Rajat Gupta, center, former Goldman Sachs director, exits federal court in New York on Wednesday.
Rajat Gupta, once one of America's most-respected corporate directors, was indicted on six criminal counts in an insider trading case that prosecutors said was motivated not by quick profits but rather a lifestyle where inside tips are the currency of friendships and elite business relationships.
WSJ legal reporter Ashby Jones stops by Mean Street to discuss former Goldman Sachs director Rajat Gupta's indictment on charges of leaking inside information.
The Charges Brought Against Raj Gupta
The U.S. accused Mr. Gupta of passing along nonpublic information to disgraced hedge-fund titan Raj Rajaratnam, gleaned from Mr. Gupta's role as a director at Goldman Sachs Group Inc. and Procter & Gamble Co. Mr. Gupta and Mr. Rajaratnam, the billionaire trader sentenced this month to an 11-year prison term, were good friends whose regular discussions of business included the illegal tips, according to federal prosecutors, the Federal Bureau of Investigation and securities regulators.
The two also were partners in investing, supporting each other's funds with money, the government alleges. Authorities say their relationship was so close that Mr. Gupta passed along tips about corporate secrets almost as soon as he received them.
Janice Fedarcyk, the FBI's assistant director in charge in New York, said Wednesday.
"His eagerness to pass along inside information to Rajaratnam is nowhere more starkly evident than in the two instances where a total of 39 seconds elapsed between his learning of crucial Goldman Sachs information and lavishing it on his good friend."
Mr. Gupta was charged with five counts of securities fraud and one count of conspiracy. He faces up to 20 years in prison on each fraud charge. Bail was set at $10 million, secured by his Westport, Conn., home. He was ordered to surrender his passport. A trial is scheduled for April 9, 2012, before U.S. District Judge Jed S. Rakoff.
According to the indictment, Mr. Gupta allegedly called Mr. Rajaratnam 16 seconds after the end of a Goldman board meeting on Sept 23, 2008, where he learned about a $5 billion investment in the bank by Berkshire Hathaway. Galleon generated an $840,000 profit in subsequent trading, prosecutors said. The indictment says Mr. Gupta tipped Mr. Rajaratnam again on Oct. 23, 2008, roughly 23 seconds after a Goldman board meeting where he was told the investment bank would suffer its first quarterly loss as a public company, saving Galleon several million dollars in losses.
Mr. Gupta is also accused of calling Mr. Rajaratnam from Switzerland on Jan. 29, 2009, with information about P&G's coming earnings release. At the time, Mr. Gupta was in Davos at the summit for World Economic Forum, for which he was a board member, according to an online picture of him at the event. Goldman declined to comment. A P&G spokesman said the company "is not a party" to the charges and had cooperated with the investigation.
Preet Bharara (below), U.S. Attorney for the Southern District of New York, speaks at a press conference following the conviction and sentencing of Galleon Group chief Raj Rajaratnam. Mr. Bharara's office is responsible for the arrest and conviction of 51 individuals involved in the insider trading case against Galleon Group's Raj Rajaratnam.
This is what U.S. Attorney Prett Bharara said in a press release following the 11-year prison sentence handed down to Raj Rajaratnam.
“Two years ago, Raj Rajaratnam stood at the summit of Wall Street, commanding his own financial empire. Then he was arrested, tried, and convicted by a jury. Mr. Rajaratnam stood convicted 14 times over of felonies, his empire exposed as a web of fraud and corruption that entangled many. Today, Mr.Rajaratnam stood once more and faced justice which was meted out to him. It is a sad conclusion to what once seemed to be a glittering story. We can only hope that this case will be the wake-up call we said it should be when Mr. Rajaratnam was arrested. Privileged professionals do not get a free pass to pursue profit through corrupt means. The message is the same for everyone no matter who you are or how much money you have — obey the law or face the fate of those who don’t.”
U.S. Attorney Preet Bharara said this about Mr. Gupta in a statement following the reading of the charges gainst Raj Gupta in Federal Court.
"Mr. Gupta became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam."
Raj Gupta's Attorney Reacts To The Federal Charges
Gary Naftalis, Mr. Gupta's lawyer, called the government allegations "totally baseless." He said Mr. Gupta "has always acted with honesty and integrity." Mr. Gupta "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."
The charges come amid distrust of business and Wall Street, symbolized by the Occupy Wall Street movement that began blocks away from the federal courthouse where Mr. Gupta was arraigned.
Charles Munger, vice chairman of Berkshire Hathaway Inc., whose investment in Goldman during the heat of the financial crisis in 2008 was the focus of one of Mr. Gupta's alleged leaks said.
"There is a lot of insider trading—and some of that goes to high places."
The company had its own trading controversy this year after one of its top managers bought shares of a company in advance of an acquisition by Berkshire, though no charges have been brought.
