March 24, 2023

DealBook: Jurors Begin Deliberations in Insider Trading Trial

Former Goldman Sachs board member Rajat Gupta leaves Manhattan Federal Court in early June.Andrew Kelly/ReutersFormer Goldman Sachs board member Rajat Gupta leaves Manhattan Federal Court in early June.

As head of the elite consulting firm McKinsey Company, Rajat K. Gupta associated with corporate chieftains and heads of state around the world.

Today, his fate rests in the hands of a retired librarian, a freelance beauty consultant and 10 other New Yorkers.

A jury of eight women and four men concluded their first day of deliberations on Thursday without a verdict in the insider trading trial of Mr. Gupta.

The government has charged Mr. Gupta, 63, a former director of Goldman Sachs and Procter Gamble, with leaking boardroom secrets about those two companies to Raj Rajaratnam, the former head of the Galleon Group hedge fund.

Judge Jed S. Rakoff, the judge presiding over the trial in Federal District Court in Manhattan, briskly read his 24-page charging document to the jury on Thursday morning. Mr. Gupta sat at the defense table, flanked by his legal team, reading along. “Your duty is to decide the fact issues in the case and arrive, if you can, at a verdict,” Judge Rakoff said. “You are to perform your final duty in an attitude of complete fairness and impartiality.”

Two of the male jurors wore suits and ties for the first time during the monthlong trial, leading the lawyers and courtroom spectators to dissect the meaning of their wardrobe. A television producer speculated that they wanted to be interviewed in the event they reached a verdict. Another observer suggested that the suits and ties were meant to convey the message that they, and not the lawyers, were now in charge of the case.

Before the jury started their discussions, Judge Rakoff complimented one of the spiffed-up jurors on his bold pink tie. That juror — Juror No. 11, an executive at a nonprofit in Westchester County — was selected by the panel as its foreman.

At noon, an hour before the jury’s lunch break, one of the jurors received permission to go outside to smoke a cigarette.

There are six counts in the government’s indictment. One count is a conspiracy charge, accusing Mr. Gupta of engaging in an insider trading scheme with Mr. Rajaratnam, who last year was convicted by a jury after 12 days of deliberations.

The five other counts are discrete tips that Mr. Gupta is said to have given Mr. Rajaratnam about confidential corporate information — four relating to Goldman and one to P. G. Among them is the government’s accusation that on Sept. 23, 2008, Mr. Gupta told Mr. Rajaratnam about Warren E. Buffett’s $5 billion investment in Goldman ahead of a public announcement.

“You must consider each individual charge separately and evaluate each on the proof or lack of proof that relates to that charge,” Judge Rakoff said.

Beyond the smoking-break request, the jury sent two substantive notes to the judge on Thursday. It asked for copies of the testimony of Michael Cardillo, a former trader at Galleon who has pleaded guilty and is cooperating with prosecutors. Mr. Cardillo testified that in January 2009 he shorted Procter Gamble stock, or bet that its shares would decline, after he heard that “Raj’s guy on the P. G. board” said that the company was going to reduce its sales forecast. The second request asked for clarification on the legal definition of conspiracy.

During summations on Wednesday, Richard Tarlowe, a federal prosecutor, described the evidence against Mr. Gupta as “overwhelming.”

In his closing statement, Gary P. Naftalis, a lawyer for Mr. Gupta, decried the government’s case as speculative and lacking hard, direct evidence. He also appealed to the jury’s humanity, reminding them of the weighty task they had before them.

“In a few weeks, this case will be a dim memory to you,” Mr. Naftalis said to the jurors. “For Rajat Gupta, this is the only case. Whatever you do here will make whatever future he has left.”

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DealBook: A Stunning Fall From Grace for a Star Executive

Rajat K. Gupta, left, and his lawyer, Gary Naftalis, leave federal court on Wednesday after Mr. Gupta was charged with insider trading.John Marshall Mantel for The New York TimesRajat K. Gupta, left, and his lawyer, Gary Naftalis, leave federal court in Manhattan on Wednesday after Mr. Gupta was charged with insider trading.

Last year, Rajat K. Gupta delivered a commencement speech at the Indian School of Business, a graduate school in Hyderabad that he helped start.

