Insider trading: Corporate icon Rajat Gupta's trial begins on May 21

Insider trading: Corporate icon Rajat Gupta's trial begins on May 21

Corporate icon Rajat Gupta could get up to 105 years in jail if convicted of conspiracy and securities fraud.The trial by jury begins in New York on May 21.

Corporate icon Rajat Gupta Corporate icon Rajat Gupta
The mood was tense one morning early in April at Rajat Gupta's home in Westport, Connecticut, a wealthy suburb of New York City. He and his wife Anita were watching over their grandchildren-half-Indian, half-Nigerian twin girls, nearly two-and-a-half years old-and one of them, Meera, could not be found. It turned out to be a minor crisis, Gupta told his friend Atul Kanagat with a laugh later that day; she was located in the exercise room of the house.

Rajat Gupta, 63, is used to more substantive problems. The former managing director of global consulting firm McKinsey & Co sat on the board of blue chip companies such as Goldman Sachs and Procter & Gamble (P&G) as well as institutions like the Indian School of Business. He was the first Indian to head a major global firm and hobnobbed with Bill Clinton, Bill Gates and Kofi Annan. He lived on a 24/7 treadmill-jetting around the world, meeting government leaders and corporate executives, yet squeezing in time to mentor youngsters or to catch up with friends and return every call.

The high-powered treadmill stopped abruptly about two years ago, when his name surfaced in connection with the alleged insider trading by New York hedge fund billionaire Raj Rajaratnam. Since then, Gupta has had to step down from positions on all boards.

Gupta is preparing for the fight of his life. He has been charged with one count of conspiracy to commit securities fraud and five counts of securities fraud and could face a sentence of up to 105 years in jail and millions of dollars in fines if convicted on all counts. His criminal trial is scheduled to start in a US District Court in New York on May 21. The charges relate to his alleged disclosure of insider information about Goldman Sachs and Procter & Gamble, while serving on the boards of these companies, to Rajaratnam, founder of the Galleon Group hedge fund. Rajaratnam was found guilty of insider trading last year and is now serving an 11-year prison term.

Rajat Gupta trial: The case and defence

The office of the US Attorney for the Southern District of New York, headed by the Indian-American federal prosecutor Preet Bharara, filed a superseding indictment or chargesheet in January, expanding the charges against Gupta.

While releasing the original indictment in October 2011, Bharara stated that Gupta "became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr Gupta's breach of duty." Gupta has denied any wrongdoing.

His attorney Gary Naftalis dismissed the US government's allegations as totally baseless. In a statement, Naftalis said, "The newly added charges-like the ones brought last year-are not based on any direct evidence but rely on supposed circumstantial evidence. The facts in this case demonstrate that Mr Gupta is innocent of all of these charges. He 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."

The trial will be one of the most keenly watched proceedings in corporate history. Gupta is arguably the highest ranking and most celebrated executive to figure in a white-collar criminal trial. Bharara, given his jurisdiction spanning New York City and Wall Street, is one of the most highprofile prosecutors in the US.

Experts believe the government will have a tougher time arguing its case against Gupta than it did against Rajaratnam. "The case against Rajat Gupta will certainly be more difficult for the government primarily because it appears to be based on circumstantial evidence," says Richard Holwell, the federal judge who presided over Rajaratnam's trial and sentenced him after he was convicted. Holwell, who resigned from the judiciary earlier this year and is now a founding partner of the New York law firm Holwell, Shuster and Goldberg, adds, "The wiretap evidence, while it will be harmful to Gupta, is not as significant as it was in the Rajaratnam case."

In the trial against Rajaratnam, wiretapped conversations between the hedge fund manager and his various associates and contacts, including Gupta, were seen as pivotal in convincing the jury of his guilt. While the wiretapped calls were seen as directly implicating Rajaratnam, the evidence against Gupta is not as direct and will be underplayed by his lawyers as "hearsay". For instance, there are wiretaps of Rajaratnam telling third persons about getting information from a source at Goldman Sachs, and also from "someone on the Goldman Sachs board", but he does not name Gupta in these calls.

In March 2012, Gupta's lawyers failed to prevent prosecutors from seeking to replay the taped conversations during his own trial. Judge Jed Rakoff, who will preside over the trial, ruled that the government had obtained the wiretaps legally and with proper authorisation.

However, this ruling does not mean that all the conversations will be accepted as evidence in Gupta's trial; the judge will need to rule on each call.

This month, prosecutors asked the judge to allow three wiretap conversations of Rajaratnam speaking to traders at Galleon. In response, Gupta asked the judge to exclude 26 recordings of Rajaratnam's calls with various persons, as well as the taped call between the two of them, arguing in filings that they don't relate to his case and don't contain any direct evidence.

According to a source familiar with the case, the calls could be a key factor in the trial. The source, who asked not to be identified, said, "If the calls are allowed as evidence, Rajat Gupta will find it difficult and the government will win. If the judge rules the calls are not evidence, it will be a close call for the government." The last pre-trial hearing is scheduled for May 16.

