A secret recording of Galleon Group LLC co-founder Raj Rajaratnam and phone records from a McKinsey & Co. conference room were presented to a jury by prosecutors to link Rajat Gupta to what they say was an illegal tip about Goldman Sachs Group Inc.
On the fourth day of the insider-trading trial of Gupta, who was a Goldman Sachs director and McKinsey executive in 2008, prosecutors played wiretapped calls of Rajaratnam from Sept. 24, 2008, on which the hedge-fund manager talked to traders about his buying Goldman Sachs shares the day before.
“I got a call at 3:58, right?” Rajaratnam can be heard telling trader Ian Horowitz on the recording played yesterday in federal court in Manhattan. “Saying something good might happen to Goldman.”
Rajaratnam repeated his remarks on another call to Horowitz about 45 minutes later. These recordings were also played last year at Rajaratnam’s trial, where he was convicted of insider trading and sentenced to 11 years in prison.
After prosecutors played the recordings, Carolann Shields, who works in McKinsey’s information technology department, told jurors about phone calls on Sept. 23, 2008, from conference room 2704 in the consulting firm’s New York office, where Gupta was working.
From 3:13 p.m. to 3:53 p.m., Shields testified, the phone in the conference room dialed into a Goldman Sachs board call, where, according to prior witnesses, directors were briefed on a plan by Warren Buffett’s Berkshire Hathaway Inc. to invest $5 billion in Goldman Sachs. At 3:55 p.m., calls from his assistant’s office phone and one assigned to the McKinsey conference room where Gupta was working were placed to Rajaratnam’s line at Galleon.
“It could have been connected for 30 seconds, or up to 35 seconds,” Shields told jurors.
Prosecutors say Gupta, 63, tipped Rajaratnam to the Berkshire investment, prompting Galleon to buy 267,000 Goldman Sachs shares. Galleon made almost $1 million in profit on the trade at a time of stock market turmoil, the government says.
Gupta is also accused of passing tips involving the earnings of New York-based Goldman Sachs and transactions involving Cincinnati-based Procter & Gamble Co., the world’s largest consumer-products company. Gupta, who denies wrongdoing, was a director at both companies.
Gupta, who ran McKinsey from 1994 to 2003, is charged with conspiracy and securities fraud. He has pleaded not guilty to the charges.
Prior witnesses in what the defense has called a “circumstantial case” told jurors that Gupta participated by phone in the Goldman Sachs board meeting on Sept. 23, 2008, and that Galleon rushed to buy shares in the bank after Rajaratnam got a call minutes before the stock market closed.
There is no direct evidence that the caller was Gupta, defense attorney Gary Naftalis told jurors this week. On cross-examination yesterday, defense lawyers suggested that Rajaratnam was referring to Goldman Sachs’s plan to issue additional shares
William George, an independent Goldman Sachs director and a management professor at Harvard Business School, testified that the bank’s governance guidelines require that board discussions about earnings, strategic plans and other issues be kept secret.
“My general view of this is any deliberation the board is having should be limited to the board,” said George, also a director at Exxon Mobil Corp.
George, who was on the Goldman Sachs board with Gupta, told jurors about the board’s strategic review meeting in St. Petersburg, Russia, over two days in late June 2008. Prosecutors have played a wiretap of Gupta and Rajaratnam discussing issues raised at the meeting, including whether Goldman Sachs should purchase a commercial bank or insurer. George said that issue was raised and he opposed it.
“Commercial banking appears to be unattractive,” said George, who has been on the bank’s board since 2002.
Also yesterday, the government sought to establish a close relationship between Gupta and Rajaratnam by showing jurors e-mails from Gupta to associates. In one, he calls Rajaratnam “one of the most outstanding hedge fund managers” and “a very close friend.”
Prosecutors also summoned Mark Belgya, chief financial officer of J.M. Smucker Co. Gupta is accused of giving Rajaratnam secret information about P&G’s 2008 sale of its Folgers Coffee unit to Smucker for $3.3 billion.
Belgya told jurors that talks concerning its acquisition of Folgers were confidential until the afternoon of June 3, 2008, when a news article reported it. The deal, the largest in Smucker’s history, was announced the next day, he said.
On cross-examination, defense counsel Gary Naftalis focused on the leak to the media, which prosecutors don’t attribute to Gupta, and suggested that others, including executives at Smucker, P&G or advising banks, make have been the leakers.
The trial continues today. Prosecutors said they intend to call Michael Cardillo, a former portfolio manager at Galleon, and Anil Kumar, a former partner at McKinsey. Both men have pleaded guilty and are cooperating with the government. Kumar testified against Rajaratnam at his trial last year.
Cardillo testified against former Galleon trader Zvi Goffer, his brother Emanuel Goffer and Michael Kimelman, who were convicted of being part of a separate insider-trading scheme involving their fund, Incremental Capital LLC.
The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).