“Try to make other people successful,” said Mr. Gupta, one of the world’s most prominent Indian-born business executives. “If you work on making other people successful, they will in turn make you successful beyond your dreams.”

On Wednesday, federal prosecutors said that Mr. Gupta had tried to make other people successful — illegally.

Mr. Gupta, 62, a former director of Goldman Sachs, is accused of leaking corporate secrets about the bank to his friend Raj Rajaratnam, the head of the Galleon Group hedge fund. Mr. Rajaratnam was sentenced to 11 years in prison this month for orchestrating a huge insider trading conspiracy.

Gary P. Naftalis, a lawyer for Mr. Gupta, has denied the government’s accusations.

“Mr. Gupta is innocent of any of these charges,” he said. “He has always acted with honesty and integrity.”

Regardless of the case’s outcome, the charges punctuate a stunning fall from grace for Mr. Gupta, whose personal story reads like a caricature of a Horatio Alger tale.

Orphaned at 18, Mr. Gupta, a native of Kolkata, received an engineering degree from the elite Indian Institute of Technology. He earned a scholarship to Harvard Business School, graduating at the top of his class and securing a prized posting at McKinsey Company, the dispenser of corporate wisdom to many of the Fortune 500.

He rose rapidly at the consulting firm, making his mark running its Scandinavian office, once considered a backwater at the firm. He expanded McKinsey’s presence in that region and became known for his low-key, dignified manner.

Most young consultants use McKinsey as a breeding ground for careers in corporate America. The firm counts among its alumni James P. Gorman, the chief executive of Morgan Stanley, and Sheryl Sandberg, the chief operating officer of Facebook.

But Mr. Gupta became a McKinsey lifer, taking on more and more responsibility until 1994, when, at the age of 45, his partners elected him to run the firm. His election — he was the first non-American-born executive to run McKinsey — was seen as a sea change for the hidebound organization.

“I know consensus says McKinsey is white and traditional, but I am testimony to the fact that image isn’t true,” said Mr. Gupta in a 1994 profile in The Chicago Tribune. “If anything, it’s a meritocracy.”

Under his tenure, McKinsey expanded its global reach, aggressively moving into emerging markets like India and China. While he oversaw an era of growth at the consulting firm, his reign was not without controversy.

Mr. Gupta and some of his partners got caught up in the euphoria of the dot-com boom. One former executive, who requested anonymity because he was not authorized to discuss his former firm, said that during that time, McKinsey strayed from its core big-company consulting work and began helping dot-coms cut deals and develop their businesses.

“It was pigging out,” said this executive. “The work was there, and the young people wanted to do it.”

The firm was also an architect of Enron’s push from a sleepy energy pipeline company into the high-risk trading operation that led to the company’s 2001 collapse amid an accounting scandal. Jeffrey Skilling, Enron’s former chief executive, was a McKinsey alumnus.

The firm suffered, and in the wake of the technology and telecom bust during the early part of the last decade, McKinsey found itself with too many employees and not enough business.

When he stepped down from McKinsey in 2003, Mr. Gupta used the reputation — and peerless Rolodex — that he had built at the firm.

Kofi A. Annan, the former secretary general of the United Nations, appointed him to advise the international organization on management reform. The Rockefeller Foundation named him a trustee. Some of America’s top companies recruited him for their boards, including Procter Gamble, the consumer products giant; AMR, the parent of American Airlines; and Goldman Sachs.

“Over his 32-year career, Rajat Gupta has been a valued source of counsel to institutions, governments and business leaders around the world,” said Lloyd C. Blankfein, the chief executive of Goldman, in a November 2006 statement announcing Mr. Gupta’s election to the board. “Our shareholders will be fortunate to have his strategic and operational expertise and judgment.”

Mr. Gupta’s directorship at Goldman was part of his aggressive push away from management consulting and into the more lucrative arena of Wall Street. In 2007, he started a private equity firm, New Silk Route, that focused on Indian investments. One of his original partners on the New Silk Route deal was Mr. Rajaratnam. A Sri Lankan native, Mr. Rajaratnam met Mr. Gupta through their philanthropic work. The two men, both pillars of New York’s South Asian immigrant business community, became fast friends.

