Rajat Gupta, former McKinsey & Co CEO and Goldman Sachs director is being accused of providing insider trading information to Raj Rajaratnam, the disgraced and convicted head of Galleon Group
Allegations Against Raj Gupta
Raj Gupta, the former McKinsey & Co executive and Goldman Sachs board member was charged for supplying Raj Rajaratnam insider trading information on March 1, 2011.
After Gupta told Raj Rajaratnam that Berkshire Hathaway was going to invest in Goldman before it was public, Raj made $1 million trading on Goldman stock - in ONE day.
He allegedly gave information about Goldman to Galleon hedge fund manager Rajaratnam at least 3 other times.
Galleon Group's founder Raj Rajaratnam was escorted by FBI agents in New York on October 16, 2009 in what authorities are calling the largest insider-trading case against a hedge fund.
The insider trading trial against Raj Rajaratnam began on March 8, 2011. On May 11, 2011, Raj Rajaratnam was found guilty on all 14 counts of insider trading. The judge said sentencing was planned for the month of September 2011, but dragged on for months because Mr. Rajaratnam's attorney's argued for a shorter prison sentence due to Mr. Rajaratnam's health issues (he has diabetes). On October 13, 2011, Raj Rajaratnam was finally sentenced to 11 years in prison, one of the longest-ever sentences for an insider case.
Here's what the SEC alleges Gupta told Rajaratnam about Goldman Sachs:
- Gupta apparently gave information about a call on which Lloyd Blankfein had told him that Goldman Sachs second quarter returns in 2008 would be better than expected. After Gupta called him, Raj bought 5,500 of June $170 call options on June 11 (the share price opened at $167 that day) and on June 11 and 12th bought over 350,000 shares. He sold the call option on June 16th and earned $7 million. He sold more on June 17th and earned $6.6 million.
- He also reportedly gave information to Rajaratnam about Goldman's 4th quarter earnings in 2008 -- telling him that Goldman would earn less than analyst-expected $2.50 per share. He told Raj that Goldman would actually lose $2 per share -- just 23 seconds after hanging up with the Board. Rajaratnam avoided losses of $3 million.
- Gupta gave information to Rajaratnam about Goldman becoming a bank holding company. On September 22 2008, just after he found out that the Board approved Goldman Sachs becoming a Bank Holding Company, Gupta told Rajaratnam, who then bought 80,000 shares.
- Gupta told Rajaratnam that Berkshire Hathaway would make a $5 billion investment in Goldman before he did in September 2008. On September 23 2008, Rajaratnam got another call from Gupta. Gupta told him that Berkshire would invest, and Galleon purchased another 175,000 Goldman shares.
On September 24th, Raj liquidated the Goldman shares he bought because of the Berkshire investment. He made $900,000.
In total, Raj's total gains from the Gupta information (about Goldman) were over $13.6 million.
Here's what the SEC alleges Gupta told Raj about Proctor and Gamble:
- Gupta may have told Rajaratnam on January 29, 2009 that P&G would report sales growth lower than expected. All the SEC knows is that Gupta called him on January 29th, that Rajaratnam sold short 180,000 shares of P&G on the same day (he earned $570,000) and that Raj told someone he got inside information from someone on the board so that they could trade on the information too.
Gupta is denied everything, of course.
Gary Naftalis, Gupta's lawyer said that the "SEC's allegations are totally baseless," and his client "has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder."
The SEC's press release of March 1,2011 can be found HERE.
What The Raj Rajaratnam Insider Trading Trial Disclosed About Raj Gupta
On April 13, 2011, jurors involved in the insider-trading case against Galleon Group's Raj Rajaratnam in a Manhattan federal courtroom heard an earful about Rajat Gupta, the former head of McKinsey.
- First, they listened to a wiretap on which Gupta confided to Rajaratnam that the Goldman Sachs board, on which he sat, discussed acquiring Wachovia or American International Group (AIG).
