Rajat Gupta, the former Procter & Gamble Co. (PG) director indicted last year for insider trading, illegally tipped now-convicted hedge fund manager Raj Rajaratnam about P&G’s 2008 sale of Folgers Coffee Co. to J.M. Smucker Co. (SJM), federal prosecutors said.
J.M. Smucker, the Orrville, Ohio-based maker of jams and other food products, bought Folgers for about $3 billion in June 2008. Prosecutors told U.S. District Judge Jed Rakoff in Manhattan yesterday at a pre-trial hearing that the government may file a superseding indictment against Gupta, also a former director of Goldman Sachs Group Inc. (GS), by the end of the month.
Also yesterday, Rakoff said Gupta should “not be too optimistic” about his request to bar Rajaratnam’s wiretapped calls as evidence in the case.
Gupta’s lawyer, Gary Naftalis, asked Rakoff to direct prosecutors to provide more specific details about their case against his client. Naftalis described as “vague” the indictment filed in October which alleges Gupta passed tips about Cincinnati-based Procter & Gamble, Goldman Sachs, and other “companies.”
“In June 2008, Procter & Gamble sold its Folgers Coffee business to J.M. Smucker,” Assistant U.S. Attorney Richard Tarlowe told Rakoff in court yesterday. “The allegation is that Mr. Gupta disclosed the information about that before it was public to Mr. Rajaratnam.”
When asked by Naftalis to identify any other co- conspirators in the case against Gupta or sources of illegal tips, prosecutors said Gupta was the sole source of inside information for any trading done by Rajaratnam.
“We have no evidence whatsoever that anyone other than Mr. Gupta tipped Mr. Rajaratnam,” Assistant U.S. Attorney Reed Brodsky said.
The U.S. will probably argue at the April 9 trial that Rajaratnam told another person that Gupta gave him illegal tips, defense lawyers said in a Jan. 3 filing. Gupta contends that prosecutors are trying to make Rajaratnam a government witness by using statements he made about his alleged sources of inside information. Defense lawyers note that prosecutors at the same time have challenged Rajaratnam’s veracity, and even called the Galleon Group LLC co-founder a liar.
Gupta’s lawyers said they may argue that the government can’t claim that Rajaratnam, convicted of directing the biggest insider-trading scheme in a generation, is believable on statements identifying Gupta as his source for illegal tips when prosecutors have cast doubt on his truthfulness, as in their comments disputing an interview Rajaratnam gave to Newsweek magazine.
In the interview, published in October, Rajaratnam said prosecutors pressured him to plead guilty to insider trading and become an informant against Gupta. Afterward, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan called his remarks “inaccurate” and FBI spokesman Jim Margolin said comments Rajaratnam attributed to agents were never uttered.
Now, Gupta is using the government officials’ denials as a basis to ask a judge to order prosecutors to surrender documents casting doubt on Rajaratnam’s truthfulness.
“Any such statement, in which the government expressed its own doubts about Rajaratnam’s veracity -- or simply that he is not to be trusted, even if stopping short of calling him a liar -- would obviously be helpful to the defense,” Naftalis wrote in the filing.
Prosecutors haven’t responded to Gupta’s document request.
Gupta, 63, who also led McKinsey & Co., was indicted in October on accusations that he passed inside information to Rajaratnam.
He was charged with five counts of securities fraud and one count of conspiracy to commit securities fraud. If convicted, he faces as many as 20 years in prison on each of the securities fraud counts and as long as five years on the conspiracy charge. He denies wrongdoing.
Rajaratnam, 54, who was convicted by a jury last year, is serving an 11-year prison term.
The Gupta indictment cites three instances in which he allegedly leaked tips to Rajaratnam. He’s accused of telling Rajaratnam about Berkshire Hathaway Inc. (BRK/A)’s $5 billion investment in New York-based Goldman Sachs in September 2008, about the bank’s unexpected fourth-quarter loss that year, and about P&G’s poor performance in late 2008.
The indictment cites close ties between the two men, saying Gupta invested $2.4 million in at least two Galleon offshore funds, put $10 million into a venture with Rajaratnam called Voyager Capital Partners, and committed $22.5 million to a fund they created to focus on emerging markets in Asia.
Gupta’s lawyers said they expect prosecutors to re-play at least some of the wiretapped recordings of Rajaratnam’s telephone conversations heard at his trial. In a call from Oct. 24, 2008, Rajaratnam told a colleague that he’d been tipped by a source on the Goldman Sachs board about unanticipated losses. In that call, Rajaratnam doesn’t name Gupta, who prosecutors alleged was the source.
Rajaratnam also doesn’t identify Gupta on two other wiretapped recordings that the government will probably play at the April trial, Naftalis wrote.
Gupta’s document request was part of a wide-ranging legal filing that asks Rakoff to bar prosecutors from using wiretaps as evidence and to dismiss some counts. It also seeks an order for the government to surrender “any information” showing that Rajaratnam “boasted about or exaggerated his contacts” with “prominent persons or his sources of information.”
The court filing provides insight into Gupta’s defense.
Unlike Rajaratnam’s case, “there are no wiretap recordings of conversations in which Mr. Gupta passed material, non-public information,” Naftalis wrote. Nor is there evidence that Gupta traded on illegal tips or shared in illicit profits, he said.
Naftalis said he’ll challenge the use of a wiretapped call from July 29, 2008, in which Gupta and Rajaratnam discussed whether Goldman Sachs might buy a commercial bank. At Rajaratnam’s trial, prosecutors cited the conversation as proof that Gupta leaked news about Goldman Sachs. Naftalis said there was already public speculation about Goldman’s possible purchase of a bank, and the information on the wiretap wasn’t secret.
Rakoff yesterday noted that Judge Richard Holwell, who presided over Rajaratnam’s case, ruled the wiretaps were admissible.
“Realistically, if I were the defendant, I would not be too optimistic about this motion,” Rakoff said.
Naftalis also said the “relationship between the two men deteriorated in 2008,” partly because Rajaratnam lost Gupta’s $10 million investment in the Voyager fund.
In the Newsweek interview, Rajaratnam was quoted saying: “They wanted me to plea-bargain. They want to get Rajat. I am not going to do what people did to me. Rajat has four daughters.”
According to Newsweek, Rajaratnam said FBI agent B.J. Kang, the lead investigator on the case, told him, “Take a good look at your son. You’re not going to see him for a long time,” and added, “Your wife doesn’t seem so upset. Because she’s going to spend all your money.”
Margolin said in an interview in October that statements attributed to Kang and other agents were never spoken.
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