Rajat Gupta, the former Goldman Sachs Group Inc. director accused of giving inside information to fund manager Raj Rajaratnam, faces new allegations he passed tips about earnings of Goldman Sachs in 2007 and Procter & Gamble Co. in 2009.
In a superseding indictment filed yesterday in federal court in Manhattan, the U.S. broadened its description of the insider-trading scheme, saying it began in March 2007 not in 2008 as alleged in October. Prosecutors also said Gupta tipped Galleon Group LLC co-founder Rajaratnam about Goldman Sachs’s first quarter 2007 earnings and, while at Galleon’s offices, listened to a Goldman Sachs board meeting where earnings were disclosed.
“During that call, the audit committee discussed the company’s quarterly earnings announcement that would be made the following day,” assistant U.S. attorneys Reed Brodsky and Richard Tarlowe said in the indictment. “Gupta participated in the audit committee call from the premises of Galleon.”
Gupta, 63, who also led McKinsey & Co. and was a P&G director, was accused in October of passing inside information to Rajaratnam from 2008 to January 2009.
The U.S. said yesterday that Gupta’s investments with Rajaratnam, which included $10 million invested in funds and an ownership stake in at least two other funds, was a motive for him to engage in the insider-trading scheme. Gupta made a commitment to invest about $22.5 million in a private-equity fund focusing on Asia, the U.S. said.
Gupta provided the inside information to Rajaratnam “because of Gupta’s friendship and business relationships with Rajaratnam,” prosecutors said. “Gupta benefited from Rajaratnam’s capital commitment to, and position as a limited partner of, the private equity fund.”
The government said the conspiracy continued until January 2009, beyond when Gutpa’s lawyer has said his client’s friendship with Rajaratnam deteriorated.
Gupta was previously charged with five counts of securities fraud and one count of conspiracy to commit securities fraud.
Prosecutors added a new securities fraud charge yesterday based on the March 12, 2007, conference call, in which there was discussion that the next day Goldman Sachs would announce quarterly earnings that exceeded analysts’ estimates.
About 25 minutes after Gupta left the conference call, Rajaratnam had one of his funds buy about 350,000 shares of Goldman Sachs stock, prosecutors said.
$2 a Share
The next day, after Goldman Sachs announced its quarterly results, it opened more than $2 a share higher than the previous close, prosecutors said.
The U.S. yesterday also said Gupta passed Rajaratnam another tip after attending a Goldman board meeting on Sept. 19, 2007, also a day before quarterly earnings were announced.
Rajaratnam caused a Galleon Tech fund to purchase more than 700,000 shares of common stock at a cost of more than $140 million. The U.S. didn’t say how much the fund manager earned as a result of the tip.
In an e-mailed statement, Gupta’s lawyer, Gary Naftalis, called the government’s allegations “totally baseless” and said that his client “did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo.”
‘Honesty and Integrity’
“The newly added charges -- like the ones brought last year -- are not based on any direct evidence, but rely on supposed circumstantial evidence,” Naftalis said. “The facts in this case demonstrate that Mr. Gupta is innocent of all of these charges, and that he has always acted with honesty and integrity.”
Naftalis has said the friendship between the men deteriorated after Lehman Brothers Holdings Inc. filed for bankruptcy protection in September 2008. As a result, Gupta lost $10 million in investments he made with Rajaratnam.
Prosecutors said yesterday that the scheme continued until January 2009, alleging Gupta illegally tipped Rajaratnam about P&G’s January quarterly results.
At about 9 a.m. on Jan. 29, 2009, a day before P&G announced its quarterly earnings, Gupta participated in a P&G board call that included information that the company would report that growth of pre-existing business was below its previous guidance.
At about 1:18 p.m. that day, Gupta called Rajaratnam and spoke to him for about eight minutes, prosecutors said yesterday.
That afternoon, Rajaratnam told a Galleon portfolio manager, “that he had heard from someone on the P&G board certain information concerning P&G’s organic sales growth,” prosecutors said.
Beginning at about 2:52 p.m. that day, Galleon shorted about 180,000 shares of P&G stock.
In a previously made allegation, prosecutors said that on Sept. 23, 2008, just 16 second elapsed between the time Gupta disconnected from a Goldman board call and his assistant telephoned Rajaratnam.
Before the close of the New York Stock Exchange that day, Gupta allegedly participated by phone in a meeting during which Goldman Sachs agreed to accept a $5 billion investment from Warren Buffett’s Berkshire Hathaway Inc.
Two minutes before the market closed that day, Rajaratnam caused certain Galleon funds to buy about 217,200 shares of Goldman Sachs common stock at a total cost of about $27 million, according to the indictment.
Galleon made a profit of about $840,000 on the transaction after the Berkshire investment became public, the U.S. said.
Gupta, who denies wrongdoing, faces as long as 20 years in prison if convicted of any of the securities fraud charges and as long as five years if convicted of conspiracy, according to the office of U.S. Attorney Preet Bharara in Manhattan. He also faces a fine of as much as $5 million, prosecutors said.
“There were a host of legitimate reasons for any communications between Mr. Gupta and Mr. Rajaratnam -- not the least of which was Mr. Gupta’s attempt to obtain information regarding his $10 million investment in the GB Voyager fund managed by Mr. Rajaratnam,” Naftalis said.
“In fact, Mr. Gupta lost his entire investment in the fund, negating any motive to deviate from a lifetime of probity, integrity and distinguished service,” Naftalis said.
Rajaratnam, who was convicted by a jury last year, is serving an 11-year prison term.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).