The U.S. Securities and Exchange Commission wants to question under oath “one or both” brothers of Raj Rajaratnam for its lawsuit against Rajat Gupta, the former Goldman Sachs Group Inc. (GS) director, an agency lawyer said.
The SEC sued Gupta on Oct. 26, accusing him of feeding tips to Rajaratnam, the Galleon Group LLC co-founder convicted of being at the center of the largest hedge fund insider-trading case in U.S. history.
“We have a long list of witnesses including the defendant and one or both of Mr. Rajaratnam’s brothers,” Kevin McGrath, a lawyer for the SEC, told U.S. District Judge Jed Rakoff today at a hearing in Manhattan.
Manhattan U.S. Attorney Preet Bharara charged Gupta with five counts of securities fraud and one count of conspiracy to commit securities fraud on the same day that the SEC sued Gupta. Rajaratnam, who is a co-defendant in the SEC’s case against Gupta, was sued separately by the agency in 2009, when he was first charged criminally. Today, Rakoff, ruling in a summary judgment without a trial, ordered Rajaratnam to pay $92.8 million.
Rakoff has set an Oct. 1, 2012, trial date for the SEC’s suit against Gupta, which alleged he engaged in an “extensive insider-trading scheme” with Rajaratnam, allegedly passing tips about Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs before it was publicly announced on Sept. 23, 2008, and about Procter & Gamble Co. (PG)’s earnings while he was a board member.
McGrath today said he expects the SEC will seek to call as witnesses and question under oath Goldman Sachs and Procter & Gamble board members and “current and former employees” of both companies.
On March 1, the SEC filed an administrative proceeding against Gupta, rather than a civil lawsuit as it had done with 21 people and seven companies tied to the Galleon insider- trading case. Gupta later sued the SEC in federal court, arguing the agency violated his rights by pursuing an administrative action rather than a lawsuit were he would have had more procedural protections.
In August, after Rakoff ruled that Gupta could argue he was singled out by the agency for unfair treatment, the SEC agreed to drop its case and Gupta agreed to drop his suit.
Gary Naftalis, a lawyer for Gupta, told Rakoff today that the earlier administrative action by the SEC was filed on the eve of Rajaratnam’s trial “with ruinous publicity to our client.”
Naftalis said a review of evidence turned over by prosecutors in the criminal case against Gupta shows the SEC worked with FBI agents to interview some witnesses. That evidence included memos by the Federal Bureau of Investigation agents, known as “302s,” Naftalis said. The lawyer said the SEC hasn’t turned over any evidence to him from the earlier administrative proceeding, as part of the so-called discovery process.
“The FBI 302 reports are of joint interviews conducted by the SEC and the FBI, which they take the position that they were theoretically not in their custody and control,” Naftalis said of the SEC. “So the notion that we’ve gotten great discovery from the SEC is a bit of a shibboleth.”
Rakoff asked Gupta’s lawyers and SEC attorneys to provide him with a list of their “top 10” witnesses they would like to question under oath as well as rank their list of preferences. The judge said he would likely decide by the end of the year whether to allow the interviews to occur before Gupta’s criminal trial. Rakoff is also presiding over Gupta’s criminal case.
Gupta has pleaded not guilty to the charges.
Rajaratnam and his brother, Rengan, who operated his own fund, Sedna Capital Management LLC, were heard talking on wiretaps that were recorded by the FBI and played at the Galleon Group co-founder’s trial. Prosecutors also identified Rengan Rajaratnam as an unindicted “co-conspirator” with Raj Rajaratnam.
Rajaratnam’s other brother has been identified in published reports as Ragakanthan Rajaratnam. Neither of the brothers has been charged with criminal wrongdoing.
Rakoff held a second hearing today in a separate lawsuit, filed in June by a shareholder seeking to recover “short- swing” profits Rajaratnam’s Galleon fund made from trading on Gupta’s tips.
The judge told lawyers in that case today that he would probably rule on Gupta’s motion to dismiss the investor suit by the end of the year.
Samidh Guha, a lawyer for Rajaratnam, declined to comment about the cases after court, as did Naftalis and the SEC’s lawyers.
The cases are U.S. v. Gupta, 11-cr-00907, and SEC v. Gupta, 11-cv-07566, U.S. District Court, Southern District of New York (Manhattan).
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