Bail set at $10M for ex-Goldman director in securities fraud
NEW YORK -- Washington's broadest-ever fight against insider trading has snared its most prominent business executive: Rajat Gupta, a former Goldman Sachs director and former head of global consulting giant McKinsey & Co.
Gupta surrendered to FBI agents and pleaded not guilty Wednesday to one count of conspiracy and five counts of securities fraud in Manhattan federal court. He was freed on $10 million bail, and conditions call for the 62-year old Westport, Conn., resident to remain in the continental United States. A trial date of April 9 was set.
The charges stem from Gupta's long personal and business relationship with Raj Rajaratnam, the former Galleon Management hedge fund founder who was sentenced to 11 years in prison Oct. 13 after conviction as the central figure in a sprawling, multi-million dollar insider trading scheme.
If convicted, Gupta could face a maximum 105-year prison term, and millions of dollars in fines.
Defense attorney Gary Naftalis called the allegations "totally baseless," saying they were based on entirely circumstantial evidence. He predicted Gupta would be "completely exonerated."
But Manhattan U.S. Attorney Preet Bharara, whose office has led the government's insider trading investigation, says Gupta broke the trust of the companies and investors he served by becoming the "illegal eyes and ears" in the boardroom that helped Rajaratnam reap millions in stolen profits.
"We allege that the corruption we have seen in the trading cubicles, investment firms, law firms, expert consulting firms, medical labs and corporate suites also insinuated itself into the boardrooms of elite companies," Bharara said.
As proof, the 21-page indictment — paired with a similar civil lawsuit filed Wednesday by the Securities and Exchange Commission — outlined a series of incidents in which Gupta allegedly tipped off Rajaratnam to secret information.
On Oct. 23, 2008, for instance, the criminal indictment charges that Gupta participated by phone in a Goldman Sachs board meeting that involved the investment bank's secret decision to accept a $5 billion investment from Berkshire Hathaway, the holding company run by famed investor Warren Buffett.
About 16 seconds after Gupta disconnected from the meeting at 3:54 p.m., his assistant allegedly called Rajaratnam and put Gupta on the line.
At 3:58 p.m., Rajaratnam bought 217,000 shares of Goldman Sachs stock. The share price rose more than $3 the following morning on news of the Buffett investment. The indictment says Rajaratnam sold the shares, generating approximately $840,000 in illegal profits.
The indictment similarly alleges that Gupta, while serving as a Procter & Gamble board member in 2009, secretly alerted Rajaratnam that the firm's upcoming earnings report would show that sales fell below the level previously given to financial analysts as guidance.
Once again, Rajaratnam profited, by selling short approximately 180,000 shares of Procter & Gamble stock, the indictment says. A short sale is a bet that the stock price will fall.
Denying that Gupta leaked inside information, Naftalis noted his client was not accused of illegal stock trading or sharing any profits with Rajaratnam "as part of any quid pro quo."
He also cited innocent reasons for any communications between Gupta and Rajaratnam, including Gupta's efforts to get information about his $10 million investment in a Rajaratnam-managed fund.
"Mr. Gupta lost his entire investment in the fund at the time of the events in question, negating any motive to deviate from a lifetime of probity and distinguished service," Naftalis said.
In all, 56 people have been charged in insider trading cases since Bharara took over shortly before Rajaratanam's October 2009 arrest. Of those, 51 have been convicted and 21 sentenced to prison terms ranging from no prison time to 11 years.
FBI Assistant Director-in-Charge Janice Fedarcyk said Gupta's arrest was the latest to occur in an initiative launched by the FBI in 2007 against hedge fund cheats.
"The conduct alleged is not an inadvertent slip of the tongue by Mr. Gupta," she said.
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