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Gupta Told Rajaratnam of Goldman Mulling Wachovia, AIG Purchases

McKinsey & Company’s Former Worldwide Director Rajat Gupta
McKinsey & Company’s former worldwide director Rajat Gupta. Photographer: Seokyong Lee/Bloomberg

While serving on Goldman Sachs Group Inc.’s board in 2008, Rajat Gupta told Raj Rajaratnam of talks about whether to buy American International Group Inc. or Wachovia Corp., according to a wiretap recording.

Prosecutors at the insider-trading trial of Rajaratnam, the co-founder of the Galleon Group LLC hedge fund, yesterday played the recording of a July 29, 2008, discussion between the men. During the conversation, Rajaratnam asked about a “rumor that Goldman might look to buy a commercial bank.”

“Yeah, this was a big discussion at the board meeting,” Gupta replied, adding the board was “divided.” Gupta told Rajaratnam that among the institutions the Goldman Sachs board discussed were Charlotte, North Carolina-based Wachovia, now part of Wells Fargo & Co., and New York-based insurer AIG, according to the transcript.

Prosecutors have told jurors that Gupta, 62, was a “co-conspirator” with Rajaratnam, alleging he tipped the hedge fund manager about Goldman Sachs’s transactions, including the 2008 investment in the bank by Warren Buffett’s Berkshire Hathaway Inc. Gupta isn’t charged with a crime and has denied wrongdoing. Anne Granfield, his spokeswoman, declined to comment.

Yesterday’s recording was the first tape played in which Gupta was a participant in the conversation. The exchange was one of about 170 wiretaps the government said it will present to jurors in Manhattan federal court. Rajaratnam, 53, is the central figure in the largest crackdown on hedge-fund insider trading in U.S. history. He is accused of making $45 million from confidential information leaked by corporate insiders and hedge fund traders.

Nationwide Investigation

The Galleon Group case has led to a nationwide investigation implicating banks, consultants, technology companies and other hedge funds.

Former McKinsey & Co. partner Anil Kumar, a government witness, yesterday described Rajaratnam’s relationship with Gupta, McKinsey’s former worldwide director. Before prosecutors played the tape, Kumar said Gupta had invested or planned to invest in several Galleon Group funds.

In the taped conversation, Gupta takes Rajaratnam through a portion of a recent Goldman Sachs board meeting, calling his colleagues “an opportunistic group.”

“We aren’t having trouble funding ourselves but, you know we should explore more global sources of funding,” Gupta quoted board members as saying. “It’s quite conceivable they’d come and say ‘Let’s go buy Wachovia,’” Gupta said, “Or even AIG.”

The board’s view was “very bearish” on buying a bank, Gupta told Rajaratnam. “I would be extremely surprised if there was anything imminent.” Goldman Sachs never bought Wachovia or AIG, and no evidence was presented that Rajaratnam traded on Gupta’s disclosure about the board’s discussions.

AIG, Wachovia

Ed Canaday, a spokesman for New York-based Goldman Sachs, Mark Herr, a spokesman for AIG, and Mary Eshet, a spokeswoman for San Francisco-based Wells Fargo, declined to comment.

Kumar testified Gupta invested in a Galleon fund and told him he’d lost $10 million when it failed in 2008. Gupta was also in talks to become the chairman of a Galleon fund known as Galleon International, Kumar said.

Rajaratnam told Kumar that Gupta “gives a little bit of cachet in South Asia and globally,” according to the May 28, 2008, recorded call played for the jury. “He wanted to be chairman of Galleon International, and that’s fine, you know.”

Kumar replied he was surprised Gupta was willing to serve, noting he was also on the boards of American Airlines Inc. and Procter & Gamble Co.

“It’s now reached a point where it’s physically and humanly impossible to do the things he’s doing, right?” Kumar said, according to the recording.

Telephone Call

The jury heard a tape of a July 29, 2009, telephone call in which Rajaratnam complained to Gupta about Kumar. The former McKinsey partner had just testified that he decided in 2006 not to join Gupta and Rajaratnam in a private-equity fund called New Silk Route.

