Bloomberg News

Rajat Gupta Sues New Silk Route Chief Saxena

March 22, 2013

Former Goldman Sachs Group Inc. (GS:US) Director Rajat Gupta, convicted last year on insider-trading charges, filed a breach-of-contract lawsuit against Parag Saxena, chief executive officer of New Silk Route LLC.

Gupta agreed in February 2012 to step down from New Silk Route NSR’s board of directors in response to Saxena’s request that he distance himself from the the company while securities charges were pending against him, according to his complaint yesterday in federal court in Manhattan.

Gupta, 64, said he transferred his voting shares in NSR, an investment firm he co-founded, to Saxena, his partner in the venture. Gupta claims Saxena breached the agreement by improperly removing Gupta’s designee to the board and refusing to permit NSR to acquire directors and officers’ insurance.

“Saxena is seeking to thwart Gupta’s contractual right to designate one member” of the company’s board, Gupta said in the complaint.

Gupta sat on the board of New York-based Goldman Sachs and Cincinnati-based Procter & Gamble Co. (PG:US) and ran the consulting firm McKinsey & Co. from 1994 to 2003. He was convicted in June of passing insider tips to Galleon Group LLC founder Raj Rajaratnam in a sprawling conspiracy that ran from 2007 to January 2009. Gupta, sentenced to two years in prison, is free pending his appeal.

Private Equity

New Silk Route, a $1.4 billion private-equity firm that focuses on South Asia and the Middle East, said in a statement that the lawsuit is without merit.

“Since Mr. Gupta’s conviction of conspiracy and securities fraud in June of 2012, the firm has been actively working to sever all ties with him including offering to buy his remaining investment stake,” the firm said. “New Silk Route’s team of over 25 professionals continues to focus on the business and remains excited about opportunities in Asia and India and realizing value from its existing portfolio of investments for its investors and stakeholders.”

Yesterday, Rajaratnam’s younger brother Rengan was indicted by a federal grand jury for allegedly taking part in an insider- trading scheme tied to Galleon.

Rengan Rajaratnam, 42, is accused of conspiring with his brother to trade on material nonpublic information about Clearwire Corp. (CLWR:US) and Advanced Micro Devices Inc. (AMD:US) in 2008, Manhattan U.S. Attorney Preet Bharara said in a statement.

Trial, Wiretaps

Prosecutors alleged that Rengan, while working as a fund manager at Galleon, made almost $1.2 million from trades that occurred on March 24 and March 25 of that year based on tips provided by his brother and his Rolodex of insiders. He was implicated during his brother’s trial, where wiretapped conversations between the two men were played in court.

The U.S. Securities and Exchange Commission also filed a parallel insider-trading suit against Rengan Rajaratnam, describing a conspiracy that the agency said began in 2006 and lasted until 2008. Rajaratnam reaped more than $3 million in illicit gains for Galleon and Sedna Capital Management LLC, the SEC alleged.

David Tobin, an attorney for Rengan Rajaratnam, didn’t immediately return a call yesterday seeking comment on the charges.

Rajaratnam isn’t in U.S. custody, Bharara said.

Gupta said that he and Saxena agreed that Anil Sood, the manager of NSR-H, would assume Gupta’s place on the board.

Saxena informed Gupta on Dec. 26 that he intended to remove Sood without obtaining support of the holders of the firm’s voting majority, Gupta said in the complaint.

D&O Insurance

Gupta also alleged that Saxena moved to thwart his proposal that Sood be replaced by Herbert Henzler (HOT), a former chairman of McKinsey & Co. (Europe), by refusing to buy directors’ and officers’ insurance.

Henzler informed Gupta that in becoming a director of New Silk Route, he would “not accept any legal liabilities” until directors and officers’ insurance for “past and current activities/legal suits has been made out,” Gupta said.

Saxena’s lawyers sent a letter to Gupta on March 14 stating that Henzler’s request for the insurance constituted a refusal to serve as director.

“By refusing to exercise his power as a shareholder of the company to cause director and officer insurance to be obtained and thereby trying to thwart the appointment or election of Henzler, Saxena breached the covenant of good faith and fair dealing inherent in the voting agreement,” Gupta said.

Sood hasn’t resigned from the board, he said.

Declaratory Judgment

The suit includes claims of breach of contract and asks for a declaratory judgment that the voting agreement is “valid and binding” under New York law. Gupta also seeks court orders requiring Saxena to place Gupta’s designee on New Silk Route’s board.

New Silk Route, based in New York, has offices in Mumbai, Dubai and Bangalore, India, according to its website. Gupta, who was chairman, led the firm with Saxena and senior adviser Victor Menezes.

Gupta took a voluntary leave of absence from the firm in March 2011 to “avoid any distraction and ensure New Silk Route’s continued focus on the execution of its investment strategy,” the firm said in a statement.

Saxena said at the time that the matters involving Gupta had nothing to do with New Silk Route.

Trial Testimony

Anil Kumar, a former McKinsey & Co. partner and former classmate of Rajaratnam’s, testified last year at Gupta’s trial that his former mentor approached him in 2006 saying he wanted to start an investment fund after his scheduled retirement from McKinsey in 2007.

Gupta “wanted to create the best asset management company in Asia, as good as the ones in America, but this would be focused on India,” Kumar said. “He wanted it to be widely based.”

Gupta and Rajaratnam planned to have one unit dedicated to making private-equity investments and another that would operate as a hedge fund focusing on South Asia, Kumar said. The fund that Gupta and Rajaratnam opened as Taj Capital was later re- named New Silk Route LLC, Kumar testified.

Kumar pleaded guilty to insider trading with Rajaratnam, who is serving an 11-year prison sentence after being convicted at trial.

The case is Gupta v. Saxena, 13-cv-01891, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Patricia Hurtado in Manhattan federal court at phurtado@bloomberg.net.

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


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