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Former Goldman Sachs director Rajat Gupta — the most prominent name to be
caught up in Wall Street’s biggest trading scandal — was criminally
charged today with leaking inside information to convicted hedge fund boss
Raj Rajaratnam.
Manhattan US Attorney Preet Bharara slapped Gupta with six counts of
securities fraud as part of his massive crackdown on insider trading. Gupta
surrendered to the FBI this morning and will be arraigned in Manhattan
federal court later today.
READ THE INDICTMENT (PDF)
READ THE SEC COMPLAINT (PDF)
Gupta, who rose to prominance as head of well-known consulting firm McKinsey
& Co, was accused of sharing illegal stock tips with Rajaratnam when he was
serving as a director of Goldman Sachs and Procter & Gamble.
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Galleon Group founder Rajaratnam was convicted on 14 counts of insider
trading in May and sentenced earlier this month to 11 years in prison — the
longest ever sentence for insider trading.
The Securities and Exchange Commission also brought a separate civil suit
against Gupta today, alleging he generated $23 million in illegal profits
and loss avoidance for Galleon based on his tips.
The arrest marks a new phase in Bharara’s widespread insider-trading probe,
which kicked off with the arrest of Rajaratnam in 2009 and culminated
earlier this year with his conviction.
Gupta is accused of feeding Rajaratnam illegal tips about Goldman and P&G’s
earnings as well as spilling the beans ahead of Warren Buffett’s $5
billion cash influsion in Goldman during the depths of the financial crisis
in 2008.
“Today we allege that the corruption we have seen in the trading cubicles,
investment firms, law firms, expert consulting firms, medical labs, and
corporate suites also insinuated itself into the boardrooms of elite
companies,” Bharara said in a statement.
Gupta breached his duty to those companies and “instead became the illegal
eyes and ears in the boardroom” for Rajaratnam, Bharara said.
Prosecutors named Gupta as a co-conspirator to Rajaratnam ahead of the hedge
fund kingpin’s trial but stopped short of officially charging him. Many of
today’s allegations are the same as those made during the trial.
A civil suit by the SEC from earlier this year, making many of the same
allegations, was withdrawn for technical reasons.
One barrier to charging Gupta earlier was the absence of wiretapped
conversations between him and Rajaratnam. Instead, the wiretaps — the
cornerstone of Bharara’s success in the widespread probe — show Rajaratnam
bragging to others about the information he received.
In one taped call, Rajaratnam tells a co-worker that he “heard yesterday
from someone who’s on the board of Goldman Sachs that they are gonna lose $
2 per share.” At the time, Wall Street was predicting per-share profit of $
2.50.
Instead, the feds appear to be relying on phone and trading records showing
a flurry of calls between the two followed by trading by Galleon.
For example, the complaint refers to phone records showing Gupta called
Rajaratnam seconds after ending a conference call with the rest of Goldman’
s board to approve Buffett’s $5 billion investment, as well as trading
records showing Rajaratnam making buy orders minutes before trading closed
that day.
The day after the call from Gupta, the feds wiretapped a phone call where
Rajaratnam told one of his traders that he received a call just before
markets closed the day before saying “something good” was going to happen
to Goldman.
During Rajaratnam’s trial, prosecutors whipped out just one taped call with
Gupta telling Rajaratnam about private board discussions related to whether
Goldman should buy a commercial bank or an insurance company just as the
financial crisis was getting underway.
But Rajaratnam never traded on the information, so the call can only be used
to show that Gupta was willing to leak confidential board disussions to his
hedge fund pal.
Indeed, Goldman CEO Lloyd Blankfein told jurors that the ex-Goldman director
breached the bank’s policies by telling Raj Rajaratnam about that board
meeting when he took the stand during Rajaratnam’s trial.
“On that call, did Rajat Gupta violate Goldman’s confidentiality policy?”
Special Assistant US Attorney Andrew Michaelson asked the banking chief
after playing the taped call for him.
“My sense of it, yes,” Blankfein responded.
Gupta’s attorney, Gary Naftalis, called the charges baseless.
"The facts in this case demonstrate that Mr. Gupta is innocent of any of
these charges and that he has always acted with honesty and integrity,"
Naftalis said. "He did not trade in any securities, did not tip Mr.
Rajaratnam so he could trade, and did not share in any profits as part of
any quid pro quo.
“There were legitimate reasons for any communications between Mr. Gupta and
Mr. Rajaratnam,” including Gupta’s role as an investor in a fund managed
by Rajaratnam, known as the GB Voyager fund, Naftalis added.
The feds say Gupta’s role as an investor provided him incentive to give
Rajaratnam illegal tips.
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