Former Goldman Sachs Group Inc. (GS) director Rajat Gupta was indicted for conspiracy and securities fraud, making him the highest-ranking executive charged in a nationwide crackdown on insider trading centered on Raj Rajaratnam, co-founder of hedge fund Galleon Group LLC.
Gupta, who also sat on the board of Procter & Gamble Co. (PG), was charged with five counts of securities fraud and one count of conspiracy to commit securities fraud in an indictment unsealed today in Manhattan federal court. The U.S. Securities and Exchange Commission also sued Gupta, 62, today.
“From 2008 through January 2009, Gupta disclosed to Raj Rajaratnam material, nonpublic information that Gupta had learned in his capacity as a member of the boards of directors of Goldman Sachs and P&G with the understanding that Rajaratnam would use the inside information to purchase and sell securities,” according to the indictment.
The Federal Bureau of Investigation and prosecutors in the office of Manhattan U.S. Attorney Preet Bharara have spent four years probing illegal trading at hedge funds, technology companies, banks and consulting firms. Gupta gave himself up to the FBI today in Manhattan.
Rajaratnam on Oct. 13 was sentenced to 11 years in prison, the longest term for insider trading in U.S. history. 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 the conspiracy charge.
“The government’s allegations are totally baseless,” Gary Naftalis, a lawyer for Gupta, said in an e-mailed statement today. “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.”
Naftalis said there were “legitimate reasons” for his client to communicate with Rajaratnam, including a $10 million investment Gupta had with a fund Rajaratnam managed.
“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.
The indictment describes a series of calls between Gupta and Rajaratnam in which the inside information was allegedly passed.
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 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.
Rajaratnam, the central figure in what prosecutors have called the largest crackdown on insider trading at hedge funds in U.S. history, was arrested in October 2009. He was convicted of conspiracy and securities fraud by a Manhattan federal jury in May. More than 50 people have been charged in the probe.
The criminal case against Gupta comes months after federal prosecutors in court first called Gupta and Rajaratnam’s brother Rengan “unindicted co-conspirators.”
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.
Gupta left the Goldman Sachs board in 2010 and stepped down from P&G’s board in March. From 1994 to 2003, Gupta ran McKinsey & Co., the global consulting firm. He remained a senior partner there until 2007.
“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,” Bharara said in a statement. “He broke that trust.”
Gupta, a resident of Westport, Connecticut, 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.
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.
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 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. Prosecutors said Gupta tipped Rajaratnam, who sold Galleon’s position in Goldman Sachs, warding off millions of dollars in losses.
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 Galleon’s David Lau.
“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 Procter & Gamble, as well as Goldman Sachs’s results and the $5 billion Berkshire Hathaway investment, the SEC said today in a civil complaint, also filed in Manhattan federal court.
The tips Gupta provided to Rajaratnam on Goldman Sachs generated “illicit profits and loss avoidance” of more than $23 million, the SEC said. 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 trading profits” and other gains received 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.
In March, the SEC brought an administrative action against Gupta in Washington. He 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.
The agency dropped its proceeding in August and agreed that it would bring any subsequent action against Gupta in district court. Gupta agreed to withdraw his lawsuit against the SEC.
“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 today in a statement.
The cases are U.S. v. Gupta, 11-00907, and SEC v. Gupta, U.S. District Court, Southern District of New York (Manhattan).
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