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Rajat Gupta trial Day 5: Ex-Galleon trader testifies on P&G tips

The US government tried to establish that the now defunct Galleon Hedge Fund LLP had bought and sold Procter & Gamble Co shares in 2008 and 2009, based on confidential information given to the fund by Rajat Gupta, who served on the board of the consumer products giant.

Betwa Sharma | May 26, 2012 | Updated 11:32 IST

On Day 5, the US government tried to establish that the now defunct Galleon Hedge Fund LLP had bought and sold Procter & Gamble Co shares in 2008 and 2009, based on confidential information given to the fund by Rajat Gupta , who served on the board of the consumer products giant.

Gupta, former global head of McKinsey & Co, has also been accused of passing information discussed in the boardroom of Goldman Sachs Group Inc to Raj Rajaratnam, co-founder of Galleon.

FULL COVERAGE:Rajat Gupta trial

Gupta allegedly told Rajaratnam that P&G shares were going to lose value in the first quarter of 2009. This tip, according to the prosecution, led Galleon to sell thousands of P&G shares.

Rajaratnam was convicted of insider trading in May 2011 and sentenced in October to 11 years in prison - the longest term ever for such a crime.

The prosecution on Friday called as a witness Michael Cardillo, a former trader at Galleon, who has already pleaded guilty to insider trading. Cardillo told the 12-member jury that he was cooperating with the government's investigation for the past two years in exchange for leniency in his sentencing.

Highlights of trial: Day 1 | Day 2 | Day 3 | Day 4

Cardillo admitted to selling P&G shares in January 2009 on the instructions of Ragakanthan Rajaratnam ("RK"), Rajaratnam's brother, who also worked at Galleon. RK had learned that P&G's organic growth was going to be less than expected. "He was hearing it from Raj's guy in the P&G board," said Cardillo. "I remember making a lot of money."
The "guy," according to the prosecution, was Gupta. Cardillo also testified to buying 17,800 shares of The JM Smucker's Co on June 3, 2008, just before the company announced that it was going to acquire P&G's Folgers Coffee brand. The former Galleon trader said that this was the "first time" he had purchased Smucker's stock.
The US government has accused Gupta of telling Rajaratnam about the acquisition before the deal went public. On Thursday, the fourth day of the hearings, the prosecution called as a witness, Mark Belgya, Chief Financial Officer of JM Smucker's, who confirmed that the transaction was kept secret.

Belgya, however, also told the jury that some details of the $3.3 billion acquisition were leaked to the media before the public announcement. Gupta's legal team tried to establish that this leak could have come from any of the employees of the banks and lawyers who were participating in the deal.

Witness says Goldman's discussion "confidential"
On Thursday, William George, a Goldman Sachs director, told a jury that discussions about acquiring an insurance company, which the investment bank was considering in 2008, were confidential.

The prosecution is connecting George's testimony with a conversation between Gupta and Sri Lankan-born Raj Rajaratnam on July 29, 2008, which was secretly being recorded by the US Federal Bureau of Investigation.

The wiretap has Gupta responding 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 (AIG).  

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."

Gupta later in the conversation also says, "A, AIG, was definitely on, in, in in, the discussion."

After a great deal of debate between the prosecution and Gupta's counsel, Judge Rakoff did not allow the prosecution to ask George his opinion on whether Gupta breached his duty as a director on the July phone call.

Gupta's legal team has argued that his motive on that July call was to assure an important customer like Rajaratnam that Goldman Sachs was in a good financial position. In the call, Rajaratnam says that he wants to check up on rumours ahead of his meeting with Goldman Sachs President Gary Cohn. They have also argued that Goldman Sachs had already discussed the possibility of acquiring a commercial bank with analysts.

More sidebars than testimony
The lawyers on both sides are fighting for every inch of ground to convince the jury of their case. Gupta's counsel has argued that the prosecution's case against him is based entirely on circumstantial evidence. This week, his lawyer Gary Naftalis raised several objections to the questions posed by the government to their witnesses. He objects to the testimony being presented as hearsay or irrelevant.

After presiding of a squabbling-filled afternoon, Judge Jed Rakoff described the Friday's session as "two minutes of actual testimony and two hours of sidebar".

The legal proceedings broke for the long Memorial Day weekend in the US. Next week, the government will present more witnesses including Anil Kumar, a former senior partner at McKinsey.  Kumar, who co-founded the Indian School of Business with Gupta, has pleaded guilty to insider trading and also testified against Rajaratnam.

In their July 2008 conversation, Gupta describes Kumar as "unsettled" and Rajaratnam says he seems "unhappy".  "Because, you know I'm getting a feeling that he's trying to, just do a mini, you know, be a mini Rajat, right?" "Yes, yes," responds Gupta.

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