutors said.
Stephen Cohen, a spokesman for New York-based Goldman Sachs, declined to comment.
In the indictment unsealed yesterday, prosecutors cite at least three instances in which Gupta and Rajaratnam spoke on the phone. The U.S. alleges Gupta passed inside information to Rajaratnam during those calls.
Before the close of the New York Stock Exchange on Sept. 23, 2008, Gupta participated by phone in a meeting of the Goldman Sachs board, according to the indictment. During the meeting, Goldman agreed to accept a $5 billion investment from Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), the U.S. said.
“Sixteen seconds after Gupta disconnected his phone from the Goldman Sachs board call, at approximately 3:54 p.m., his assistant called Rajaratnam and connected Gupta to the call,” the U.S. said.
“At approximately 3:58 p.m., just two minutes before the close of the market, Rajaratnam caused certain Galleon funds to purchase approximately 217,200 shares of Goldman Sachs common stock at a total cost of approximately $27 million,” according to the indictment. Galleon made a profit of about $840,000 on the transaction after the Berkshire investment became public, the U.S. said.
A month later on Oct. 23, 2008, Rajaratnam avoided losses on Goldman Sachs, prosecutors said, after Gupta was told during a board meeting that the company had lost almost $2 a share, worse than Wall Street’s expectations.
Prosecutors said that about 23 seconds after Gupta hung up from that call, he dialed Rajaratnam and spoke to him for 13 minutes. Rajaratnam later directed that Galleon sell its entire position in Goldman, avoiding a loss of more than $3.6 million, the SEC alleges.
On Jan. 29, 2009, a day before P&G announced its quarterly earnings, the U.S. alleges Gupta participated in a meeting by telephone from Switzerland in which earnings were discussed. A few hours later, Gupta called Rajaratnam and spoke to him for eight minutes, passing inside information concerning P&G’s organic sales growth, according to prosecutors.
The Galleon co-founder later that day caused his funds to short about 180,000 shares of P&G stock. Rajaratnam reaped a profit of more than $570,000 from Gupta’s tip, the SEC said.
“The alleged conduct of Mr. Gupta is not an inadvertent slip of the tongue,” Janice Fedarcyk, head of the FBI’s New York office, said in a statement. “That information (captured by the FBI) was conveyed by phone so quickly it could be termed instant messaging.”
The criminal case against Gupta comes seven months after federal prosecutors in court first described Gupta and Rajaratnam’s brother Rengan as “unindicted co-conspirators.” Rajaratnam’s lawyer, John Dowd, had said his client had been considering calling Gupta as a character witness. Dowd said then, after court , “I think it’s an attempt to smear a possible witness.”
Rengan Rajaratnam hasn’t been charged criminally.
“It appears they’re ready to make out their case with a combination of phone records, co-conspirator statements from Rajaratnam, wiretaps and perhaps other witnesses or documents,” said Daniel Richman, a professor at Columbia Law School and a former federal prosecutor in New York.
While the indictment unsealed yesterday reprises the government’s evidence from Rajaratnam’s trial and an SEC administrative action filed against Gupta in March and later dismissed, it also provides details about the relationship between the two and new examples of their business dealings and contacts.
New Silk Route
Gupta invested about $2.4 million in two offshore Galleon funds created from 2003 to August 2005, prosecutors said. As of May 2010, Rajaratnam had a stake in a fund managed by New Silk Route NSR Partners LLC, co-founded by Gupta. In the indictment, the U.S. alleges that Gupta invested about $35 million in entities with Rajaratnam, including New Silk Route.
From 1994 to 2003, Gupta ran New York-based McKinsey, the global consulting firm. He remained a senior McKinsey partner until 2007. He left the Goldman Sachs board in 2010 and stepped down from P&G’s board in March.
Gupta received a bachelor of technology degree in mechanical engineering from the Indian Institute of Technology and a master’s in business administration from Harvard University. In 2001, Kolkata-born Gupta founded the Indian School of Business in Hyderabad.
