Ex-Goldman Director Gupta Faces Charges

By Patricia Hurtado - Oct 26, 2011 11:01 AM GMT+0700

Rajat Gupta, the former Goldman Sachs Group Inc. director once accused of feeding inside information Galleon Group LLC’s Raj Rajaratnam, will face federal charges, a person familiar with the matter said, making him the highest-ranking executive to be named in the probe.

Gupta, 62, will surrender to FBI agents in New York today, the person said. After a four-year securities-fraud investigation of insider trading at hedge funds, Gupta will be charged in a case prosecuted by Manhattan U.S. Attorney Preet Bharara, according to the person, who declined to be identified because the matter isn’t public.

“Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless,” his lawyer, Gary Naftalis, said in an e-mailed statement after the charges were reported yesterday. “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 case against Gupta comes seven months after federal prosecutors in court first called him and Rajaratnam’s brother Rengan “unindicted co-conspirators.”

Gupta isn’t being charged based on evidence provided by Raj Rajaratnam, said the person familiar with the matter. The charges against him are based on evidence uncovered by the Federal Bureau of Investigation’s investigation, the person said.

Ellen Davis, a spokeswoman for Bharara, declined to comment. Jim Margolin, an FBI spokesman, didn’t immediately return a call seeking comment yesterday.

Central Figure

Rajaratnam, the central figure in what prosecutors have called the largest crackdown on insider trading at hedge funds in U.S. history, was arrested in October 2009. He was convicted of conspiracy and securities fraud by a Manhattan federal jury in May and sentenced to 11 years in prison on Oct. 13. More than 50 people have been charged in the probe.

In an interview in Newsweek this month, Rajaratnam said prosecutors pushed him to plead guilty to one criminal charge and inform against Gupta. Rajaratnam understood that he would be sentenced to as little as five years in prison, according to the Newsweek article.

Rajaratnam told Newsweek that he refused to inform on Gupta or wear a wire to record him for the FBI.

Blankfein’s Testimony

At Rajaratnam’s trial, Goldman Sachs Chief Executive Officer Lloyd Blankfein testified that Gupta violated the New York-based bank’s policies by allegedly telling the defendant about the company’s results and plans.

The U.S. Securities and Exchange Commission in March filed an administrative action contending Gupta passed inside information to Rajaratnam about Goldman Sachs and Procter & Gamble Co. That action was dropped in August after Gupta, who denied the allegations, sued the SEC for violating his rights by not bringing its case in federal district court.

In the administrative proceeding, the SEC had claimed Gupta tipped Rajaratnam, 54, about Berkshire Hathaway Inc.’s $5 billion investment in New York-based Goldman Sachs. The agency also said Gupta told Rajaratnam about quarterly earnings of Goldman Sachs and Cincinnati-based P&G, the world’s largest consumer products company.

Gupta left the Goldman Sachs board in 2010 and stepped down from P&G’s board in March.

Aside from serving on those two boards, Gupta from 1994 to 2003 ran McKinsey & Co., the global consulting firm. He remained a senior partner there until 2007.

Northwestern, Harvard

He has been on advisory boards at Northwestern University’s Kellogg School of Management, University of Pennsylvania’s Wharton School, Massachusetts Institute of Technology’s Sloan School of Management and Harvard Business School, his alma mater. In 2001, Kolkata-born Gupta founded the Indian School of Business in Hyderabad.

As of May 2010, Rajaratnam had a stake in a fund managed by New Silk Route NSR Partners LLC, co-founded by Gupta. At a January 2007 benefit honoring Rajaratnam called “A Night for India,” Gupta was the honorary chairman along with conductor Zubin Mehta, according to a program.

Blankfein said Gupta and other board members were told in October 2008 that Goldman was facing the possibility of a quarterly loss for the first time since it went public in 1999. Prosecutors said Gupta tipped Rajaratnam, who sold Galleon’s position in Goldman, warding off millions of dollars in losses.

Gupta Recording

At the Galleon co-founder’s trial, prosecutors also played a secret recording of a July 2008 phone call in which Gupta can be heard telling Rajaratnam that the Goldman Sachs board had discussed acquiring a commercial bank or an insurance company.

The SEC brought its action against Gupta in Washington on March 1. He sued in Manhattan federal court on March 18, claiming the SEC violated his rights by pursuing an administrative action rather than a lawsuit. Gupta would have more procedural protections in district court, including the right to a jury trial and the use of federal rules of evidence.

U.S. District Judge Jed Rakoff ruled in July that Gupta could argue that the agency intentionally singled him out for unfair treatment in retaliation for claiming his innocence. The judge said that all the SEC’s other lawsuits related to the Galleon insider-trading case were in federal court.

The agency dropped its administrative proceeding in August and agreed that it would bring any subsequent action against Gupta in district court. Gupta agreed to withdraw his lawsuit against the SEC.

The imminent charges against Gupta were reported earlier by the New York Times.

To contact the reporters on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.