The Galleon Group Web of Insider Information
The accusations indicate a new twist in an insider-trading investigation that has so far focused primarily on those who profited directly from stock tips, but is now examining a culture where prosecutors say secrets are swapped freely among powerful business figures.
Click Image To View Interactive of Galleon's Web
How Raj Gupta Surrendered To The FBI
The 62-year-old Mr. Gupta, the former managing director of consulting firm McKinsey & Co., surrendered to the FBI on Wednesday and was arraigned in a New York federal court, wearing a dark suit and light-red tie.
According to childhood friend Anand "Bill" Julka, who said he has spoken recently with Mr. Gupta, he believed it was auspicious to surrender on Diwali, a major holiday popularly known as the "Indian festival of lights," Mr. Julka said.
"He believes he is innocent and the gods will protect him if humans fail."
A representative for the Manhattan U.S. attorney's office declined to comment on the timing of the charges.
The Raj Gupta Case Is A Huge Gamble For The Federal Government
The charges against Mr. Gupta represent a gamble for the government. Manhattan U.S. Attorney Preet Bharara's office debated whether to bring charges, people familiar with the matter say. The government doesn't have wiretapped recordings of Mr. Gupta passing inside information about the trades at issue by Mr. Rajaratnam—making the case potentially more difficult for prosecutors. A loss at trial could detract from a run of victories against insider-trading defendants, lawyers say.
Mr. Gupta is the 56th person charged with insider trading by federal prosecutors in New York over the past two years; 51 have been convicted or pleaded guilty. Many of those resulted from the government's probe into the Galleon Group, which was founded and led by Mr. Rajaratnam.
Mr. Gupta's motives, and that he wasn't paid for any alleged tips, could be important if he goes to trial, because insider-trading law generally requires the government to prove that tippers received some benefit to prosecute them for leaking inside information.
But Jonathan S. Sack, a securities lawyer in New York, said based on Supreme Court case law, the Justice Department won't have to prove that the benefit Mr. Gupta received was direct or financial in nature. Prosecutors have indicated they will argue it was partially intangible.
Federal prosecutors said in the indictment.
"Gupta benefited and hoped to benefit from his friendship and business relationship with Rajaratnam in various ways, some of which were financial."
The Securities and Exchange Commission—which had brought an administrative proceeding on insider-trading charges against Mr. Gupta in March but later dropped it—separately brought a new civil lawsuit against Mr. Gupta on Wednesday. Mr. Gupta hasn't responded to the SEC's complaint, but he previously denied the regulators' allegations in March.
Anil "The Consultant" Kamar
The broad cases against Mr. Rajaratnam, Mr. Gupta and Anil Kumar—a former McKinsey partner who has pleaded guilty in the probe—also are an embarrassment for the global consulting giant, people familiar with the company say. Though not all of the charges involve information gleaned from McKinsey clients—those against Mr. Kumar did—the consulting firm prides itself on client confidentiality, and any concerns about the firm's discretion could create a risk for consulting contracts, the people say. Mr. Gupta led McKinsey from 1994 until 2003.
Anil Kumar, a former McKinsey & Co consultant, leaked insider information to Raj Rajaratnam of Galleon Group about secret merger talks between Advanced Micro Devices and ATI Technologies. Mr. Rajaratnam made $23 million from that insider information. Mr. Kumar was given a $1 million bonus for those efforts
Mr. Kumar earned several million dollars a year as a senior executive at McKinsey. He had a grueling work schedule, traveling some 30,000 miles a month, consulting for corporate clients across the globe.
In 2003, Mr. Rajaratnam, who was fast on his way to becoming a billionaire, told his business school classmate that he was underpaid.
Kumar said he was told by Mr. Rajaratnam,
“You work hard, travel a lot; people made fortunes while you were away and you deserve more.”
Mr. Kumar would later depict himself as a reluctant felon, initially rejecting Mr. Rajaratnam’s offer. But after they devised an elaborate scheme to hide the payments — opening a Swiss bank account and then transferring funds from it into a Galleon account in the name of Mr. Kumar’s housekeeper — he began moonlighting as a private consultant to Mr. Rajaratnam.
At first, Mr. Rajaratnam asked Mr. Kumar general “big picture” questions about the technology industry but soon became “quite specific,” pressing him for details about individual companies, Mr. Kumar said.
Says Kumar,
“Mr. Rajaratnam kept asking for that information, and I felt that I owed him something, given how much money he was paying me.”
After Mr. Rajaratnam told Mr. Kumar that his insights were not detailed enough and had little value to him, he suggested an alternative arrangement where they would share trading profits when Mr. Kumar’s tips made money. Mr. Kumar rejected this proposal, preferring a straight-up fee similar to how he was paid for his work at McKinsey.
Mr. Kumar testified,
“I was a consultant at heart. That seemed like an even bigger crime to me.”
In 2006, Mr. Kumar agreed to another compensation scheme: Mr. Rajaratnam would pay him a year-end bonus based on his annual performance. Mr. Kumar proved his worth that year, providing him with details about secret merger negotiations between Advanced Micro Devices and ATI Technologies.