His $6.12 million white mansion, which faces Long Island Sound, was purchased in 1999. It sits on 2.28 acres and has more than 12,000 square feet of living space, according to the Westport town assessor’s office. According to town records, its current appraised value is $12.5 million.
The house has 18 rooms including eight bedrooms, eight bathrooms, five fireplaces, a gazebo and a pool.
In an interview in Newsweek this month, Rajaratnam said prosecutors pushed him to plead guilty to one criminal charge and inform against Gupta. He told the magazine that he refused to inform on Gupta or wear a wire to record him for the FBI.
Richman said it may not be too late for Rajaratnam to change his mind.
“New cooperators might be developed,” the former federal prosecutor said. “There may come a time that Rajaratnam reconsiders his decision not to cooperate, and leniency, post- sentencing is still available.”
At Rajaratnam’s trial, Goldman Sachs Chief Executive Officer Lloyd Blankfein testified that Gupta violated the bank’s policies by allegedly telling the defendant about the company’s confidential board discussions, results and plans.
Blankfein said Gupta and other board members were told in October 2008 that Goldman Sachs was facing the possibility of a quarterly loss for the first time since it went public in 1999.
The Gupta indictment includes evidence that first surfaced at Rajaratnam’s trial. According to the indictment, Rajaratnam told a Galleon employee on Oct. 24, 2008, that he had heard from someone on the Goldman Sachs board that the company was losing $2 a share. Galleon sold 150,000 shares, avoiding “several million dollars in losses,” the U.S. said.
At Rajaratnam’s trial, prosecutors played a secret recording of the defendant speaking on the phone with a Galleon employee.
“I heard yesterday from somebody who’s on the board of Goldman Sachs, that they are gonna lose $2 per share. The Street has them making $2.50,” Rajaratnam can be heard saying. “I’m gonna whack it, you know.”
Gupta illegally tipped Rajaratnam with inside information about earnings at Cincinnati-based Procter & Gamble, as well as Goldman Sachs’s results and the $5 billion Berkshire Hathaway investment, the SEC said yesterday in its civil complaint, also filed in federal court in Manhattan.
Tips involving Procter & Gamble resulted in illicit profits of more than $570,000, the SEC said.
“Gupta tipped the material non-public information to Rajaratnam with the expectation of receiving a benefit,” according to the SEC complaint.
The agency is seeking a court order forcing Gupta and Rajaratnam to give up all “illicit” profits and other gains made or losses avoided through the trades. The SEC also asked the court to bar Gupta from being an officer or director of a public company and from associating with any broker, dealer or investment adviser.
“Directors who exploit boardroom confidences for private gain can be certain they will ultimately be held responsible for their illegal actions,” SEC Enforcement Director Robert Khuzami said yesterday in a statement.
Rakoff was assigned the criminal case against Gupta because he presided over a related matter. In March, the SEC brought an administrative action against Gupta in Washington. Gupta sued in Manhattan federal court weeks later, claiming the SEC violated his rights by pursuing an administrative action rather than a lawsuit in district court, where he would have had the right to a jury trial and the use of federal rules of evidence.
In March, Rakoff, who presided over Gupta’s SEC lawsuit, called the SEC’s administrative action “bizarre.” He noted that he was already presiding over the cases of more than two dozen Galleon defendants who the agency sued in federal court.
The judge said in July that Gupta could argue that the agency intentionally singled him out for unfair treatment in retaliation for claiming his innocence. Rakoff also said that the SEC’s other suits related to the Galleon case were before him.
The SEC dropped the administrative action in August, agreeing to bring any subsequent case against Gupta in district court. Gupta agreed to withdraw his lawsuit against the SEC.
In another insider trading case, Rakoff sentenced Winifred Jiau to a four-year prison term for insider trading, rejecting the 10-year term which prosecutors had sought.
The cases are U.S. v. Gupta, 11-cr-00907, and SEC v. Gupta, 11-cv-07566, U.S. District Court for the Southern District of New York (Manhattan).
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