Rajat Gupta trial Day 3: The phone number that busted insider trading on Wall Street

Rajat Gupta trial Day 3: The phone number that busted insider trading on Wall Street

On the third day of the trial, the US government presented phone records that showed that two calls had been exchanged between Rajaratnam and Gupta while the 917-907-2350 number was being tapped from March 10, 2008 to December 5, 2008.

Former global head of McKinsey & Co. Rajat Gupta Former global head of McKinsey & Co. Rajat Gupta
917-907-2350 is the number that led to busting one of the biggest insider trading scams in US history. The cell phone number belonged to billionaire hedge fund manager Raj Rajaratnam, who made profits or avoided losses of over $70 million by trading on confidential information provided by different sources.

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Rajaratnam, co-founder of the Galleon Group LLP hedge fund, was convicted of insider trading last year in May and sentenced in October to 11 years in prison - the longest term ever for this crime. While exchanging secrets, Rajaratnam and his accomplices didn't know that the US Federal Bureau of Investigation was tapping his cell phone in 2008.

More than 50 people have pleaded guilty or been convicted for insider trading since 2009. On trial now is the former global head of McKinsey & Co. Rajat Gupta, who is the highest-level executive to be caught in the US government's ongoing investigation to clean up Wall Street. Gupta, 63, has been accused of passing confidential information to Rajaratnam about Goldman Sachs Group Inc and Procter & Gamble Co while he was serving as a director for both.

On the third day of the trial, the US government presented phone records that showed that two calls had been exchanged between Rajaratnam and Gupta while the 917-907-2350 number was being tapped from March 10, 2008 to December 5, 2008.

The US government also called as a witness Special Agent Thomas Zukauskas from the FBI, who testified about recognising Gupta's voice on the wiretaps. "Yes," he replied when Assistant US Attorney Reed Brodsky asked him if he was familiar with Gupta's voice.

Zukauskas, who participated in the Rajaratnam investigation for three years, described how the wiretaps were carried out over approximately eight months. The phone was tapped from 6 am to 12 pm, which resulted in 2,191 calls. Out of these, only 285 were classified as pertinent to the investigation.

During cross-examination, defence lawyer David Frankel tried to establish that his client's two calls represented only a tiny fraction of so many recorded calls. One argument put forth by Gupta's lawyers is that the two men were not on good terms.

In his direct examination by Brodsky, Zukauskas explained that the FBI did not have the resources or manpower to monitor Rajaratnam's cell phone around the clock. The FBI collected 71 hours, 31 minutes and 27 seconds of audio. In fact, only one out of Rajaratnam's several office and home lines was tapped by the FBI.

First wiretap heard
The day's legal proceedings, which wrap up at 5 pm, were almost over before the prosecution could play its first tape. Defence lawyers have previously argued that these wiretaps should not be played because they don't have Gupta's voice. Judge Jed Rakoff has allowed the jury to hear them but these tapes can be admitted as evidence only if the prosecution can prove a conspiracy. The US government lawyers are taking a risk because the failure to prove a conspiracy could also lead to a mistrial.

The wiretap played on Thursday, however, is the only one with Gupta's voice on it. Gupta responds to Rajaratnam's query about a rumour that Goldman Sachs is considering buying commercial bank Wachovia (now acquired by Wells Fargo & Co) or insurance company American International Group, Inc.

Defence lawyers have argued that this information was already public. This call is also not a basis for the US government's charges of securities fraud and conspiracy levied against Gupta. When allowing it, Judge Rakoff explained that this conversation was the only way for the jury to hear how the two men communicated with each other.

At around 4:30 pm on Wednesday, the prosecution played the July 28, 2008, call made at 5:39 pm.

Rajaratnam says, "And there's a rumour, that Goldman might look to buy a commercial bank." He also says, "Have you heard anything along that line."

Gupta says, "Yeah, this was a big discussion at the board meeting."

The 12 jury members were given thick blue folders that contained the transcript of the approximately 24-minute call. The conversation also provided an insight into the lives of the two men who discussed plans worth billions of dollars as well as their colleagues.

As the tape played, Gupta did not betray any emotion but steadily gazed at his blue folder and turned the pages of the transcript on cue.

Buffett's "top secret" deal
In the earlier part of the day, the prosecution called as a witness Byron Trott, former vice chairman of investment banking at Goldman Sachs, to testify on the 2008 deal, which involved Warren Buffett's Berkshire Hathaway Inc investing $5 billion into Goldman Sachs.

Trott described how the deal, which Buffett made in approximately 20 minutes on September 23, 2008, was initially only known to the top brass at Goldman Sachs, and then shared with the board in the afternoon. Trott told the jury that it was a deal that saved Goldman Sachs during the peak of the financial crisis, which saw the collapse of Lehman Brothers Holding Inc. Buffett also made a lot of money on the deal, according to Trott. "One of the best," he said, responding to Frankel's question if Buffett was a "shrewd investor".

Gupta allegedly called Rajaratnam with Buffett deal information immediately after the boardroom meeting concluded on September 23, 2008.  The US government is trying to prove that Rajaratnam's decision to buy shares, just minutes before the market closed that day, was based on Gupta's call. The prosecution has a record of the call being placed from Gupta to Rajaratnam's phone but it does not have a wiretap of the actual conversation.

The prosecution, however, has a wiretap of a conversation from the day after the Goldman Sachs board meeting in which Rajaratnam tells Galleon trader Ian Horowitz, "I got a call at 3:58…saying something good might happen to Goldman."

During cross examination, defence lawyer Frankel tried to suggest that Rajaratnam's decision to buy Goldman Sachs shares could have been based on the potential $10 billion that it would receive under the US government's TARP (Troubled Asset Recovery Program) program to bail out the banks. "The planning was underway but the offering was not," replied Trott, suggesting that TARP wasn't a likely basis for Rajaratnam's move.

Squabbling lawyers
The trial has been marked by intense wrangling between the prosecution and the defence. Both sides continuously raise objections when witnesses are being questioned. They also complain about the kind of evidence being admitted by their opponent. Several times during the trial on Wednesday, lawyers interrupted the proceedings and were asked to approach the bench to consult the judge.

The defence has already raised an objection to the prosecution's next witness, Bill George, a Goldman Sachs board member and Harvard Business School professor.

The prosecution wants him to testify about the role of a director and whether Gupta breached his duty on the July 29, 2008, call.

Before the trial resumes on Thursday, Judge Rakoff will hear objections of the defence lawyers. The judge, who ended the day on a light note, joked that since NYC is a great place, he wouldn't want to deprive the witness of an opportunity to visit.

Published on: May 24, 2012, 10:55 AM IST
Posted by: Surajit Dasgupta, May 24, 2012, 10:55 AM IST