- Second, the jury watched Goldman Sachs Chief Executive Officer Lloyd Blankfein testify that Gupta violated the company's ethics code for directors for disclosing confidential information to Rajaratnam.
During the trial federal prosecutors called Gupta an unindicted co-conspirator, and the Securities and Exchange Commission filed an administrative action against Gupta for his alleged role in the scandal. Still, nothing explains why Gupta, once one of the world's most trusted advisers to companies, would risk his reputation by sharing confidential information with a hedge fund manager.
Lloyd Blankfein, CEO of Goldman Sachs, was a witness for the prosecution in the insider trading case against Galleon Group chief Raj Rajaratnam. Mr. Blankfein's testimony in the Rajaratnam trial will be used against Raj Gupta, if and when that case goes to court.
Raj Gupta's Love For Dealmaking Was His Downfall
After stepping down from the top job at McKinsey, the financial markets were booming, and private equity and hedge fund managers were New York's new elite, so Raj Gupta pursued a second career as a dealmaker. Many of the CEOs he had counseled were finding positions in this lucrative world. Gupta figured he could leverage his own contacts and add to his wealth, says a senior executive at a company where Gupta was a director until March 2011.
He loved gathering Wall Street rumors and analyzing them in his professorial way, the executive says. He liked the idea of doing 8 or 10 deals a year—making introductions among executives and investors, and leaving the math and paperwork to others, says the executive, who didn't want to be named because his conversations with Gupta were private. That's also how Rajaratnam saw him. Rajaratnam told Gupta in a July 2008 wiretapped phone conversation submitted at the trial.
"Your value-added is not to do cash flows. Your value-added is to bring people together, deals together, at the right time to make the call."
Several wiretapped conversations indicate Gupta coveted a role at KKR, one of the largest private equity firms. He knew Henry Kravis, KKR's co-chairman, from his philanthropic work and through some clients. Rajaratnam told Anil Kumar, a McKinsey consultant at the time who has pled guilty to insider trading, in an Aug. 15, 2008, taped call.
"He's enamored with Kravis, and I think he wants to be in that circle. That's a billionaire's circle. … I think here he sees an opportunity to make $100 million over the next 5 or 10 years without doing a lot of work."
Gupta began doing business with a group of men who, like him, had connections in the U.S. and India: Parag Saxena, Victor Menezes, and Rajaratnam. All three had had trouble with the SEC. In 2006 he co-founded a fund called New Silk Route Partners with Saxena and Menezes. Rajaratnam contributed $50 million to the fund, which eventually raised $1.3 billion to invest in ventures in India and other emerging countries.
Some worried about Gupta. Bala Balachandran, a business professor who has known Gupta for three decades, said in an interview last year.
"I told him once, 'If you are in a herd of pigs, you'll also smell like a pig,' "
In 2007, Gupta joined Rajaratnam and a third man to form the GB Voyager Multi-Strategy Fund, contributing $10 million of his own. The $40 million fund "invested in numerous Galleon hedge funds, including those that traded on Gupta's illegal tips," according to the SEC's complaint. Gupta asked Rajaratnam for a 10 percent stake in the Galleon International Fund in exchange for attracting investors, according to a May 28, 2008, wiretapped call between Rajaratnam and Kumar. He never got that, according to testimony at Rajaratnam's trial.
Gupta's dealmaking career never took off. The New Silk Route fund hasn't turned a profit on any of the investments it has made so far, according to Venture Intelligence, a Chennai-based research firm. The Voyager Fund was wiped out in the 2008 financial crisis, costing Gupta his $10 million investment, according to his attorney.
Shoba Narayan, an author who was part of that circle through her husband, a former Morgan Stanley (MS) banker says.
"I think Rajat Gupta got caught in that whole New York milieu where people measure themselves by their net worth, the size of their bonus, or square footage of their house. If he'd lived away from that incestuous Wall Street set, perhaps none of this would have happened."
