May 22 (Bloomberg) -- Rajat Gupta, who was a director at Goldman Sachs Group Inc., “threw away his duties” to the company when he tipped hedge-fund co-founder Raj Rajaratnam to news that the bank would get a $5 billion investment, a prosecutor told jurors.
At the start of Gupta’s insider-trading trial, Assistant U.S. Attorney Reed Brodsky told jurors that Gupta broke the law when, immediately after a Goldman Sachs board meeting on Sept. 23, 2008, he informed Rajaratnam that Warren Buffett’s Berkshire Hathaway Inc. would invest $5 billion in the firm. Rajaratnam, Gupta’s friend and co-founder of Galleon Group LLC, traded on the tip, Brodsky said.
In the defense opening yesterday in Manhattan federal court, attorney Gary Naftalis told jurors that Gupta was “innocent of the allegations” and said that the government has the “wrong man on trial.”
Brodsky said “Gupta threw away his duties, he threw away his responsibilities, and he broke the law at the time the company was in crisis.”
“He used those secrets to help his friend, and Raj Rajaratnam sold his Goldman stock and made nearly a million dollars from Gupta’s tip,” the prosecutor said.
Naftalis said of his client that “it defies common sense that in the twilight of an illustrious life, he’d decide knowingly, willfully and deliberately to suddenly become a criminal and do it for no benefit.”
The lawyer said even if there is evidence of leaks from Goldman Sachs, the tips didn’t come from Gupta.
“There may be a crime here but Rajat Gupta had nothing to do with it,” he said. “You’ve got the wrong man on trial here. The evidence will show that Raj Rajaratnam had sources all over town, he had other sources at Goldman Sachs.”
Gupta, who ran consulting firm McKinsey & Co. from 1994 to 2003, also sat on the Procter & Gamble Co. board. The U.S. alleges he passed insider tips to Rajaratnam in a conspiracy that lasted from 2007 and January 2009. Rajaratnam is serving an 11-year prison sentence for insider trading.
Procter & Gamble
Prosecutors say Gupta, 63, gave Rajaratnam material, nonpublic information about New York-based Goldman Sachs and Cincinnati-based P&G, the world’s largest consumer-products company. Gupta is charged with one count of conspiracy and five counts of securities fraud, which carries a maximum 20-year prison sentence.
U.S. District Judge Jed Rakoff, who is presiding over the trial, directed that prosecutors call their first witness today.
Brodsky told jurors about four alleged illegal tips Gupta passed to Rajaratnam from Goldman Sachs, including details of Goldman Sachs’s earnings in the first quarter of 2007 and fourth quarter of 2008, as well as the $5 billion investment by Berkshire Hathaway in September 2008.
The leaks generated millions of dollars in profits for Galleon, Brodsky said.
Gupta also gave Rajaratnam secret information about P&G’s 2008 sale of its Folgers Coffee unit to J.M. Smucker Co., the prosecutor said.
Brodsky told jurors that Gupta and Rajaratnam had close financial ties, including a venture between the two men called Voyager Capital Partners. Gupta was so comfortable with Rajaratnam and Galleon that he had his own swipe card to enter Galleon’s offices, like an employee of the firm, he said.
The prosecutor told jurors they will hear recorded wiretaps from Rajaratnam’s mobile phone, including a conversation in which he said he had been told, after the board meeting approving Buffett’s investment, that “something good is going to happen” to Goldman Sachs. Jurors will also hear from witnesses who pleaded guilty and are cooperating with the government in hopes of leniency, he said.
“This is a straightforward case of illegal insider trading,” Brodsky said, urging the jury to find Gupta guilty.
Naftalis told jurors that Gupta, orphaned as a teenager in India, rose to become “one of America’s most respected business leaders.” He said at the same time Gupta was involved with Rajaratnam, most of Wall Street viewed the fund manager as respectable.
“Rajaratnam was in a secret and separate world concealed from Rajat Gupta and concealed from every other law-abiding person,” Naftalis said. “There will not be any direct evidence that Rajat Gupta was part of that secret insider-trading world because he wasn’t.”
Naftalis assailed a government case that he said was based on hearsay. After thousands of hours of wiretaps on Rajaratnam’s phones over 10 months, prosecutors never once heard Gupta directly tipping Rajaratnam, he said.
“They’re presenting a case based on speculation, a case based on guesswork, a case based on suspicion,” he said. “There is an absence of real, hard, direct evidence.”
Naftalis said Gupta had no motive to tip Rajaratnam, who lost Gutpa’s entire $10 million investment in Voyager and took an additional $40 million in fees and redemptions from the fund without Gupta’s knowledge, he said.
Naftalis added that Galleon frequently traded in Goldman Sachs stock and that what the prosecutors have done in this case was “cherry-pick” trades supporting their theory. Gupta had “perfectly legitimate” reasons to speak to Rajaratnam, he said.
Earlier yesterday, both sides selected 12 jurors and four alternates, including a psychiatric nurse whose husband works for Bank of America Corp., a professor of strategic design and behavior, an occupational therapist, a fourth-grade teacher, an executive at a nonprofit organization, a freelance beauty consultant and the president of a consulting firm.
The jurors, eight women and four men, are from Manhattan, the Bronx and Westchester and Rockland counties.
Witness testimony is scheduled to begin today with Caryn Eisenberg, who was Rajaratnam’s personal assistant, Brodsky said. The U.S. also plans to call Thomas Zukauskas, an agent with the Federal Bureau of Investigation, and Carolann Shields, an official at McKinsey, according to Stephanie Cirkovich, a court spokeswoman.
Shields testified last year at Rajaratnam’s trial that the firm’s phone records the records show that Gupta’s phone telephoned Rajaratnam’s phone within seconds of participating in a September 2008 Goldman Sachs board meeting about Berkshire Hathaway’s investment.
Brodsky also told Rakoff before court yesterday that the government intended to call former Goldman Sachs banker Byron D. Trott, who helped arrange the Buffett deal, to the stand May 23. William George, an outside director at Goldman Sachs, would be called May 24, Brodsky said.
The case is U.S. v. Gupta, 11-cr-907, U.S. District Court, Southern District of New York (Manhattan).
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