Bloomberg News

Rajat Gupta Convicted of Insider Trading by U.S. Jury

June 16, 2012

Former Goldman Sachs Director Rajat Gupta

Rajat Gupta, former Goldman Sachs Inc. director and former senior partner at McKinsey & Co., center, exits federal court with his lawyers Gary Naftalis, right, and Robin Wilcox, left, in New York on June 15, 2012. Photographer: Peter Foley/Bloomberg

Rajat Gupta, who reached the pinnacle of corporate America as managing partner of McKinsey & Co. and director at Goldman Sachs Group Inc. (GS:US) and Procter & Gamble Co. (PG:US), was convicted by a federal jury of leaking inside information to hedge-fund manager Raj Rajaratnam.

Gupta, 63, was found guilty of three counts of securities fraud and one count of conspiracy yesterday by a federal jury in Manhattan in its second day of deliberations. Securities fraud carries a maximum prison sentence of 20 years, and conspiracy carries a five-year maximum. U.S. District Judge Jed Rakoff said Gupta can remain free on bail until his sentencing on Oct. 18.

The outcome is a victory for the U.S. government in its nationwide crackdown on insider trading at hedge funds.

“Having fallen from respected insider to convicted inside trader, Mr. Gupta has now exchanged the lofty board room for the prospect of a lowly jail cell,” Manhattan U.S. Attorney Preet Bharara said in a statement. “Violating clear and sacrosanct duties of confidentiality, Mr. Gupta illegally provided a virtual open line into the boardroom for his benefactor and business partner, Raj Rajaratnam.”

No Reaction

Gupta, who was also acquitted of two counts, showed no reaction during the reading of the verdict. His wife, Anita, sobbed loudly as she lowered her head onto the courtroom balustrade when the jury announced the first guilty count.

He is most prominent of the 62 people convicted since the nationwide crackdown began. To date, the U.S. has brought cases against 68 traders and their sources from Wall Street to Silicon Valley. No one has won an acquittal; six cases are pending.

Gupta didn’t speak to reporters as he left the courthouse with his family. Gupta’s four daughters -- Geetanjali, who testified for the defense, Megha, Aditi and Deepali -- were seated directly behind their father and hugged and cried when the verdict was read.

“We continue to feel that Mr. Gupta is innocent of all charges,” defense lawyer Gary Naftalis said after the verdict. “We will be making a motion to set aside the verdict and appeal if necessary.”

Gupta “didn’t trade,” Naftalis said. “He didn’t tip Mr. Rajaratnam. He didn’t receive a dishonest dime.”

Besides his tenure at Goldman Sachs and McKinsey, which he ran from 1994 to 2003, the Kolkata-born Gupta served on the boards of the Rockefeller Foundation and the Bill & Melinda Gates Foundation. He is also a co-founder of the Indian School of Business in Hyderabad.

Raising Money

He has raised millions of dollars for education and health- care programs, served as an adviser to the United Nations and counseled chief executives including Lloyd Blankfein of Goldman Sachs, who was a prosecution witness at the trial. He lives in a waterfront home in Westport, Connecticut.

Richard Scheff, chairman of Philadelphia-based Montgomery, McCracken, Walker & Rhoads LLP, said a conviction would be “extremely” significant.

“It doesn’t get much higher,” Scheff, who specializes in white-collar criminal investigations, said in an interview before the verdict.

Rajaratnam, who co-founded Galleon Group LLC, was convicted at trial last year and sentenced to 11 years in prison, a record at the time for insider-trading crimes. He’s appealing the verdict.

Hugged Lawyers

After the jury left, Gupta hugged defense lawyers Alan Friedman and Robin Wilcox. Naftalis patted his client on the back. Gupta embraced his wife, who buried her head in his chest and sobbed. The four daughters and Gupta’s brother-in-law joined in the embrace.

The U.S. Securities and Exchange Commission filed a lawsuit against Gupta, which is still pending.

