Bloomberg News

Gupta Prosecutor Attacks Defense Claim Loeb Was Tipper

June 11, 2012

A prosecutor in the insider-trading trial of Rajat Gupta used his questioning of a defense witness to attack the ex-Goldman Sachs Group Inc. (GS:US) director’s claim that another bank executive was the source of illegal tips.

In the first full day of the defense case, Gupta’s lawyers called Richard Schutte, the former president of Galleon Group LLC’s domestic unit, to testify about the relationship between the fund and Goldman Sachs in late 2008. Gupta is accused of leaking stock tips about the bank to Galleon co-founder Raj Rajaratnam, and the defense is trying to show that Galleon had other sources -- both legal and illegal -- of information about Goldman Sachs.

Rajaratnam got some of his illegal tips from David Loeb, Goldman Sachs’s head of Asia equity sales in New York, defense attorney Gary Naftalis has said in court. On cross-examination of Schutte, Assistant U.S. Attorney Reed Brodsky tried to show that Loeb wasn’t Rajaratnam’s source of information about Goldman Sachs.

“Is it fair to say that Mr. Loeb, in any of the e-mails distributed to you, did not provide any information about Goldman Sachs?” Brodsky asked.

“Yes, that’s fair to say,” Schutte replied.

Brodsky also emphasized that Loeb’s focus was on overseas stocks, and not U.S. banks.

“Do you know that Mr. Loeb specialized in Asian equities?” Brodsky asked.

“That’s what I recall,” Schutte said.

Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment on questions about Loeb.

McKinsey & Co.

Gupta, who ran McKinsey & Co. from 1994 to 2003, is accused of leaking secret tips to Rajaratnam about Goldman Sachs and Procter & Gamble Co. (PG:US), where Gupta was also a director.

The tips in question involve Goldman Sachs earnings in the first quarter of 2007 and fourth quarter of 2008. Another involves a $5 billion Berkshire Hathaway Inc. (B:US) investment in Goldman Sachs on Sept. 23, 2008. Prosecutors also say Gupta told Rajaratnam that Cincinnati-based P&G planned to sell its Folgers Coffee unit to J.M. Smucker Co.

Naftalis has argued that “the wrong man” is on trial and has pointed to Loeb, who hasn’t been accused by the government of wrongdoing. On May 23, Brodsky said in court, after jurors had left, that Loeb passed tips about Intel Corp., Apple Inc. and Hewlett-Packard Co. (HPQ:US) to Rajaratnam.

Schutte testified for the defense last year in the trial of Rajaratnam, who was convicted of insider trading and sentenced to 11 years in prison.

Goldman Sachs

Schutte, who previously worked at Goldman Sachs, testified today about the close relationship between the firm and Galleon, telling jurors that Galleon paid Goldman Sachs as much as $35 million in commissions and fees annually. Defense lawyers argue that Galleon had legitimate sources of information about Goldman Sachs.

At a July 31, 2008, meeting with senior Goldman Sachs executives including President Gary Cohn, for instance, Schutte said Rajaratnam asked about the likelihood that the firm would purchase a commercial bank. Gupta is accused of tipping Rajaratnam on Goldman Sachs’s discussions about buying a commercial bank or an insurance company.

Cohn said it was unlikely, telling the Galleon executives, “The problem is, you don’t know what you’re getting.”

Goldman Sachs had also discussed the issue with Wall Street analysts, the defense said.

Spottail Capital

Schutte told jurors today that Rajaratnam made a $25 million investment in a fund he managed, Spottail Capital Advisers LLC, after Galleon closed. Since Rajaratnam’s trial last year, the convicted fund manager has withdrawn $10 million from the fund, Schutte said.

The defense may rest tomorrow. Closing arguments will begin June 13, Rakoff said.

Since they began calling witnesses, defense lawyers have called four character witnesses, including Anil Sood, 62, a childhood friend of the defendant’s who testified he’s known Gupta for 53 years and attended middle, high school and college with him in India.

“I have always admired Rajat,” said Sood, a former World Bank official. “He is straightforward, honest, truthful, and inspires confidence.”

Defense lawyers also called Suprotik Basu, 34, a United Nations special envoy for malaria, who described a meeting he attended with Gupta involving the UN on the afternoon of Sept. 23, 2008.

Board Meeting

Prosecutors allege that Gupta participated in the Goldman Sachs board meeting via telephone where directors approved the Berkshire Hathaway investment. Within minutes of hanging up the phone from the Goldman Sachs call at 3:54 p.m., prosecutors say Gupta called Rajaratnam, who then traded on the tip.

Gupta was in Basu’s offices in Manhattan where he participated in a meeting with UN officials that day between 5 p.m. to 5:45 p.m., he testified.

“After that meeting, did Mr. Gupta say anything to you about Goldman Sachs?” Naftalis asked.

“No we were focusing on the meeting in two days and to close our funding gap,” Basu said.

“Did he say anything to you about Warren Buffett?” Naftalis asked.

‘No, he did not,’’ he said.

An Opinion

The defense lawyer also asked Basu if he’d formed an opinion about Gupta.

“I consider Rajat to be one of the most honest, forthright and giving gentlemen that I know,” Basu told jurors.

On cross-examination by Brodsky, Basu said he didn’t know anything about Gupta’s relationship with Rajaratnam and wasn’t aware of any business dealings Gupta had with the fund manager.

When the trial recessed on June 8, lawyers for Gupta said it was “very likely” he would testify. Yesterday, defense attorney Gary Naftalis wrote a letter to U.S. District Judge Jed Rakoff informing him that Gupta wouldn’t testify.

This morning as court began, Rakoff asked defense lawyer David Frankel who his next witness would be. Naftalis wasn’t in the courtroom.

Frankel, who wasn’t immediately certain, started to say “It is one of --”

“Who is it?” Rakoff demanded, cutting him off. “I’m tired of this ‘one-of.’”

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

To contact the reporters on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net; David Glovin in New York at dglovin@bloomberg.net

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


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