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Ex-Goldman Director Expected to Surrender on Insider-Trading Charges

Category: Frauds & Scandals


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Ex-Goldman Director Expected to Surrender on Insider-Trading Charges

Wednesday, October 26, 2011

 

For decades, Rajat K. Gupta was the face of business success, leading global consulting giant McKinsey & Co. and serving on the boards of several prestigious American companies, including Goldman Sachs Group Inc.
 

Now, prosecutors say, Mr. Gupta is the face of another side of the business world: insider trading.

 

The 62-year-old Mr. Gupta is expected to surrender to the Federal Bureau of Investigation Wednesday on criminal charges of leaking inside information to Galleon Group hedge fund founder Raj Rajaratnam, according to people familiar with the matter. Mr. Rajaratnam this month was sentenced to 11 years in prison, the longest-ever for insider trading.

 

If prosecutors are able to prove their case against him, Mr. Gupta would be by far the highest-ranking corporate executive to fall in an unprecedented push by the government to root out insider trading, which prosecutors have said they believe is rampant. Since late 2009, federal prosecutors in Manhattan have charged 55 individuals with insider trading, resulting in 51 convictions or guilty pleas.

 

Gary Naftalis, Mr. Gupta's lawyer, said in a statement that he is innocent and "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," Mr. Naftalis said, adding that he would fight any charges. A representative for the Manhattan U.S. Attorney's office declined to comment.

 

Specific details of the expected charges, which were sealed, couldn't immediately be determined. But prosecutors and the Securities and Exchange Commission have said in filings and in court that Mr. Gupta gave Mr. Rajaratnam details he had learned at Goldman board meetings in 2008 about a $5 billion investment in the bank by Warren Buffett's Berkshire Hathaway Inc. and about Goldman's first ever quarterly loss as a public company.

 

According to evidence presented at Mr. Rajaratnam's trial, Mr. Gupta called him within minutes of learning confidential details at Goldman board meetings. Mr. Gupta also allegedly leaked information about the corporate earnings of Procter & Gamble Co., where he also served on the board, according to a complaint filed by regulators.

 

The expected charges against Mr. Gupta are likely to reveal that the government believes that insider trading doesn't always involve swapping information for money. Mr. Gupta isn't alleged to have received any money or direct benefits from Mr. Rajaratnam in exchange for corporate secrets, a potential weakness in the prosecutors' case Mr. Gupta's lawyer is likely to seize on.

 

The government is expected, however, to argue that the relationship between the two men, who socialized and invested together, is emblematic of the back-scratching that pervades the corporate world and can sometimes veer into insider trading.

 

Mr. Naftalis said his client "lost his entire investment" with Mr. Rajaratnam "at the time of the events in question, negating any motive to deviate from a lifetime of probity and distinguished service."

 

Mr. Rajaratnam was convicted after a trial in May of securities fraud and conspiracy.

 

As the first non-Westerner to lead McKinsey, a preeminent global consulting firm, the soft-spoken Mr. Gupta inspired younger generations both in his native India and in the U.S. Later, carving out a new role in philanthropy, he drew on his vast Rolodex of corporate chieftains, who didn't hesitate to jump when he called seeking their support.

 

McKinsey hasn't been accused of any wrongdoing in the insider-trading matter. McKinsey couldn't immediately be reached for comment.

 

Goldman declined to comment. A spokesman for P&G declined to comment.

 

Mr. Gupta grew up in Kolkata, India, studied at the Indian Institute of Technology in Delhi, and moved to the U.S. in 1971 to attend Harvard Business School. Two years later, he joined the New York office of McKinsey, a largely white, clubby consulting firm founded 50 years earlier that had become a management consultant of choice for Fortune 500 companies.

 

By 1994, at 45, Mr. Gupta had risen to the top of the company, which then had annual revenues of $1.3 billion. The promotion elevated him to the top, with only one or two peers, of Indian business leaders in the U.S. At the time, though, Mr. Gupta sounded a distinctly humble and anti-corporate note, telling the Chicago Tribune that his biggest role models were Mother Teresa and Swami Vivekananda, a 19th-century Hindu reformer. He also rejected McKinsey's reputation as elitist.

 

"If anything, it's a meritocracy," Mr. Gupta said. "In fact, I think it's a great tribute to the firm that it actually elected someone like me."

 

Mr. Gupta was well-liked at McKinsey. Anil Kumar, a McKinsey consultant who pleaded guilty himself to giving Mr. Rajaratnam inside information, privately described Mr. Gupta as having a "spiritual quality and a Zen-like calm," people close to the situation say.

