Gupta Insider Case Built on Circumstantial Proof Poses Challenge to U.S.
The insider-trading prosecution of former Goldman Sachs Group Inc. (GS) director Rajat Gupta is built on circumstantial evidence that may be less persuasive than the wiretaps that sealed the fate of his friend Raj Rajaratnam.
Unlike the case against the Galleon Group LLC co-founder and hedge fund tycoon, which included his own words in calls with leakers, prosecutors will seek to convict Gupta based on the timing of his phone calls and the Rajaratnam trades that immediately followed, said Peter Henning, a law professor at Wayne State University in Detroit. Wiretaps likely to be used at Gupta’s trial involve Rajaratnam boasting of a source he doesn’t name. The government said that source is Gupta.
Prosecutors “don’t have the wiretaps, the smoking gun evidence,” Henning said in an interview following Gupta’s surrender to the FBI yesterday in Manhattan. “I wouldn’t call it a weak case, but there are some challenges that weren’t featured in the Rajaratnam case.”
Gupta, 62, who previously led McKinsey & Co., became the highest-ranking executive to be charged in a four-year probe by the Federal Bureau of Investigation that led to a nationwide crackdown on insider trading. Yesterday, prosecutors unsealed a six-count indictment accusing him of leaking inside information to his business partner Rajaratnam.
Rajaratnam, 54, was sentenced on Oct. 13 to 11 years in prison, the longest term for insider trading in U.S. history, following his conviction in May. If convicted, Gupta faces up to 20 years in prison on each of five securities fraud counts and as long as five years on a conspiracy charge.
Procter & Gamble
Gupta, who also served on the board of Procter & Gamble Co. (PG), the world’s largest consumer-products company, pleaded not guilty yesterday in an appearance in Manhattan federal court.
“The government’s allegations are totally baseless,” defense attorney Gary Naftalis said in a statement. “Mr. Gupta is innocent of any of these charges and that he has always acted with honesty and integrity.”
Gupta’s indictment cites at least three instances in which he allegedly leaked tips to Rajaratnam. He’s accused of telling Rajaratnam about Berkshire Hathaway Inc. (BRK/A)’s $5 billion investment in Goldman Sachs in September 2008, about the bank’s unexpected fourth-quarter loss that year, and about P&G’s poor performance in late 2008.
In a related lawsuit by the U.S. Securities and Exchange Commission, the agency said Gupta tipped Rajaratnam about Goldman Sachs’s second-quarter profit in 2008. The regulator puts Rajaratnam’s profit from the entire insider scheme at more than $23 million.
Sam Buell, a law professor at Duke University in Durham, North Carolina, said the indictment suggests that prosecutors will rely on the tools they traditionally employed in insider trading cases before turning to wiretaps in 2008 to catch Rajaratnam and others swapping secret data.
“They’ll be matching up phone calls and trades and the timing of meetings,” Buell said. “There are aspects of this case that resemble a more traditional insider trading case.”
To show that Gupta tipped Rajaratnam about Berkshire’s investment, the indictment says that Gupta telephoned Rajaratnam “approximately 16 seconds” after learning of it during a Goldman Sachs board meeting on Sept. 23, 2008. Rajaratnam bought Goldman Sachs shares minutes later, prosecutors alleged.
To establish that Gupta leaked news about his securities firm’s losses, the indictment states he called Rajaratnam 23 seconds after leaving a board conference call on Oct. 23, 2008. The next morning, Galleon sold about 150,000 shares, prosecutors said.
And to prove that Gupta disclosed secrets about P&G’s earnings, the indictment cites an eight-minute telephone call that Gupta made to Rajaratnam from Switzerland on Jan. 29, 2009, hours after he learned about the Cincinnati-based company’s results. Rajaratnam also claimed to have gotten information from “someone” on the P&G board, prosecutors said.
“The government has a long history of prosecuting insider trading cases based on circumstantial evidence of well-timed phone calls and trading based on material events,” said David Siegal, a former federal prosecutor now at Haynes and Boone LLP in New York. “People have been prosecuted and convicted without tape recordings for 200 years.”
The government will also offer evidence of close ties between the two men. According to the indictment, Gupta invested $2.4 million in at least two Galleon offshore funds, put $10 million into a venture with Rajaratnam called Voyager Capital Partners, and committed $22.5 million to a fund they built that focused on emerging markets in Asia.
‘It Shows Motive’
“It shows motive,” said Michael Kendall, the head of the white-collar practice at McDermott Will & Emery and a former federal prosecutor in Boston. “It shows the intimacy of the business relationship.”
Jerika Richardson, a spokeswoman for U.S. Attorney Preet Bharara in Manhattan, declined to comment on the evidence against Gupta. According to the indictment, Gupta “benefited and hoped to benefit from his friendship and business relationship with Rajaratnam” in financial and non-financial ways. Some such benefit is required to be proven in a case against a tipper.
Still, there are risks in a circumstantial case, as the defense will offer alternative explanations for the contacts and calls between Gupta and Rajaratnam, lawyers said.
“What’s Gupta’s defense going to be?” Buell said. “If the government does get those calls into evidence, is there any explanation that’s inconsistent with guilt? Maybe it’s that things were discussed in very general terms and Rajaratnam drew conclusions on his own.”
Naftalis began doing just that in a statement after Gupta’s arrest, citing “legitimate reasons for any communications between” his client and Rajaratnam.
Gupta telephoned Rajaratnam “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 at the time of the events in question, negating any motive to deviate from a lifetime of probity.”
Stanley Twardy, a lawyer at Hartford, Connecticut-based Day Pitney LLP and a former federal prosecutor, said Gupta’s defense may use the absence of wiretaps to his advantage.
“Now that jurors in insider-trading cases have heard wiretaps, are they going to expect it?” Twardy asked. “Has the Raj case raised expectations in the public’s mind about what the case needs?”
A Little Audio
In the end, jurors will hear at least a little audio, lawyers said. As they did at Rajaratnam’s trial, prosecutors will likely play a recording of the hedge fund co-founder telling a Galleon employee that “somebody” on the Goldman Sachs board told him that the bank will “lose $2 per share” in 2008’s fourth quarter.
That person was Gupta, prosecutors claim.
And Gupta was caught on a wiretap in July 2008 responding to Rajaratnam’s question about a “rumor that Goldman may look to buy a commercial bank,” according to evidence at Rajaratnam’s trial. Gupta replied, “Yeah, this is being discussed” and said the board was “divided” on suggestions that it make asset purchases of commercial banks or insurers such as Wachovia Corp. or American International Group Inc. (AIG)
That conversation doesn’t figure in the indictment, though. At Rajaratnam’s trial, prosecutors presented no evidence that the Galleon co-founder traded on Gupta’s comments and there was already public speculation by analysts that Goldman Sachs might make such acquisitions.
The cases are U.S. v. Gupta, 11-cr-00907, and SEC v. Gupta, 11-cv-07566, U.S. District Court for the Southern District of New York (Manhattan).
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