Bloomberg News

Gupta Stake in Fund Increased After Tip, U.S. Says

May 15, 2012

Rajat Gupta, former Goldman Sachs Inc. director and former senior partner at McKinsey & Co., center, arrives at federal court with his attorneys Gary Naftalis, left, and Alan R. Friedman, right, in New York. Photographer: Peter Foley/Bloomberg

Rajat Gupta, former Goldman Sachs Inc. director and former senior partner at McKinsey & Co., center, arrives at federal court with his attorneys Gary Naftalis, left, and Alan R. Friedman, right, in New York. Photographer: Peter Foley/Bloomberg

After Goldman Sachs Group Inc. (GS:US) Director Rajat Gupta told Galleon Group LLC co-founder Raj Rajaratnam about topics raised at a bank board meeting, the hedge fund manager increased by $4 million Gupta’s stake in a fund in which both men were investors, prosecutors alleged.

The government claim was included in a motion filed yesterday in Manhattan federal court. The U.S. is seeking to use a wiretap recording of a July 29, 2008, call between the two men at Gupta’s May 21 trial on insider trading charges.

“The evidence at trial will show that Rajaratnam agreed to increase the value of Gupta’s stake by approximately $4 million, and shortly after the July 29 call, Rajaratnam had a Galleon employee send Gupta a letter, on Galleon letterhead, memorializing the increased value,” the government said.

The “ease with which” Gupta told Rajaratnam what was discussed at the board meeting, including that Goldman Sachs was considering buying a commercial bank or American International Group Inc. (AIG:US), is pertinent to the trial, assistant U.S. attorneys Reed Brodsky and Richard Tarlowe said in court papers.

Voyager Capital

Gupta is accused of leaking tips about Goldman Sachs and Procter & Gamble Co., where he was also a director, to Rajaratnam, who directed the biggest hedge fund insider-trading scheme in U.S. history. Gupta, who is no longer on the boards of Procter & Gamble or Goldman Sachs, has pleaded not guilty.

Prosecutors argued the taped discussion is direct proof of the alleged conspiracy between Gupta and Rajaratnam, whom they identify as Gupta’s co-conspirator in the scheme. The fund manager is serving an 11-year sentence for insider trading.

Both men were investors in a fund called Voyager Capital Partners, according to prosecutors. Gupta’s lawyers have asked U.S. District Judge Jed Rakoff, who is presiding over the trial, to exclude the wiretap as well as others made of Rajaratnam where Gupta isn’t a participant on the call.

Gupta’s lawyers have argued against the government being allowed to play the intercepted calls, saying they are either irrelevant or prejudicial.

Prosecutors said the July 2008 call is also evidence that Gupta was seeking professional guidance from Rajaratnam and what they described as “the relationship of trust‘‘ between the alleged co-conspirators.

$10 Million Losses

Gary Naftalis, Gupta’s lawyer, has said the government’s argument is flawed and that his client had no incentive to pass tips to Rajaratnam because Gupta lost $10 million investing with Rajaratnam in the Voyager fund.

At a January hearing before Rakoff in the case, Naftalis said ‘‘a significant theme in this case is that during 2008 and 2009 there was a significant deterioration in the relationship between Mr. Rajaratnam and Mr. Gupta’’ after Lehman Brothers Holdings Inc. collapsed in September 2008.

‘‘Our position is that we were very unhappy with Mr. Rajaratnam, how he handled our investment, what kind of information he gave us, whether we were dealt with fairly,’’ Naftalis said at a Jan. 27 hearing in the case. The lawyer said that is ‘‘obviously inconsistent with going out and tipping him.’’

Lawsuit Against Rajaratnam

The defense lawyer has asked Rakoff to allow him to present testimony to the jury showing that Gupta lost his entire Voyager investment and that he discussed with a lawyer plans to sue Rajaratnam over the losses.

‘‘In fact, Mr. Gupta lost his entire investment in the fund, negating any motive to deviate from a lifetime of probity, integrity and distinguished service,’’ Naftalis said today in a statement.

‘‘There were a host of legitimate reasons for any communications between Mr. Gupta and 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,’’ Naftalis said in the statement.

Defense lawyers, in a separate filing yesterday, asked Rakoff to allow them to present evidence at trial of Gupta’s charitable works.

Prosecutors have said evidence of Gupta’s past charitable contributions and the damage the case has had on his reputation aren’t relevant. The U.S. has also sought to block Gupta’s lawyers from speculating at trial about the government’s motives in bringing the case.

‘Charitable Activities’

‘‘Gupta’s charitable activities are a large component of his background and a critical element of who he is as a person,” defense lawyers argued in court papers. Prosecutors are attempting to exclude “relevant and important evidence” from the trial, they said.

Prosecutors asked Rakoff to keep Gupta from telling the jury about his potential prison sentence if convicted.

Gupta is charged with five counts of securities fraud and one count of conspiracy and faces as long as 20 years in prison for each count of securities fraud.

The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Patricia Hurtado in New York federal court at pathurtado@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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