 

Mr. Gupta was known on occasion to read Indian poetry at partners' meetings, according to news accounts.

 

McKinsey expanded dramatically under his watch, which lasted until 2003. Both before and after he led the company, Mr. Gupta increased his international prominence as an advocate for business and development around the world.

 

He helped his alma mater in India start a business school, with the help of corporate executives of major companies who donated millions at his request, including Goldman's former CEO Hank Paulson. He served in advisory roles at Harvard and the Kellogg business school in Chicago, where he once lived while leading McKinsey. Mr. Gupta worked with former President Bill Clinton in leadership roles at the American India Foundation, and as chairman of the Global Fund for HIV/AIDS.

 

In the corporate world, Mr. Gupta joined the boards of AMR Corp., the parent company of American Airlines, and Goldman in 2006. Goldman chief Lloyd Blankfein said he considered Mr. Gupta a "peer," and wanted him on the Goldman board because he believed he and Mr. Gupta were similarly situated at the top of the heap in the business world.

 

Neither Goldman nor P&G has been accused of any wrongdoing in the insider-trading matter.

 

Mr. Gupta also became close with Mr. Rajaratnam, a Sri Lankan born billionaire who had become a rising star among Wall Street money managers. Mr. Gupta often visited Mr. Rajaratnam's offices; he invested in one of Mr. Rajaratnam's funds. Mr. Rajaratnam invested in New Silk Route, an India-focused private equity group Mr. Gupta launched. But troubles related to that relationship began to surface in 2010.

 

Mr. Gupta's role in the Galleon investigation was first reported by The Wall Street Journal that April, when prosecutors were examining whether Mr. Gupta had given inside information to Galleon.

 

Mr. Gupta's name emerged in a government letter, filed in a New York federal court as part of the Rajaratnam case at the time, listing companies whose trading by Mr. Rajaratnam the U.S. was investigating. The March 22, 2010, letter said the government was scrutinizing trades by Mr. Rajaratnam and others from June 2008 to October 2008.

 

In subsequent days, the Journal reported that Mr. Gupta allegedly tipped off Mr. Rajaratnam about the $5 billion investment by Mr. Buffett's Berkshire Hathaway in Goldman.

 

This March, securities regulators alleged in a civil administrative proceeding that Mr. Gupta tipped off Mr. Rajaratnam about the Buffett investment, which was a turning point in the financial crisis for Goldman and other financial firms. Regulators also alleged that Mr. Gupta tipped Mr. Rajaratnam about earnings of Goldman and P&G in 2008.

 

Mr. Gupta denied the SEC allegations.

 

The action preceded Mr. Rajaratnam's trial by a matter of days, but was later withdrawn by the regulator. It is unclear whether the SEC will refile its case. The SEC has declined to comment.

 

During Mr. Rajaratnam's trial, the hedge fund manager was heard in a recorded conversation on Oct. 24, 2008, confiding to a colleague in Singapore that he was tipped that Goldman was on track to potentially report a quarterly loss. The conversation came a day after members of Goldman's board, including Mr. Gupta, were told that the investment bank was positioned to report its first quarterly loss since it became a public company.

 

"I heard yesterday from somebody who's on the board of Goldman Sachs that they are going to lose $2 per share," Mr. Rajaratnam said on the tape. "The Street has them making $2.50."

 

Mr. Gupta was heard in one tape at the trial telling Mr. Rajaratnam that the Goldman board had discussed buying a commercial bank, a conversation that Mr. Blankfein testified was confidential.

 

But one possible weakness in prosecutors' case according to securities lawyers is that Mr. Gupta wasn't directly heard on tape passing the tips about Goldman or P&G based on which Galleon executed trades. Mr. Naftalis could argue that Mr. Rajaratnam's statement that he received a tip from a Goldman director is hearsay.

 

In other tapes played at the trial, Mr. Gupta's associates portrayed him as unduly concerned about money. In one conversation, Mr. Kumar told Mr. Rajaratnam that Mr. Gupta had talked about quitting the Goldman board because it didn't pay that much, and that he was exploring a job with wealthy investor Henry Kravis.

 

"That's a billionaire circle, right?" Mr. Rajaratnam responded. "Goldman is like the hundreds-of-millionaires circle."

 

"I think he sees an opportunity to make $100 million over the next five years, or 10 years, without doing a lot of work," Mr. Rajaratnam said.

 

Source: The Wall Street Journal / Write to Michael Rothfeld at michael.rothfeld@wsj.com and Susan Pulliam at susan.pulliam@wsj.com



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