The man CEOs turned to for his expertise and sound judgment made questionable decisions as he invested with Raj Rajaratnam, the co-founder of the hedge fund Galleon Group. The SEC has accused him of passing confidential information on earnings at P&G and Goldman Sachs, and Warren Buffett's $5 billion investment in Goldman Sachs. Those tips generated more than $17 million in illicit profits or avoided losses for Galleon, the SEC says. Gupta's lawyer, Gary Naftalis, calls those allegations "totally baseless."
Gupta's Educational and Professional Background
The son of a man who fought for India's independence, Raj Gupta was orphaned as a teenager. After graduating from high school, Gupta ranked in the top 20 applicants among hundreds of thousands of Indian youth who took the entrance examination in 1966 for a spot at the elite Indian Institute of Technology in Delhi, according to an interview he gave to the “Economic Times” of India when he became head of McKinsey. He worked his way from lower-middle-class roots in Kolkata to Harvard Business School.
Harvard Business School academic workload was unrelenting for most but not for Gupta, says John Carberry, who lived in the same Boston dormitory and was Gupta’s friend. Carberry, who’s now president of Wellesley, Massachusetts-based F.L. Putnam Investment Management Co says.
“Sometimes we’d still be doing cases at 2 a.m., but he’d be done by 11 p.m. and lying on his bed, watching Johnny Carson, but if you had problems with your schoolwork, he’d always help.”
At a time when students at Harvard Business School were overwhelmingly white, Gupta stood out culturally and intellectually, Carberry says.
“Gupta was unassuming and humble. When he spoke in class, though, everyone put their pencils down and listened. He was the smartest guy in my section, just brilliant.”
Gupta became a Baker Scholar, a distinction earned by the top 5 percent of students in his graduating class in 1973. With his Master of Business Administration degree, he applied for a spot with McKinsey.
Even with his stellar academic record, the firm turned him down. Walter Salmon, one of Gupta’s professors who had McKinsey connections, wrote Gupta a recommendation, and the consulting firm decided to hire him in New York.
Gupta advanced steadily, becoming a McKinsey partner in 1980 and moving to Copenhagen the following year. In 1984, Gupta began overseeing all of the firm’s business in Scandinavia. He moved to McKinsey’s Chicago office in 1987 and became head there in 1989. The office served many of the region’s manufacturing and consumer products companies.
His big leap came in 1994 when McKinsey held elections for a new leader. Gupta won over two other candidates, becoming the first non-U.S.-born managing director of the firm. Raj Gupta, 62, Led McKinsey & Co from 1994 to 2003, serving for three three-year terms, the maximum under McKinsey's rules.
James Kilts, a former CEO of Nabisco Group Holdings Corp. and Gillette Co., says he was impressed when he first met Gupta in Chicago in the late 1980s. Kilts was then an executive atKraft Foods Inc. (KFT), and Gupta advised him about strategy for cheese products.
He sat on the boards of some of the largest multinationals, including American Airlines, Procter & Gamble and Goldman Sachs. He also sat on the boards of the Rockefeller Foundation and Bill and Melinda Gates He raised millions for charity, hung out with the Prime Minister of India, and attended President Barack Obama's first state dinner at the White House. He divided his time between a waterfront home in Westport, Conn., that once belonged to J.C. Penney, a Manhattan apartment, and a Florida getaway.
Raj Gupta's five acre waterfront estate located in Westport, Connecticut
Gupta Surrendered and Arrested
Today, Wednesday, October 26, 2011, Rajat Gupta, was taken into custody by the FBI on criminal charges related to his hedge fund manager friend Raj Rajaratnam, the central figure in a U.S. crackdown on insider trading.
Rajat Gupta, the most high-ranking corporate executive to become embroiled in a push by the government to root out insider trading, surrendered to the FBI on criminal charges of leaking confidential information. Michael Rothfeld joins the Markets Hub to discuss.
In a six-count indictment, federal prosecutors in Manhattan alleged that Mr. Gupta, the former head of global consulting firm McKinsey & Co., leaked details about the companies' financial condition and an investment by Warren Buffet's Berkshire Hathaway Inc. to former hedge-fund titan Raj Rajaratnam. The Galleon Group founder was sentenced earlier this month to serve 11 years in prison for insider trading.