"The details made public so far have completely destroyed Gupta's image," says Vivek Wadhwa, a fellow at Stanford University's Rock Center for Corporate Governance. "He was a legend, an icon of American industry, and the impact has been devastating."

But he doesn't see the image of the Indian-American community or executives taking a hit. "Ten years ago, it would have been very bad. But we've come too far for our image to be tarnished now. It's like saying the Bernie Madoff scandal was bad for the whole Jewish community," says Wadhwa.

But some of Gupta's acquaintances may be distancing themselves. Several prominent Indian-Americans declined to comment for this story. An Indian-American Wall Street veteran, who did not want to be identified, said it was "not acceptable behaviour" to disclose board meeting proceedings, regardless of whether the information was acted upon or not.

Gupta's cfriends are rallying to his defence. Atul Kanagat, who retired from McKinsey as a director and now lives in Summit, New Jersey, admits he was surprised to hear his friend and former boss refer to a discussion from a board meeting. "It's not what you'd expect from someone of his stature."

But, he insists that "Goldman had talked about it to 50-60 investors a couple of days earlier" and that Goldman considering buying Wachovia was "no longer a state secret".

In other words, Gupta was not conveying what the street did not know. Gupta's supporters also question the prosecutors' assertion that Gupta and Rajaratnam were close friends. A few hundred guests were present at the wedding of Gupta's eldest daughter at his Westport residence in June 2008, including family, friends and Gupta's associates and former colleagues. "I can tell you who wasn't invited," says Kanagat.

"Rajaratnam, who is portrayed as his bosom buddy, he wasn't there." Prosecutors have highlighted two other instances when Gupta allegedly conveyed insider information about Goldman Sachs to Rajaratnam-in September 2008, when the company's board agreed to accept a $5 billion (Rs 25,000 crore) investment from Warren Buffett's firm Berkshire Hathaway, and a month later, about the investment bank's quarterly loss of $2 (Rs 100) per share. FBI official Janice Fedarcyk says in these two cases, "a total of 39 seconds elapsed between his learning of crucial Goldman Sachs information and lavishing it on his good friend. That information (captured by FBI) was conveyed by phone so quickly it could be termed instant messaging." Federal investigators have not presented taped conversations of Gupta disclosing information in the above two instances, as these calls were not made to Rajaratnam's cellphone, which was the line being tapped.

However, Naftalis has argued that the prosecutors have "put the wrong man on trial" despite having direct wiretap evidence of another source at Goldman Sachs providing insider information to Rajaratnam. Prosecutors have informed Gupta's lawyers that at least three other Goldman Sachs employees are currently under investigation for providing insider information to Rajaratnam. "There were a host of legitimate reasons for any communication between Mr Gupta and Mr Rajaratnam-not the least of which was Mr Gupta's attempt to obtain information regarding his $10 million (Rs 50 crore) investment in the GB Voyager fund managed by Mr Rajaratnam," says the lawyer, adding that his client lost his entire investment in the fund, which "negates any motive on Mr Gupta's part to deviate from a lifetime of probity, integrity and distinguished service."

That's a sentiment echoed by Gupta's friends, who are convinced the former McKinsey chief has been unfairly dragged into the case involving Rajaratnam due to his high profile and stature. He is currently out on a $10-million (Rs 50 crore) bond, secured by his Westport home, which is his primary residence. He has at least three other properties in the US-an apartment in Manhattan, a vacation home in Florida and another in Colorado, described by friends as a "simple, two-three bedroom farmhouse" surrounded by hundreds of acres of land.

His houses, in fact, are his only weakness, according to Kanagat, who calls Gupta an amateur architect. He is said to have spent considerable time personally designing the house in Florida, expanding his Westport residence and remodelling the Colorado home.

Gupta, ironically, wanted to get into politics after IIT Delhi, according to Chandra Kiran, his classmate and close friend from those years. Kiran, a retired IBM executive, now based in a Toronto suburb, recalls both of them had talked about working for social change in India. They were talked out of it and advised to go abroad for further studies by their economics professor, who is now a well-known politician. That's right, Subramanian Swamy.

Late last year, a few dozen friends of Gupta's got together in New York and decided to create a platform for his supporters and well-wishers. The result was the website Friendsofrajat. com, which went online in January. Among those who have posted messages of support for Gupta on the website are Indian industrialist Mukesh Ambani and Sabeer Bhatia, the founder of Hotmail.

Gupta will need all the help he can get. His legal defence is expected to cost at least $5 million (Rs 25 crore). But the popular mood, in the wake of the 'Occupy Wall Street' protests and the current economic situation, is not exactly sympathetic to high-flying corporate executives. Former judge Holwell notes that "the government usually wins in criminal trials".

The legal courts will decide whether Gupta acted in a criminal manner, but his reputation has already been battered in the court of public opinion.

Courtesy: India Today