Mr. Gupta had a number of hedge fund and private equity investments, including several with Mr. Rajaratnam’s Galleon firm. Around that time, Mr. Gupta was weighing a position at the private equity firm Kohlberg Kravis Roberts. On a taped call played during Mr. Rajaratnam’s trial, Mr. Rajaratnam and a friend gossiped about what they saw as the materialistic ambitions of Mr. Gupta, who lives with his wife in a waterfront mansion in Westport, Conn, where they raised four daughters.

“Here he sees an opportunity to make a hundred million dollars over the next five years, or 10 years, without doing a lot of work,” Mr. Rajaratnam said.

His foray into Wall Street could not have been more ill-timed. The first cracks in the global economy surfaced just as he started New Silk Route, and his Galleon investments struggled as the stock market swooned. He ultimately lost his entire $10 million investment in a special Galleon-related vehicle set up for Mr. Gupta and a third partner.

On July 29, 2008, with the financial crisis entering its most serious phase, Mr. Gupta called Mr. Rajaratnam. The conversation, secretly recorded by Federal Bureau of Investigation agents, was played during Mr. Rajaratnam’s trial. On the call, Mr. Rajaratnam asked Mr. Gupta about a rumor that Goldman might look to buy a commercial bank.

“This was a big discussion at a board meeting,” said Mr. Gupta, who then told Mr. Rajaratnam that Goldman was weighing a purchase of Wachovia and the American International Group.

The charges do not include the contents of that telephone call because there appears to be no evidence that Mr. Rajaratnam traded on the tip. Instead, the government’s case is based on more circumstantial evidence — phone bills and trading records that the government says show that Mr. Gupta leaked other secret Goldman board discussions to Mr. Rajaratnam, and that Mr. Rajaratnam traded on those, gaining several million dollars.

During its closing argument in the Rajaratnam trial, the government effectively previewed its case against Mr. Gupta.

“You don’t get on the board of Goldman Sachs without having accomplished a lot in your life and having a great reputation,” said Reed Brodsky, a prosecutor. “But having a great reputation doesn’t give you a free pass to violate the law. Nobody is above the law, no matter how good their reputation is.”

Mr. Gupta spoke to the issue of reputation in his speech last year to the Indian business school graduates. Mr. Gupta urged the students to “have a set of values that guide you.”

“Don’t take the shortcut,” he said. “Have your sense of values, your compass, and follow that.”

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DealBook: U.S. Expected to Charge Executive With Ties to Galleon

Rajat K. Gupta, a former director of Goldman Sachs.Seokyong Lee/Bloomberg NewsRajat K. Gupta, a former director of Goldman Sachs.

Federal prosecutors are expected to file criminal charges on Wednesday against Rajat K. Gupta, the most prominent business executive ensnared in an aggressive insider trading investigation, according to people briefed on the case. He is expected to surrender to authorities on Wednesday.

The case against Mr. Gupta, 62, would extend the reach of the government’s inquiry into America’s most prestigious corporate boardrooms. Most of the defendants charged with insider trading over the last two years have plied their trade exclusively on Wall Street.

The charges would also bring to a head a stunning fall from grace of a trusted adviser to political leaders and chief executives of the world’s most iconic companies.

A former director of Goldman Sachs and Procter Gamble and the longtime head of McKinsey Company, the elite consulting firm, Mr. Gupta has been under investigation over whether he leaked corporate secrets to Raj Rajaratnam, the hedge fund manager who was sentenced this month to 11 years in prison for trading on illegal stock tips. While there has been no indication yet that Mr. Gupta profited directly from the information he passed to Mr. Rajaratnam, securities laws prohibit company insiders from divulging corporate secrets to those who then profit from it.

The case against Mr. Gupta, who lives in Westport, Conn, would tie up a major loose end in the long-running investigation of Mr. Rajaratnam’s Galleon Group hedge fund. Yet federal authorities continue their campaign to ferret out insider trading on multiple fronts. This month, for example, a Denver-based hedge fund manager and a chemist at the Food and Drug Administration pleaded guilty to such charges.

A spokeswoman for the United States attorney in Manhattan declined to comment.

Gary P. Naftalis, a lawyer for Mr. Gupta, did not respond to requests for comment. Mr. Naftalis has previously said that his client did nothing wrong.