The government is expected to argue that the relationship between the two men, who socialized and invested together, is emblematic of the back-scratching that pervades the corporate world and can sometimes veer into insider trading.
In the indictment, prosecutors alleged that Mr. Gupta invested in at least two Galleon offshore funds and those investments had a value of $2.4 milliion in March 2005. He also allegedly invested $10 million in an investment fund called Voyager Capital Partners along with Mr. Rajartnam, owning a 20% equity interest, prosecutors said.
Preet Bharara, the U.S. attorney in Manhattan said.
"Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders. As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam."
Janice K. Fedarcyk, the FBI's assistant director-in-charge and head of the New York FBI office said.
"The conduct alleged is not an inadvertent slip of the tongue by Mr. Gupta. His eagerness to pass along inside information to Rajaratnam is nowhere more starkly evident than in the two instances where a total of thirty-nine seconds elapsed between his learning of crucial Goldman Sachs information and lavishing it on his good friend."
He entered his plea in an afternoon hearing. Bail was set at $10 million, to be secured by Mr. Gupta's Connecticut home. He was also ordered to surrender his passport.
A spokesman for Gupta's lawyer, Gary Naftalis, declined immediate comment on his client's arrest.
On Tuesday night, October 25, 2011, when a source briefed on the case said Gupta would be arrested, Naftalis said in a statement that his client did nothing wrong.
Naftalis said.
"Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless. The facts demonstrate that Mr. Gupta is an innocent man and that he has always acted with honesty and integrity. 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."
An FBI spokesman said Gupta, 62, surrendered to agents at his home in Connecticut and he was driven to the New York FBI office, where he was placed under formal arrest at 8.15 a.m. EDT (1215 GMT).
Gupta is expected to appear in court later in the day on charges related to the Rajaratnam insider trading case, the spokesman said. Prosecutors said at Rajaratnam's trial that in 2008 Gupta leaked information about Goldman that he learned from the bank's board meetings.
Rajaratnam was convicted in May by a New York federal jury after a two-month-long trial. On October 13, a judge sentenced him to 11 years in prison, the longest recorded for insider trading.
Possible Raj Gupta Case Defense Strategy
The insider trading trial of Raj Rajaratnam provided some insight into the big discussion points that will come up during the criminal trial of Rajat Gupta.
When he took the stand to testify in the Rajaratnam trial, Goldman Sachs CEO Lloyd Blankfein had an interesting exchange with Rajaratnam's defense lawyer, John Dowd, that might shed some light on one point.
Rajaratnam did not cooperate with the prosecutors who are bringing charges against Rajat Gupta (he was offered a plea deal. Rajaratnam told Newsweek that prosecutors were particularly interested in Rajaratnam's strategic position close to Raj Gupta. They asked him to wear a wire and tape conversations with Gupta, but Rajaratnam said no, acc6rding to Rajaratnam.), but part of his defense suggested that Goldman Sachs might be able to communicate with "tier 1" clients, like Rajaratnam, about big upcoming deals that important clients have exposure to.
When CEO Lloyd Blankfein took the stand to testify, he explained the difference between what Raj Gupta did wrong, and what Goldman Sachs COO Gary Cohn did right, as far as giving information to tier 1 clients.
What Cohn did right was to keep one of Goldman's top clients abreast of matters that affect the firm's business on a regular basis. This might well be part of Cohn's job, to inform clients.
Here's what happened during Blankfein's testimony on March 23, 2011. (We were there and wrote an article about it back then.)
What the Rajaratnam defense tried to establish is that the discussion along the lines of what happened during a board meeting is legitimate for a "Tier 1" client, and that it was a standard inquiry in advance of Rajaratnam's upcoming meeting with Gary Cohn.
Blankfein explained.
"We rank clients, based on who's "more important or less important. I'm not entirely sure what 'Tier 1' means myself, but I know that we rank clients."
