Rajat K. Gupta pleaded not guilty yesterday to passing inside information he learned as a board member at Goldman Sachs and Procter & Gamble to Raj Rajaratnam, the Galleon Group hedge fund founder and convicted insider trader.
Mr. Gupta pleaded not guilty to one count of conspiracy and five counts of securities fraud before Southern District Judge Jed S. Rakoff following his initial presentment before Magistrate Judge Kevin N. Fox. He surrendered to authorities early yesterday morning and appeared with lawyers Gary P. Naftalis and Alan R. Friedman of Kramer Levin Naftalis & Frankel.
“The facts demonstrate that Mr. Gupta is an innocent man and that he always acted with honesty and integrity,” Mr. Naftalis said in a statement.
He said Mr. Gupta had legitimate reasons for communicating with 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. 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 and distinguished service.”
In an indictment unsealed at federal court in lower Manhattan, prosecutors charge that Mr. Gupta, 62, passed material nonpublic information from 2008 to 2009 to Mr. Rajaratnam, who was ordered to serve 11 years in prison on Oct. 13 for trading on illegal tips (NYLJ, Oct. 14).
Mr. Gupta was released on a $10 million personal recognizance bond secured by his home in Westport, Conn. He became the 56th person charged in the Southern District in a series of insider trading conspiracies since 2009, with Mr. Rajaratnam the central figure.
Using wiretaps, cooperating witnesses, and phone and trading records, Southern District U.S. Attorney Preet Bharara’s prosecutors have secured 51 convictions or guilty pleas.
Judge Rakoff issued a favorable ruling for Mr. Gupta in July in his suit challenging the Securities and Exchange Commission’s decision to pursue essentially the same allegations made against him yesterday in an SEC administrative proceeding as opposed to a civil suit in federal court (NYLJ, July 13).
The principal allegations in the indictment are that Mr. Gupta passed both good and bad news concerning Goldman Sachs to Mr. Rajaratnam almost immediately after he heard it from his privileged spot inside the boardroom.
According to the indictment, on Sept. 23, 2008, just before the stock market closed for the day, Mr. Gupta learned during a conference call that Warren Buffett of Berkshire Hathaway was going to make a $5 billion investment in Goldman Sachs.
Sixteen seconds after the call ended, at 3:54 p.m., Mr. Gupta rang Mr. Rajaratnam. Four minutes later, at 3:58 p.m., Mr. Rajaratnam had Galleon buy 217,000 shares of Goldman Sachs common stock.
Goldman Sachs announced the deal after the market closed, and when it reopened the next day, the stock rose more than $3 per share. Mr. Rajaratnam sold 217,000 shares immediately, making a quick $840,000 on the deal.
On Oct. 23, 2008, Mr. Gupta allegedly learned in a board conference call that Goldman Sachs was preparing to post its first quarterly loss in its history as a public company—nearly $2 a share.
A mere 23 seconds after that call ended, at 4:49 p.m., Mr. Gupta got on the line with Mr. Rajaratnam. The two spoke for approximately 13 minutes.
The next morning, Oct. 24, Mr. Rajaratnam dumped all of Galleon’s Goldman Sachs stock, avoiding millions in losses.
Later that same day, Mr. Rajaratnam told a Galleon employee that he had heard from a Goldman board member about the impending loss—a conversation that was recorded by the government and played at Mr. Rajaratnam’s two-month trial that ended in May with his conviction for five insider trading conspiracies and nine counts of securities fraud (NYLJ, May 11).
Mr. Gupta, the former global head of the consulting company McKinsey & Co., allegedly called Mr. Rajaratnam at 1:18 p.m. on Jan. 29, 2009, after participating in a Procter & Gamble Co. board conference call, and passed on information that the consumer goods company was about to report negative news about sales. At 2:52 p.m. the same day, Mr. Rajaratnam sold short some 180,000 shares of Procter & Gamble’s common stock.
The prosecution is being handled by Southern District Assistant U.S. Attorneys Reed M. Brodsky and Richard C. Tarlowe and Special Assistant U.S. Attorney Andrew Z. Michaelson.
Additional allegations against Mr. Gupta were made in a civil suit filed yesterday by the SEC.
Mr. Gupta, the SEC charges, tipped Mr. Rajaratnam to positive results on Goldman earnings “in a flurry of phone calls” on the evening of June 10, 2008. The next morning, the SEC claims, Mr. Rajaratnam had Galleon buy 7,350 out-of-the-money call options and 350,000 Goldman shares, moves that earned the Galleon funds $18.5 million.
The SEC had issued an internal Order Instituting Public Administrative and Cease-and-Desist Proceedings against Mr. Gupta on March 1.
But Mr. Gupta filed a lawsuit on March 18 challenging the institution of the civil proceeding and, on July 11, Judge Rakoff ruled that Mr. Gupta had the right to challenge the SEC on a claim of selective prosecution/equal protection (NYLJ, July 13).
Mr. Gupta also had claimed that the SEC, by seeking penalties from him that only became available with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, was attempting retroactive application of the act.
“A funny thing happened on the way to this forum,” Judge Rakoff wrote in Gupta v. Securities and Exchange Commission, 11 Civ. 1900. “On March 1, 2011, the Securities and Exchange Commission—having previously filed all of its Galleon-related insider trading actions in this federal district—decided it preferred its home turf.”
In his opinion, the judge said the SEC’s administrative scheme does not provide “a reasonable mechanism for raising or pursuing” an equal protection claim.
The SEC then withdrew the civil proceeding while reserving the right to sue Mr. Gupta civilly in federal court.
A tentative trial date of April 9 was set yesterday by the judge. Mr. Brodsky told Judge Rakoff that he expects the trial to last 10 to 14 days.
@|Mark Hamblett can be contacted at email@example.com.