Mr. Gupta, in his role at the helm of McKinsey, was a trusted adviser to business leaders including Jeffrey R. Immelt of General Electric and Henry R. Kravis of the private equity firm Kohlberg Kravis Roberts Company. An Indian from Kolkata and a graduate of the Harvard Business School, Mr. Gupta has also been a philanthropist, serving as a senior adviser to the Bill and Melinda Gates Foundation. Mr. Gupta also served as a special adviser to the United Nations.

His name emerged just a week before Mr. Rajaratnam’s trial in March, when the Securities and Exchange Commission filed an administrative proceeding against him. The agency accused Mr. Gupta of passing confidential information about Goldman and Procter to Mr. Rajaratnam, who then traded on the news.

The details were explosive. Authorities said Mr. Gupta gave Mr. Rajaratnam advanced word of Warren E. Buffett’s $5 billion investment in Goldman Sachs during the darkest days of the financial crisis in addition to other sensitive information affecting the company’s share price.

At the time, federal prosecutors named Mr. Gupta a co-conspirator of Mr. Rajaratnam, but never charged him. Still, his presence loomed large at Mr. Rajaratnam’s trial. Lloyd C. Blankfein, the chief executive of Goldman, testified about Mr. Gupta’s role on the board and the secrets he was privy to, including earnings details and the bank’s strategic deliberations.

The legal odyssey leading to charges against Mr. Gupta could serve as a case study in law school criminal procedure class. He fought the S.E.C.’s civil action, which would have been heard before an administrative judge. Mr. Gupta argued that the proceeding denied his constitutional right to a jury trial and treated him differently than the other Mr. Rajaratnam-related defendants, all of whom the agency sued in federal court.

Mr. Gupta prevailed, and the S.E.C. dropped its case in August, but maintained the right to bring an action in federal court. The agency is expected to file a new, parallel civil case against Mr. Gupta as well. It is unclear what has changed since the S.E.C. dropped its case in August.

An S.E.C. spokesman declined to comment.

The case could be a challenge for the government. Many of the defendants convicted of insider trading, including Mr. Rajaratnam, have been caught on wiretap swapping secret information.

At Mr. Rajaratnam’s trial, the government played a recorded conversation between Mr. Gupta and the hedge fund manager in July 2008. On that call, Mr. Gupta divulged that Goldman was considering a purchase of either Wachovia or American International Group. Evidence that Mr. Rajaratnam traded on this information was never presented, however.

Two of the most incriminating calls played pertain to alleged tips from Mr. Gupta. But those calls were conversations between Mr. Rajaratnam and his employees, which could make them inadmissible in a trial of Mr. Gupta.

In one call played for the jury, Mr Rajaratnam told a colleague, “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share.” In the other, the hedge fund manager said to his trader, ’”I got a call saying something good is going to happen to Goldman.”

The S.E.C.’s original case also outlined evidence that could potentially be used at trial. That includes Mr. Gupta’s phone records of on Sept. 23, 2008. That day, the Goldman board met via telephone to consider Mr. Buffett’s $5 billion investment in Goldman.

“Immediately after disconnecting from the board call, Gupta called Rajaratnam from the same line,’’ the S.E.C. filing says. A minute later, Galleon funds bought more than 175,000 shares of Goldman just before the market closed, the agency says, and later netted a $900,000 profit when the deal was announced.

Though he had an enviable résumé and earned millions of dollars a year at McKinsey, Mr. Gupta became fixated on the extraordinary wealth showered on hedge fund managers and private equity chiefs. Consultants are well paid, but the compensation pales in comparison to those Wall Street titans.

Around the time of his retirement in 2007, he and Mr. Rajaratnam helped start New Silk Route, a private equity firm focused on investments in India. Though Mr. Rajaratnam never had an active role in the firm, he and Mr. Gupta were good friends, having met through their philanthropic interests.

Mr. Gupta periodically visited Mr, Rajaratnam’s hedge fund, Galleon, on Madison Avenue and 57th Street in Manhattan. The two would order Indian or Chinese takeout and kibitz in Mr. Rajaratnam’s office. Mr. Gupta became an investor in Galleon’s hedge funds.

As part of his foray into Wall Street, Mr. Gupta took a senior adviser post at K.K.R., the firm co-founded by his friend Mr. Kravis. During Mr. Rajaratnam’s trial, prosecutors played a tape of the hedge fund manager gossiping with a friend about Mr. Gupta’s ambitions.

