Lawyers for Rajat Gupta, the former Goldman Sachs Group Inc. (GS) and Procter & Gamble Co. director who has denied U.S. charges he leaked stock tips to Raj Rajaratnam, are investigating whether the hedge fund manager had a different inside source at the companies.
At a Manhattan court conference Jan. 20, defense attorney Gary Naftalis complained federal prosecutors hadn’t turned over documents he wanted on whether Rajaratnam or others at his hedge fund, Galleon Group LLC, had a source inside Goldman Sachs or P&G other than Gupta, a transcript of the proceeding stated. Gupta is accused of leaking information about both companies.
At the hearing, Naftalis said Gupta’s defense may turn on whether “there are people at Goldman Sachs and at Procter & Gamble who are giving out inside information, whether it be about Goldman or Procter & Gamble or affiliates.” That would “constitute real exculpatory information for a real defense that the source of any information here is not us but somebody else.”
Assistant U.S. Attorney Reed Brodsky told the judge that prosecutors had “no information, zero, no witness statements, no documents, no type of any kind that anyone other than Mr. Gupta tipped Mr. Rajaratnam or anyone at Galleon about material nonpublic information of Goldman or of Procter & Gamble,” according to the transcript.
At the same time, Brodsky said prosecutors had turned over documents that the defense contends may point to a Rajaratnam source at Goldman or P&G other than Gupta. The government said the files don’t involve tips that relate to the crimes with which Gupta is charged.
As U.S. District Judge Jed Rakoff pressed prosecutors to identify the purported source, whom he called, “Mr. X,” Brodsky replied, “We’re happy to identify the individual to them.” The prosecutor added that the documents “would negate rather than support the notion that Mr. X was tipping Mr. Rajaratnam about material nonpublic information.”
Near the conclusion of the discussion, Rakoff told Naftalis the government is “going to give you Mr. X, they’re going to point you to at least areas where they think Mr. X’s possible involvement in leaking information comes up in the stuff you have.”
Naftalis didn’t return a call seeking comment on the hearing. Paul Fox, a spokesman for P&G, and David Wells, a spokesman for Goldman Sachs, declined to comment.
Last week, Naftalis said documents he received from prosecutors were unclear on the number of possible sources Rajaratnam had.
“It’s unclear whether it’s one source, two sources or 10 sources,” the defense lawyer said. The defense says the government is required to turn them over to aid their case.
Gupta, who faces trial in April on five counts of securities fraud and one count of conspiracy, 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, according to the government. He also faces a fine of as much as $5 million. Rajaratnam is serving an 11-year prison term after being convicted of directing the biggest hedge fund insider trading scheme in U.S. history.
The indictment cites three instances in which Gupta tipped Rajaratnam, 54. The ex-Goldman Sachs director is accused of telling the hedge fund manager about Berkshire Hathaway’s $5 billion investment in the New York-based bank in September 2008, about Goldman Sachs’s unexpected fourth-quarter loss that year, and about Cincinnati-based P&G’s poor performance in late 2008.
The indictment cites close ties between the two men, saying Gupta, 63, of Westport, Connecticut, 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.
Prosecutors said at the Jan. 20 conference that they may file new charges by Jan. 31 that Gupta also tipped Rajaratnam about P&G’s 2008 sale of Folgers Coffee Co. to J.M. Smucker Co., the transcript shows. Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, didn’t immediately return a call seeking comment on the possible charges.
Gupta separately was caught on a July 29, 2008, wiretapped conversation with Rajaratnam saying that Goldman Sachs’s board was discussing asset purchases of commercial banks or insurers such as Wachovia Corp. or American International Group Inc. (AIG) Goldman Sachs Chief Executive Officer Lloyd Blankfein testified at Rajaratnam’s trial that the information discussed on the call was “confidential.”
While the phone call didn’t lead to charges in the indictment, the U.S. said it was an “overt act,” or an action in furtherance of the crime.
Naftalis said at the Jan. 20 hearing that Goldman Sachs’s interest in acquiring a commercial bank or insurer was already “on the radar screen” before July 2008. Goldman Sachs Chief Financial Officer David Viniar and others made presentations to analysts at investment banks about a potential acquisition of a commercial bank, Naftalis said.
“Senior Goldman people made formal presentations to analysts in which they discussed with them the pros and cons of whether or not, that they were considering buying a commercial bank,” Naftalis said, according to the transcript.
The government has turned over to Gupta’s legal team 3.2 million pages of evidence, Naftalis said. He asked Rakoff to direct prosecutors to identify information that could be helpful.
“If there are these materials, they should identify for us what these materials are, not for us to run with a Geiger counter through 3.2 million pages,” Naftalis said. “This is critical stuff to get as soon as possible because this is the stuff that we want to investigate on, that there are other sources at Procter & Gamble and Goldman of inside information. This is hot stuff for us.”
Yesterday, Rakoff asked prosecutors and defense lawyers to name witnesses and summarize their accounts to resolve a dispute over evidence that had erupted in the case.
Jain was interviewed by both prosecutors and defense lawyers and may be a witness for Gupta, Brodsky said.
“Ajit Jain, a close friend of Gupta’s, spoke to us after he spoke to the defense,” Brodsky said. “My understanding is that he spoke to the defense again after he spoke to us.”
The prosecutor said Dahlback, who is a former chief executive officer of Sweden’s Investor AB (INVEA) and sits on Goldman Sachs’s board of directors, spoke to Gupta after Rajaratnam’s October 2009 arrest.
“Dahlback asked Gupta if Gupta knew Rajaratnam,” Rakoff said, quoting a memo summarizing Dahlback’s June interview with the government. “Gupta responded that ‘Rajaratnam was a bad man.’ Gupta further stated Gupta lost money with Rajaratnam,” Rakoff said, summarizing the witness report.
Naftalis told the judge it was too early to say who he will call as witnesses.
Berkshire CEO Warren Buffett picked Jain to run the company’s reinsurance operations more than 20 years ago and has repeatedly praised the executive for his performance and character. Jain, 60, heads Berkshire’s National Indemnity Co. and specializes in writing large and unusual policies.
Buffett, 81, is planning for succession at Berkshire and has said Jain would have the support of the board if he wanted to be the next CEO. Jain “loves what he does, he’s not looking to take my job,” Buffett said last year.
Jain didn’t immediately respond to a message left with an assistant yesterday. Michael DuVally, a spokesman for Goldman Sachs, didn’t return a call to his office after regular business hours yesterday seeking comment on behalf of Dahlback.
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