The verdict “sends a very strong message to corporate America and to Wall Street that those who engage in insider trading, irrespective of their station in life, can expect to be prosecuted to the fullest extent of the law,” SEC Enforcement Director Robert Khuzami said in a statement. “We appreciate the tremendous work of the federal prosecutors at the U.S. Attorney’s Office in Manhattan in successfully prosecuting this case.”

Gupta is the latest object lesson in what happens to business leaders who lose their bearings, said Georges Ugeux, a former New York Stock Exchange official and now chief executive officer of New York-based Galileo Global Advisors LLC.

“They start to believe they are so brilliant, they are so powerful, and they behave like they are above the law,” Ugeux said before the verdict was handed down. “There will always be people who will go over the line, but there are others who will see the price someone like Gupta has paid, and say it’s not worth it.”

Warren Buffett

Gupta was found guilty of leaking tips to Rajaratnam, 55, about New York-based Goldman Sachs, including information about a $5 billion investment by Warren Buffett’s Berkshire Hathaway Inc. on Sept. 23, 2008, and a tip on a quarterly loss. The jury acquitted him of charges that he leaked information that Cincinnati-based P&G’s organic sales growth would fall below estimates and that he tipped Rajaratnam about Goldman Sachs’s earnings in the first quarter of 2007.

Unlike the Rajaratnam prosecution, which was based on dozens of wiretaps of his mobile-phone conversations, the case against Gupta was circumstantial, built on trading records, business relationships and comments by Rajaratnam or others about Galleon’s sources of information.

At the trial, Blankfein testified that he briefed his board over the phone on the Buffett investment beginning at 3:15 p.m. Within a minute after the call with the directors concluded at 3:53 p.m., Rajaratnam answered a call on his private line from a McKinsey conference room being used by Gupta, according to phone records and testimony.

Bought Shares

Rajaratnam got off a call and hurriedly told Ananth Muniyappa, then a Galleon trader, to buy Goldman Sachs stock, Muniyappa testified. Galleon bought 267,000 shares. Prosecutors played a wiretapped recording of a Rajaratnam phone call from the next day.

“I got a call at 3:58, right?” Rajaratnam could be heard telling another trader. “Saying something good might happen to Goldman.”

Anthony Sabino, a professor of law at the Tobin School of Business at St. John’s University in New York, said the case relied on the “old-school” methods the federal government used in prosecuting earlier insider-trading cases.

“These cases were based on the building of a sequence of events and pieces of evidence and prosecutors connected the dots for the jury,” Sabino said.

‘Extraordinary Profits’

The defense assailed what it called the lack of “real, hard, direct evidence” in the prosecution’s case, pointed to other leakers at Goldman Sachs and sought to show that Galleon had legitimate reasons for the trades. Naftalis reminded jurors that there were no wiretaps of Gupta tipping Rajaratnam, and he said the two men had a falling out after Gupta lost $10 million in a Galleon fund.

Prosecutors said Gupta leaked the information because he wanted Rajaratnam’s help with a new fund he was starting, as well as a slice of the “extraordinary profits” at Galleon. Gupta was to become chairman of Galleon’s international fund, according to the government.

Rajaratnam, for instance, bumped up by $4 million Gupta’s stake in a Galleon investment after Gupta told him about a Goldman Sachs board discussion held in St. Petersburg, Russia, prosecutors said.

“Rajaratnam offered Gupta many benefits,” Assistant U.S. Attorney Richard Tarlowe said in his summation on June 13. “What was good for Rajaratnam and Galleon was good for Gupta.”

Parents Died

Gupta’s father, a journalist who worked for two newspapers, fought for India’s independence and was jailed several times for his political activism. Gupta’s mother was a teacher in a Montessori school. The family moved to New Delhi when Gupta was five.

Orphaned at 18 after both his parents died of natural causes, Gupta persuaded an unmarried aunt to live with him and his siblings, according to a 1994 interview he gave to “Business Today,” an Indian magazine.

He said he was shattered by his father’s death and became very studious, careful never to make a mistake that could cost him his scholarship to the Modern School, one of India’s few English-language, Western-style high schools.