“My analysis of the situation is he’s enamored with Kravis, and I think he wants to be in that circle,” Mr. Rajaratnam said. “That’s a billionaire circle, right?”

William K. Rashbaum contributed reporting.

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Galleon Case Figure Settles With S.E.C.

Danielle Chiesi, convicted of insider trading as part of the case against the Galleon Group hedge fund, agreed to pay $540,000 to settle related allegations by the Securities and Exchange Commission.

In addition to her liability for $500,000 in principal and $40,535 in interest, Ms. Chiesi agreed not to violate S.E.C. rules prohibiting her from engaging in fraudulent or deceptive practices including insider trading.

Ms. Chiesi, 45, who was an analyst at New Castle Funds, and Mark Kurland, New Castle’s co-founder, both pleaded guilty in connection with a government investigation of hedge fund insider trading centered on Galleon and its co-founder, Raj Rajaratnam.

The S.E.C. first sued Mr. Rajaratnam, Ms. Chiesi, Mr. Kurland and three other people in October 2009. Her agreement resolves allegations contained in a revised complaint filed last year.

Ms. Chiesi’s lawyer, Alan R. Kaufman, on Wednesday declined to comment. On Jan. 19, Ms. Chiesi pleaded guilty to three counts of conspiracy, telling United States District Judge Richard J. Holwell that she was “deeply ashamed” of what she had done.

Prosecutors have recommended a prison term of 37 to 46 months when she is sentenced on July 20.

Mr. Kurland, 62, is serving his sentence in Otisville, N.Y. according to the Federal Bureau of Prisons Web site.

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DealBook: Juror in Rajaratnam Trial Is Replaced

A juror in the insider trading trial of Raj Rajaratnam was replaced on Wednesday and the jury was told to begin its deliberations anew.

Deliberations were suspended on Tuesday so that a juror could undergo a medical procedure. Judge Richard J. Holwell told the court on Wednesday morning that he was excusing that juror for health reasons and appointing an alternate juror.

The jury is now composed of eight women and four men. It had originally started deliberating on April 25.

Mr. Rajaratnam, who ran the Galleon Group hedge fund, faces 14 counts of securities fraud and conspiracy. If convicted, he faces up to 25 years in prison.

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DealBook: Rajaratnam’s Lawyer Casts Doubt on Witnesses’ Credibility

“If it’s public, you must acquit.”

Though the defense lawyer, John Dowd, uttered the stilted reference to Johnnie Cochran’s famous line in the O.J. Simpson trial just once at the start of his closing statement, it quickly became a favored theme on Thursday.

His client, Raj Rajaratnam, the co-founder of the Galleon Group hedge fund, is accused of pocketing more than $50 million in illicit profit from insider tips that include Intel earnings and layoffs at eBay. Mr. Dowd took aim at those alleged tips on Thursday and the phone calls and cooperating witnesses that the government cited as evidence.

And just as the prosecutor, Reed Brodsky, used recordings and transcripts of conversations to bolster his argument to jurors, so, too, did Mr. Dowd. Though he played just one recorded call, Mr. Dowd relied heavily on transcripts from the trial to highlight what he considered inconsistencies in testimony from government witnesses.

“Thank God for cross-examination,” said Mr. Dowd, who maintained that several of the cooperators had cracked when subjected to questioning.

Mr. Dowd spoke in a gravelly monotone with few gestures and an avuncular manner, his glasses perched atop his nose. Unlike Mr. Brodsky, who shouted and roamed before the jurors with an intense energy, Mr. Dowd remained behind his lectern, reading notes from a binder.

In systematic fashion, Mr. Dowd attacked the credibility of the cooperating witnesses and the alleged tips associated with them.

He began with Anil Kumar, a former executive at the prestigious consulting firm McKinsey Company, who testified that he passed a number of insider tips to Mr. Rajaratnam for money.

Mr. Dowd said the former consultant was paid for honest work, not insider tips. The lawyer presented transcript pages where Mr. Kumar says that initially Mr. Rajaratnam proposed a legitimate agreement – not one to pass on insider tips.

“Anil Kumar denied twice under oath that he ever agreed to commit insider trading,” Mr. