Galleon fraud brings Gupta under intense glare

Galleon fraud brings Gupta under intense glare

Gupta, once one of the world’s most respected businessmen, is not being tried here, nor has he been charged criminally. Yet hardly a day has passed when the jury in Rajaratnam’s trial — the government’s biggest insider case in a generation — does not hear about Gupta, the former head of the consulting firm McKinsey & Co.

Still, Gupta is not mentioned in the government’s indictment of Rajaratnam. US government prosecutors in New York, who have been investigating Gupta’s role in the case for at least three years, have named him a co-conspirator of Rajaratnam’s but have not charged him criminally.

Instead, the prosecutors have built their formal charges against Rajaratnam around five cooperating witnesses who have pleaded guilty to engaging in insider trading conspiracies with him. Legal experts say there are myriad reasons for prosecutors to indict some people suspected of conspiring in a criminal case while not charging others.

There was no indication that Gupta would play any role in Rajaratnam’s case in the months leading up to the trial. But in early March, a week before jury selection, the US Securities & Exchange Commission sent back waves through corporate America when it files a civil administrative proceeding against Gupta. The agency accused him of leaking boardroom discussions to Rajaratnam from both Goldman and Procter & Gamble, where he also served as a director before resigning last month.

“The SEC allegations are totally baseless,” Gupta’s lawyer Gary P Naftalis said at the time. “Gupta’s 40-year record of ethical conduct, integrity and commitment to guarding his clients’ confidences is beyond reproach.” Gupta’s sudden emergence in these cases has stunned the business world. An Indian from Kolkata and a graduate of Harvard Business School, Gupta is the most prominent executive ensnared by the government’s wide-ranging investigation into insider trading at hedge funds.

As Global MD of McKinsey, Gupta, 62, was a trusted advisor to chief executives including Jeffrey R Immelt of General Electric and Henry R Kravis of private equity firm Kohlberg Kravis Roberts. Over the past decade, he grew close to Rajaratnam, a large financial supporter of the Indian School of Business, a highly regarded graduate school that Gupta helped start. Around his retirement from McKinsey in 2007, Gupta went into business with Rajaratnam, founding a private equity firm. Gupta also invested with Rajaratnam.

It was during that period — a nine-month stretch in 2008 — that the government wiretapped Rajaratnam’s cellphone. Thoe recordings helped the government bring charges against 26 people, 20 of whom have pleaded guilty.

Weak evidence

Prosecutors appear to have weaker evidence against Gupta that against some of the other people linked to Rajaratnam. For instance, two co-operating witnesses — Anil Kumar and Rajiv Goel — are on multiple wiretaps swapping tips with Rajaratnam. In Gupta’s case, the prosecutors played only one wiretap on which Gupta divulged Goldman boardroom discussions to Rajaratnam. On a July 2008 call, Gupta told Rajaratnam that the bank’s board was contemplating a purchase of Wachovia or American International Group. Prosecutors did not present evidence, however, that Rajaratnam had traded on that trip. Certain rules could also prevent prosecutors from using two of the most indiscriminating wiretaps played during the trial against Gupta, legal expert say.

In one call, Rajaratnam tells a colleague, “I heard from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share.” In the other, Rajaratnam says to his trader, “I got a call saying something good is going to happen to Goldman.”

Because those conversations were between Rajaratnam and his employees, the judge could declare them inadmissible hearsay evidence, meaning it is too indirect and speculative to be used against Gupta.

But prosecutors could try to use the conversations against Gupta under what is known as co-conspirator exception to the hearsay rule. The theory is that Rajaratnam’s statements about Goldman were made in furtherance of the suspected conspiracy between Rajaratnam and Gupta. In the civil case, the SEC has a lower burden of proof than prosecutors do in a criminal action. An SEC administrative case is also not subject to hearsay rules.

In an unusual twist, Gupta sued the SEC last month, contending that an administrative proceeding had unfairly barred him from a jury trial in US court. Gupta would have more protections there than he does in an administrative proceeding, including the right to review SEC’s evidence. A judge has not yet ruled on the issue. If the SEC prevails, a judge could impose financial penalties on Gupta and bar him from serving as an officer or dirctor of a public company.