Gupta Tapes Not Enough for Charges in Galleon Case, Lawyers Say
Former Goldman Sachs Group Director Rajat K. Gupta
Seokyong Lee/Bloomberg
Former Goldman Sachs Group Director Rajat K. Gupta.
Former Goldman Sachs Group Director Rajat K. Gupta. Photographer: Seokyong Lee/Bloomberg
A 2008 conversation between then- Goldman Sachs Group Inc. (GS) Director Rajat Gupta and Galleon Group LLC co-founder Raj Rajaratnam about the bank’s talks on buying Wachovia Corp. or AIG Inc. isn’t enough to support prosecuting Gupta for insider trading, several lawyers said.
Prosecutors in the trial of Rajaratnam this week played a tape of the call in which the former Goldman Sachs board member chatted casually with the hedge fund manager about the discussions. It’s the only tape the government will use in court that includes Gupta, said a person familiar with the case.
The exchange, along with additional government allegations divulged in recent weeks, isn’t a smoking gun that shows Gupta meant to break the law, said Tom Dewey, a lawyer at New York’s Dewey Pegno & Kramarsky LLP. Gupta is the subject of an administrative action by the Securities and Exchange Commission; the SEC hasn’t sued him in district court and no criminal charges have been brought against him.
“If they were interested in criminally charging him, they would have done it by now,” said Richard Scheff, chairman of Philadelphia-based Montgomery, McCracken, Walker & Rhoads LLP. Scheff, who practices criminal law and isn’t involved in the case, called the prospect of charges “unlikely.”
The SEC action filed March 1 accused Gupta of leaking stock tips to Rajaratnam. Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in New York, and Anne Granfield, a spokeswoman for Gupta, declined to comment on the prospect of criminal charges against him. John Nester, an SEC spokesman, declined to comment.
Criminal Charges ‘Unlikely’
“Usually, the fact that the SEC was allowed to proceed with its case means there won’t be criminal charges,” said Dewey, a defense lawyer who isn’t involved in the case. He also said criminal charges are “unlikely.”
U.S. District Judge Jed Rakoff in Manhattan, who oversees a related SEC lawsuit against former Galleon trader Adam Smith, said March 16 that the agency’s decision to file only an administrative action, and not a civil suit, was “bizarre.”
Gupta’s name has been mentioned almost daily at the Rajaratnam trial since it started March 8. Rajaratnam is accused of earning $45 million by using illegal tips from traders, corporate insiders, and others including Gupta, the former worldwide director of McKinsey & Co. He faces as many as 20 years in prison if convicted on the most serious charges.
Early in the trial, prosecutors displayed a photograph of Gupta on a video screen while Assistant U.S. Attorney Jonathan Streeter told jurors he was a “co-conspirator” who leaked tips about Goldman Sachs’ earnings and a 2008 investment in the bank by Warren Buffett’s Berkshire Hathaway Inc. Gupta has denied wrongdoing.
Two Board Meetings
Within minutes of attending two board meetings, Gupta, 62, called Rajaratnam, 53, who traded on the tips, Streeter said.
Prosecutors on March 15 played a wiretap recording of the July 29, 2008, telephone call between Gupta and Rajaratnam. In it, Rajaratnam asked about a “rumor that Goldman may look to buy a commercial bank.” In response, Gupta said, “Yeah, this is being discussed” and that the board was “divided” on suggestions that it purchase Wachovia, now part of San Francisco-based Wells Fargo & Co. (WFC), or New York-based insurer American International Group Inc. (AIG) Goldman bought neither.
Ed Canaday, a spokesman for New York-based Goldman Sachs, declined to comment.
Streeter said the government also has an October 2008 wiretap recording of Rajaratnam in which the fund manager tells “employees” that “he was told by a Goldman Sachs board member that the investment bank was losing $2 a share,” Streeter said.
‘No Allegation’
Gupta hasn’t filed a response to the SEC administrative action. In a March 1 statement, his lawyer, Gary Naftalis, said there was “no allegation” that Gupta traded in securities at issue “or shared in any profits as part of any quid pro quo.”
“Gupta had lost his entire $10 million investment in the GB Voyager Fund managed by Rajaratnam at the time of these events, negating any motive to deviate from a lifetime of honesty and integrity,” Naftalis said.
The government is unlikely to bring criminal charges against Gupta because the proof against him appears “circumstantial,” said Jacob Frenkel, a former SEC lawyer who is now a partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland.
The government has presented no evidence that Rajaratnam traded on Gupta’s wiretapped comments about the deliberations of the Goldman Sachs board, and there’s no evidence so far that Gupta knew Rajaratnam traded on other leaks, Frenkel said.
‘Is Not Clear’
“The language on the recording is not clear,” said Frenkel, who isn’t involved in the case.
News reports in July 2008 included speculation by analyst Richard Bove that Goldman Sachs may acquire Wachovia. Regulators were aware of these reports before bringing their case against Gupta, said the person familiar with the case, who declined to be identified because the person wasn’t authorized to speak publicly about the case.
Washington lawyer Jeff Ifrah, who co-wrote “Federal Sentencing for Business Crimes,” said prosecutors considering a criminal case against Gupta may lack enough evidence to prove beyond a reasonable doubt that he intended to engage in an insider scheme with Rajaratnam.
“Intent is hard to prove,” he said. “The disclosure of the information in and of itself is not a crime.”
Rajaratnam’s defense lawyers have sought to show that there were legitimate reasons for communications between Rajaratnam and Gupta, who defense attorney John Dowd said may be called to the stand as a defense witness later in the trial.
Lawful Insights
Just as Galleon hired former McKinsey partner Anil Kumar to provide lawful insights on business in South Asia, Dowd used his questioning of Kumar to suggest that Gupta also had legitimate business with the Galleon co-founder.
At the trial, prosecutors have tried to explain why each source leaked confidential tips to the hedge fund manager. Kumar, who concluded his testimony for the government this week, said he tipped Rajaratnam after the hedge fund co-founder paid him $2.6 million, a charge Rajaratnam denies. Kumar has pleaded guilty in the case and is cooperating with the government.
Separately, the government offered evidence that Hector Ruiz, then the chief executive officer of Advanced Micro Devices Inc. (AMD), gave tips to stock trader Danielle Chiesi because they were having an “intimate relationship.” Ruiz denies that he had such a relationship with Chiesi, his spokesman, Andrew Merrill, said this week. Ruiz hasn’t been formally accused of any wrongdoing or charged with a crime.
Motive to Leak
As for Gupta, the government has sought to show that his longtime business relationship with Rajaratnam gave him a motive to leak information. The two co-founded and invested in the firm New Silk Route; Rajaratnam wanted Gupta to be chairman of a fund called Galleon International; and Gupta had investments in at least two other Galleon funds, prosecutors have said.
Ifrah isn’t convinced by the evidence.
“You don’t necessarily see the profiting, you don’t necessarily see the scheming” between Rajaratnam and Gupta, said Ifrah. “The totality of circumstances of what we’ve seen so far with Kumar is far more outrageous.”
The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York Manhattan).
To contact the reporter on this story: David Glovin in Manhattan federal court at glovin@bloomberg.net
To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net
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