U.S. prosecutors are trying to convict former Goldman Sachs Group Inc. director Rajat Gupta on insider trading charges using wiretapped phone conversations in which he wasn’t a participant.
The U.S. says three recordings of Galleon Group LLC co-founder Raj Rajaratnam speaking with his colleagues and employees should be allowed as evidence against Gupta at his trial scheduled for May 21, because the fund manager was a co-conspirator in the insider-trading scheme. The conversations highlight how Rajaratnam advanced the scheme and show that he found Gupta’s tips reliable to trade on, prosecutors said.
The three wiretaps include an excerpt from a September 2008 recording never before made public, in which Rajaratnam tells his trader, Ian Horowitz, that he had previously shared “everything” about other illegal tips with a fellow Galleon fund manager, prosecutors said.
“The importance of this evidence cannot be overstated,” Assistant U.S. attorneys Reed Brodsky and Richard Tarlowe said in court papers.
“Rajaratnam’s recorded statements in the subsequent wiretapped calls with Horowitz provide crucial direct evidence that Gupta tipped Rajaratnam during their unrecorded phone conversations and Rajaratnam purchased Goldman stock in the final minutes of the trading day on the basis of that tip,” the prosecutors said.
Gupta is accused of leaking illegal tips to Rajaratnam about the bank as well as Procter & Gamble Co., where Gupta was also a director. Gupta has pleaded not guilty to six counts of securities fraud and one count of conspiracy.
His lawyer, Gary Naftalis, has said at pretrial hearings that the “wrong man” is on trial in the case and that others, including an unidentified Goldman Sachs executive, leaked Rajaratnam inside information, including tips about Apple Inc. and Intel Corp.
Prosecutors allege that Gupta told Rajaratnam on Sept. 23, 2008, that Berkshire Hathaway Inc. was about to invest $5 billion in New York-based Goldman Sachs, a tip that allowed Galleon to earn $43 million.
A month later, Galleon avoided losses on Goldman Sachs, after Gupta was told during a board meeting that the company had lost almost $2 a share, worse than Wall Street’s expectations, prosecutors said.
The U.S. disclosed new portions of a Sept. 24, 2008, call with Horowitz, in which Rajaratnam explains how he shared inside information with Horowitz and another Galleon fund manager.
Horowitz, who hasn’t been charged with wrongdoing, has been described by the prosecutors as an unindicted coconspirator. In yesterday’s filing, prosecutors identified the senior portfolio manager whom Rajaratnam refers to as “Leon” as former Galleon fund manager Leon Shaulov.
‘Tell Him Everything’
“Leon was very upset,” Rajaratnam told Horowitz on the call, which the government says refers to Shaulov being angry that the fund manager didn’t share with him Gupta’s tip about Berkshire Hathaway.
“Look, I’ve kept my mouth shut when he gave me WaMu,” Rajaratnam said. “I tell him everything, you know? AMD, IBM, everything, right?”
Prosecutors say a “reasonable person” could infer that comment is a reference to insider trading in Seattle-based Washington Mutual Inc., as well as Sunnyvale, California-based Advanced Micro Devices Inc. and Armonk, New York-based International Business Machines Corp.
Shaulov didn’t return a message left at his office with an assistant seeking comment about prosecutors having identified him as a participant in a wiretapped recording.
In a related case filed by the U.S. Securities and Exchange Commission against Gupta and Rajaratnam, Shaulov was named as someone regulators sought to question under oath before trial. U.S. District Judge Jed Rakoff, who’s presiding over both criminal and civil cases, granted the request. Shaulov hasn't been accused of any wrongdoing by the government.
Prosecutors said the Rajaratnam wiretaps are necessary because they don’t have recordings of Gupta passing tips to Rajaratnam in September and October 2008. The government didn’t have a wiretap on the fund manager’s work phone or any of Gupta’s telephones, prosecutors said.
The government seeks to play at trial calls intercepted by the Federal Bureau of Investigation of Rajaratnam speaking on his mobile phone to Galleon colleagues, Horowitz and David Lau.
“Rajaratnam’s statements in these three recorded conversations are essential evidence of the insider trading charges against Gupta in this case,” Brodsky and Tarlowe said in court papers. “There are no recorded conversations between Gupta and Rajaratnam on Sept. 23 and Oct. 23 in which Gupta is alleged to have tipped Rajaratnam.”
The recordings are “particularly significant in light of Gupta’s apparent defenses that someone at Goldman other than Gupta tipped Rajaratnam at some other time and there is doubt about whether Rajaratnam and Gupta actually spoke on Sept. 23, 2008, minutes before the market closed.”
Rajaratnam, who is serving an 11-year prison sentence, is unavailable as a witness and there were no other participants in his conversations with Gupta, prosecutors said. Rajaratnam was convicted after trial last year of trading on illegal tips involving AMD and IBM, among other stocks. He wasn’t accused of insider trading involving Washington Mutual.
Naftalis declined to comment on the government’s request to use the wiretaps. Gupta lost an earlier bid to exclude wiretaps in March when Rakoff ruled that they are admissible as evidence in securities fraud cases. Naftalis hasn’t yet filed a response to the specific Rajaratnam wiretaps that prosecutors want to use at trial.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).