When the companies announced the deal in July 2006, Mr. Kumar got a call from Mr. Rajaratnam,
“That was fantastic. We’re all cheering you at the office right now. You’re a star. You’re a hero.”
Mr. Kumar’s tip about the deal helped Mr. Rajaratnam generate about $23 million in profit buying ATI stock, his single largest illegal gain.
In December, Mr. Rajaratnam told Mr. Kumar that Galleon was paying out big year-end bonuses and said,
“'I want to give you $1 million'. I almost fell off my chair.”
The insider-trading probe prompted the firm to tighten internal security involving confidential information, a former McKinsey official said. McKinsey declined to comment.
The Motives Behind Raj Gupta's Association With Raj Rajaratnam
A Kolkata, India, native who later moved to Delhi, Mr. Gupta arrived in the U.S. to attend Harvard Business School. His character was shaped by the death of his parents in his teenage years, said Mr. Julka, the childhood friend.
According to Mr. Julka, who owns an information-technology firm in Cleveland.
"Suddenly, he became the head of the family. It made him very compassionate. He was a lot more mature than all of us."
Mr. Gupta set up the American India Foundation and also was the founding chairman of the Indian School of Business in Hyderabad. He was viewed as a master networker, establishing relationships with former President Bill Clinton, Microsoft Corp. founder Bill Gates, and Hank Paulson, the former Goldman CEO and U.S. Treasury secretary. Mr. Gupta and his wife were among the list of invited attendees to President Barack Obama's first state dinner, according to list released by the White House.
The ability to cultivate contacts, along with their South Asian heritage, was a quality he shared with Mr. Rajaratnam, 54, a Sri Lanka native. They shared a mutual friend in Mr. Kumar, a McKinsey consultant who later testified for the U.S. in Mr. Rajaratnam's trial.
Messrs. Gupta and Rajaratnam had vastly different personal styles. The square-jawed Mr. Gupta was quiet and distinguished; the portly Mr. Rajaratnam was rougher around edges, and enjoyed practical jokes, people who know them said. Though Mr. Gupta had a more public persona, Mr. Rajaratnam was far richer, people familiar with the matter said.
They established a rapport, according to associates, and Mr. Gupta often would have lunch with Mr. Rajaratnam in the hedge-fund manager's office, ordering in Indian or Chinese food.
Mr. Gupta's stature and power in business circles far exceeded his personal wealth, which paled next to Mr. Rajaratnam's $1 billion net worth, people close to the situation say. Starting around 2003, he hoped to enter super-wealthy circles through his investments with Mr. Rajaratnam, people close to the situation say. He invested more than $2 million in two of Galleon's offshore hedge funds, one named "Captains" and the other named "Buccaneers," according to the SEC complaint.
Both Mr. Rajaratnam and Mr. Gupta invested "many millions" in the GB Voyager Multi-Strategy Fund, a master fund that invested in numerous Galleon hedge funds. Mr. Gupta saw the venture as a springboard for more business ventures with Mr. Rajaratnam, according to the SEC complaint.
The two formed another fund, the Voyager Special Opportunity Fund, and they signed up a number of South Asian business leaders to invest. They also organized Taj Capital Partners, later known as the New Silk Route fund.
It was in the ensuing years that Mr. Gupta allegedly leaked Mr. Rajaratnam inside information.
After the May conviction of Mr. Rajaratnam, friends say, Mr. Gupta seemed worried and nervous about his own future. Mr. Julka recalled.
"He was distraught. He seemed upset."
In a visit to Mr. Gupta's home in August, Mr. Julka said he congratulated him on the SEC's decision at the time to drop its civil case.
Mr. Gupta told him it was "too early" for kudos, Mr. Julka said, adding that the U.S. has "a right to indict me still."
COMMENTARY: Everytime I write or comment on any articles about former Galleon Group head Raj Rajaratnam, I find a field strewn with the decaying bodies of his victims, who willingly provided him directly or indirectly, insider information that gained him millions in profits.
The insider trading culture is really what drives the big money bets on Wall Street. It's the idea of winning, no matter what rules or laws are broken. Money acts like a powerful aphrodisiac, and people do crazy things when they fall under its spell. Raj Rajaratnam was a master at dispensing this aphrodisiac nectar by convincing people to work for him so they could feed him insider information.
What I find most interesting is that this lust to make money, and as much of it as possible, as fast as possible, is driven by some very smart and savvy people, who should know better. They are well educated, schooled in business law, SEC regulations, and many of them are graduates of Ivy League schools like Harvard, Yale and Wharton.
What I find ironic is that many of the insiders that fed insider information to Raj Rajaratnam's Galleon Group are from Harvard. Harvard's motto is Veritas, which is Greek for Truth. That's what I call ironic, don't you think?
Courtesy of an article dated October 27, 2011 appearing in The Wall Street Journal
Comments