On March 14, Kumar testified that Rajaratnam paid him $2.6 million for inside information on McKinsey clients including Advanced Micro Devices Inc., the second-largest maker of processors for personal computers.

“You know I’m giving him a million dollars a year for doing literally nothing,” Rajaratnam said on the tape. “Kumar wants to “be a mini-Rajat” without “bringing anything to the party,” Rajaratnam told Gupta.

The two men also discussed the structure of New Silk Route.

“Keep your eyes and ears open,” Rajaratnam told Gupta. “If you hear anything, just anything you think may be interesting -- which I will track down and see what’s in the market -- I’ll bring that angle to you.”

Direct Testimony

Just before he concluded his direct testimony, Kumar told jurors about a conversation he had with Rajaratnam, weeks before both men were arrested on Oct. 19, 2009, on insider trading charges. He said they traveled with their wives to Trinidad for a wedding and stopped over to stay at Rajaratnam’s vacation home in Miami.

While on the beach in Miami, Rajaratnam took a call on his mobile phone and returned to say, “‘I just got a call, Cisco is buying a company called Starent,’” Kumar testified that Rajaratnam told him, referring to San Jose, California-based Cisco Systems Inc. and Tewksbury, Massachusetts-based Starent Networks Corp. “He told me he ‘just got a call from a Cisco executive.’”

Kumar said he purchased about 7,000 shares based on Rajaratnam’s tip.

In the same discussion, Rajaratnam also warned Kumar, saying, “You know Anil, I’m really disappointed, I’m told there’s a gentleman who used to work for me who is now wearing a wire,” Kumar testified. Kumar said Rajaratnam identified the informant as ex-Galleon employee Ali Far.

‘Really Disappointed’

“I’m really disappointed in him,” Rajaratnam said, according to Kumar. “He said, ‘You should be careful, you should be using pre-paid phones when you’re calling me.’”

Gupta also owned a 20 percent stake in Galleon’s Crossover Fund, which invested in small businesses, and lost millions of dollars in Galleon’s Voyager Fund, Kumar testified.

Kumar said that, in October 2009, Rajaratnam complained to him about Gupta.

Rajaratnam “told me Mr. Gupta had confronted him and said he, Mr. Rajaratnam, should have paid more attention to what was happening with Voyager,” Kumar testified.

Yesterday afternoon, Rajaratnam’s attorney, John Dowd, cross-examined Kumar, focusing on his cooperation agreement with the U.S. Kumar has pleaded guilty in the Galleon case and is testifying for prosecutors in exchange for leniency. Kumar testified that insider trading wasn’t part of the original consulting agreement between him and Rajaratnam.

Kumar’s Housekeeper

The defense attorney asked Kumar about using the name of his housekeeper, Manju Das, on the Galleon account that held the money Rajaratnam paid him. Kumar testified that Rajaratnam told him in late 2006 that Galleon was coming under increased scrutiny from the Securities and Exchange Commission and urged him to transfer the account from Das.

Dowd confronted Kumar with letters and e-mails showing he tried to produce phony documents to prove that Das, who lived with Kumar’s family in Saratoga, California, instead resided in India. He testified that the phony documents, which included a note from an Indian doctor and a false affidavit, were part of a plan to switch the account from Das to a limited partnership.

Dowd had Kumar testify that Rajaratnam didn’t participate in his efforts to transfer the account. Dowd asked Kumar if he created the phony documents to cheat his McKinsey partners and evade taxes, then later falsely blamed Rajaratnam.

“You made up a story to please the government, to put the blame on Raj,” Dowd said to Kumar. “It’s all just a lie, a monstrous lie. Isn’t that a fact, sir?”

“I hope this court will decide who is lying and who is not, sir,” Kumar answered.

The case is U.S. v. Rajaratnam, 1:09-cr-01184, U.S. District Court, Southern District of New York (Manhattan).

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