Rajaratnam defense attorney John Dowd asked Blankfein if he spoke to such important clients and kept them informed.
Of course they do, and in fact Blankfein visited the offices of Galleon "a long time ago," when he was a Senior Vice President at the firm.
How the testimony helps the Raj Gupta defense teams case is this:
The prosecution is trying to prove that the information that Raj Gupta passed on to Raj Rajaratnam was material nonpublic information. The defense suggests that it's only "confidential," information because it was discussed in the meeting, and not material nonpublic because:
- At least one news article reported on the rumor of Goldman's buying Wachovia and;
- People were talking about it happening, possibly including Cohn, who might have discussed the report with Galleon during or even before visiting the Galleon offices.
And thus a seed of suspicion was planted in the minds of the jury. But a moment later, we found out there was nothing there.
During the Rajaratnam trial, defense attorney Dowd asked Blankfein.
"And you're not suggesting Gary Cohn did anything wrong, are you?"
Blankfein answered.
"No."
In the following video, Douglas Burns, a formal federal prosecutor, speaks with Sara Eisen on Bloomberg Television's "Inside Track" about Rajat Gupta, the former Goldman Sachs Group Inc. director, who has been charged with feeding inside information to Galleon Group LLC's Raj Rajaratnam. Mr. Douglas provides some very interestuing insights into how the prosecution and defense will present their arguments in the Raj Gupta case.
Click To View The Video
Mr. Burns brings up two very interesting points:
- The defense will argue that Mr. Gupta did not benefited financially from the information Mr. Gupta provided Mr. Rajaratnam so there is no "quid pro quo". In an article dated October 26, 2011 in The Wall Street Journal, the issue of no "quid pro quo" is discussed. The idea is that absent some personal gain, there has been no breach of duty to stockholders. But in a previous court case, it defined “benefit” broadly to include “a pecuniary gain or a reputational benefit that will translate into future earnings.” This may present an opening for the defense to clear Mr. Gupta of the alledged insider information charges, but the court could just as easily rule against Mr. Gupta considering the broader definition of "benefit."
- The prosecution will argue that the benefit to Mr. Gupta does not need to be financial (see above with regarding the broader definition of "benefit" in "quid pro quo" cases, because insider information was stilled passed along by Mr. Gupta to Mr. Rajaratnam, and the benefit to Mr. Gupta was to gain entry into the "billionaire's club" he so long coveted through his long association with Mr. Rajaratnam.
COMMENTARY: I just love these high-profile insider trading cases, because they are so difficult to prove, but the tapes of telephone conversations between Raj Gupta and Raj Rajaratnam, and the testimony given by Goldman Sach's Lloyd Blankfein, appear to be quite damaging.
The very fact that Raj Gupta had a lengthy association with Raj Rajaratnam going as far back to the 1990's, and that Raj Rajaratnam benefited financially to the tune of $16 million from insider information about Goldman Sachs and Procter & Gamble furnished by Mr Gupta, is pretty hard to deny.
I found it surprising that Raj Rajaratnam refused to cooperate with prosecutor's during his trial, turned down a plea deal to finger Raj Gupta and refused to wear a wire to record further telephone calls with Raj Gupta, makes you wonder if Raj Rajaratnam is doing this out of spite or is it to protect Raj Gupta and make it more difficult for the prosecution to convict Raj Gupta.
This is going to be a very interesting case, and I intend to follow and cover it in my blog just like I did the Raj Rajaratnam and Danielle Chiesi trials.
Courtesy of an article dated October 26, 2011 appearing in The Wall Street Journal, an article dated October 26, 2011 appearing in The Wall Street Journal, an article dated October 26, 2011 appearing in Business Insider, an article dated October 26, 2011 appearing in Reuters, an article dated October 13, 2011 appearing in The Wall Street Journal, an article dated May 17, 2011 appearing in Bloomberg, an article dated April 13, 2011 appearing in Bloomberg Businessweek and an article dated March 1, 2011 appearing in Business Insider
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