He ranked among the top 20 of hundreds of thousands of Indian youth who took the entrance examination in 1966 for a spot at the elite Indian Institute of Technology, according to an interview he gave to the “Economic Times” of India when he became head of McKinsey.

Harvard Scholarship

Gupta chose the Delhi campus and in 1971 he earned a bachelor’s degree in mechanical engineering. His first job offer came from ITC Ltd., a British-owned company that sold cigarettes and ran hotels. He turned it down when he was admitted to Harvard Business School on scholarship.

Gupta became a Baker Scholar, a distinction earned by the top 5 percent of students in his graduating class in 1973. Hired by McKinsey in New York, he advanced steadily, becoming a partner at the consulting firm 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 its head in 1989.

McKinsey grew rapidly under his leadership beginning in 1994. He won re-election twice, and during his three terms at the helm, the maximum the firm allows, revenue increased to $3.4 billion from $1.2 billion. The number of partners rose to 891, according to Kennedy Information LLC, a research firm that tracks the consulting industry.

Private Equity

After retiring in 2007, Gupta divided his time between his Connecticut home, a Manhattan apartment and a Florida getaway. He traveled to India to look for investments for New Silk Route Partners, the private equity firm he started with Rajaratnam and others, and paid visits around the world to the public companies and nonprofit boards on which he was a director.

By April 2008, his net worth was $84.1 million, according to his personal banker’s testimony at the trial.

The prosecution of Gupta subjected the inner workings of Goldman Sachs, the fifth-largest U.S. bank by assets, to public scrutiny. Along with Blankfein, witnesses against Gupta included William George, an independent Goldman Sachs director, and Byron Trott, who was the company’s vice chairman of investment banking until he left the firm in 2009.

A prosecutor said a Goldman Sachs salesman also tipped Rajaratnam; the defense claimed a firm analyst leaked information; and Gupta’s lawyer, Gary Naftalis, used his summation to assail Blankfein as “less than candid.”

‘Very Disappointed’

“We are very disappointed that Mr. Gupta breached his duties as a director and violated the trust of our shareholders and the firm,” Goldman Sachs said in a statement after the verdict.

The trial won’t help the bank’s reputation, said Ben Wallace, an analyst at Westborough, Massachusetts-based Grimes & Co., which manages about $1 billion and doesn’t hold Goldman Sachs shares.

“It plays into the general thought about their access to inside information and how they use it,” Grimes said. “The question is: Where is their reputation already?” Still, he said, “This isn’t going to lead the SEC to do anything.”

Gupta’s relationship with Rajaratnam put him in the government’s crosshairs. Agents of the Federal Bureau of Investigation listened in on a July 2008 phone call in which Gupta discussed Goldman Sachs business with Rajaratnam and the two bantered about Gupta’s interest in joining KKR & Co., the buyout firm. Even after Rajaratnam lost the $10 million, Gupta continued to leave friendly messages, wishing Rajaratnam a happy New Year in January 2009.

‘Business Relationship’

“The government demonstrated that Gupta and Rajaratnam had a close and intense business relationship and they’d invested millions of dollars with each other,” said Sabino of St. John’s. “Prosecutors showed that even if Gupta didn’t receive any cash from these tips, the investments received a benefit by helping Rajaratnam.”

Donald Jacobs, dean emeritus of Northwestern University’s Kellogg School of Management, said he’s not swayed by the jury’s verdict. Jacobs said he can’t reconcile the allegations with the Gupta he has known since the 1980s, who strictly adhered to McKinsey’s client confidentiality code. Jacobs worked with Gupta in helping found the Indian School of Business in 2001.

“The whole history of Rajat Gupta doesn’t support his having done what was charged,” he said, echoing a sentiment expressed by the jury foreman after yesterday’s verdict.

“I wanted to believe the allegations weren’t true,” Richard Lepkowski, 51, said in an interview. “Here was a man who came to this country and was a wonderful example of the American Dream.”

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 Manhattan federal court at pathurtado@bloomberg.net; David Glovin in Manhattan federal court at dglovin@bloomberg.net; and John Helyar in Atlanta at jhelyar@bloomberg.net

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


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