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Rajaratnam Trial Offers Chance to ‘Test Drive’ Gupta Evidence

Raj Rajaratnam, the Galleon Group co-founder accused of insider trading, arrives at federal court for the start of his trial in New York. Photographer: Peter Foley/Bloomberg
Raj Rajaratnam, the Galleon Group co-founder accused of insider trading, arrives at federal court for the start of his trial in New York. Photographer: Peter Foley/Bloomberg

Raj Rajaratnam’s insider-trading trial may serve as a dry run for a regulatory case against one of his alleged tippers, Rajat Gupta, a former director at Goldman Sachs Group Inc. and Procter & Gamble Co.

The criminal and civil cases of the longtime business partners -- based partly on a phone conversation between them wiretapped by the FBI -- were described by a Securities and Exchange Commission lawyer in federal court in Manhattan last week as mirror images of each other, according to a transcript of the hearing.

“The U.S. Attorney’s Office has charged that Mr. Rajaratnam received illegal tips from Mr. Gupta,” George Canellos, director of the SEC’s New York office, told the judge in Rajaratnam’s criminal case on Feb. 28 in a confidential proceeding that was later unsealed. “We’re charging that Mr. Gupta provided those illegal tips to Mr. Rajaratnam.”

The SEC case is “the flip side of what the U.S. Attorney’s Office has charged Mr. Rajaratnam with,” Canellos said.

Jury selection began yesterday in the criminal insider-trading case of Rajaratnam, the co-founder of the Galleon Group LLC hedge fund who is accused of making $45 million in illicit profits by trading on inside information.

Rajaratnam, 53, is accused of using illegal tips from traders, friends, and corporate officials including Gupta, who prosecutors say is a “co-conspirator” in the scheme. Gupta, 62, the former worldwide director of consulting firm McKinsey & Co., isn’t criminally charged and denies wrongdoing. The SEC filed its administrative action against him on March 1.

SEC ‘Preview’

Barry Pollack, a white-collar defense lawyer at Miller & Chevalier in Washington who isn’t involved in the Rajaratnam case, said evidence at the Rajaratnam trial “will clearly give us a preview of what the SEC enforcement action against Gupta will be about.”

“That doesn’t mean that their fates are tied together,” Pollack said. “Each one will be judged individually based on his own state of mind. It’s not uncommon that one person has an improper purpose and the other doesn’t.”

John Nester, an SEC spokesman, declined to comment. Gupta’s lawyer, Gary Naftalis, also declined to comment.

The evidence against Gupta and Rajaratnam includes a tape of a phone call between the two men on July 29, 2008, and phone and trading records showing that Rajaratnam made stock trades immediately after speaking to Gupta, Assistant U.S. Attorney Jonathan Streeter said at another hearing on March 4.

Wiretapped Call

Streeter didn’t disclose the content of the phone call, which was secretly wiretapped by the government and will be entered into evidence at the Rajaratnam trial. It wasn’t clear from the transcript of the March 4 hearing whether the call would implicate Gupta in wrongdoing.

Streeter did disclose the content of another taped call of Rajaratnam, but not Gupta, in October 2008. In it, Rajaratnam tells “employees” that “he was told by a Goldman Sachs board member that the investment bank was losing $2 a share,” Streeter said.

Phone and trading records show Rajaratnam bought and sold Goldman Sachs stock “literally within minutes” of his conversations with Gupta, Streeter said in Manhattan federal court on March 4. The SEC made similar allegations in its March 1 administrative action.

Gupta called Rajaratnam immediately after a September 2008 conference call during which the Goldman Sachs board considered and approved the investment by Warren Buffett’s Berkshire Hathaway Inc. as well as a public equity offering, according to the SEC. Within a minute of Gupta’s call, Rajaratnam arranged for Galleon funds to buy more than 175,000 Goldman Sachs shares, the SEC alleged.

Blankfein, Earnings

In June 2008, Gupta illegally disclosed to Rajaratnam information about Goldman Sachs’s financial results for the second quarter of 2008 after a phone call to discuss earnings with Chief Executive Officer Lloyd Blankfein, according to the SEC. Between that night and the following morning, there was “a flurry of calls” between Gupta and Rajaratnam, the agency said.

Following the calls, Galleon bought more than 350,000 Goldman Sachs shares and 5,500 call options, generating more than $13.6 million in illicit profits for the Galleon funds, the SEC said.

“That evidence, we think, establishes that Mr. Gupta was in a conspiracy with Mr. Rajaratnam to provide him with material non-public information about Goldman,” Streeter said in court last week.

23 Seconds

Gupta also allegedly tipped Rajaratnam to Goldman Sachs fourth quarter 2008 results in October 2008, just 23 seconds after Gupta was told the results, the SEC said. The next day, Galleon began selling its holdings of Goldman Sachs stock, the SEC said.

Gupta told Rajaratnam on Jan. 29, 2009, that Procter & Gamble’s sales would fall short of public predictions for the fourth quarter of 2008, the SEC said. Galleon sold short, or bet against, about 180,000 of the company’s shares, making more than $570,000 in illegal profits, according to the SEC’s order.

“There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo,” Naftalis said on the day the SEC filed its case. “Mr. 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.”

In bringing its case against Gupta, the SEC may not have had access to the prosecutors’ tapes of Gupta. Prosecutors didn’t provide the agency with the recordings. Regulators had to sue Rajaratnam to gain possession of at least some of them.

Burden of Proof

It may be easier for the SEC to prove that Gupta violated civil insider-trading laws than it is for the Justice Department to persuade jurors that Rajaratnam is guilty of a crime, said Stephen Miller, a former U.S. prosecutor in New York and Philadelphia and now a partner in the law firm Cozen O’Connor LLP.

The SEC’s burden of proof is lower in an administrative proceeding, where the rules of evidence may allow regulators to offer hearsay that may be excluded at a criminal trial, Miller said.

Gupta may not be out of the woods after Rajaratnam’s trial, Miller said. Prosecutors may gauge how jurors reacted to their evidence involving Gupta and elect to bring a criminal case against him, he said.

In that sense, he said, the government may be using the Rajaratnam trial to “test drive” the evidence against the former Goldman Sachs director.

The case is U.S. v. Rajaratnam, 09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

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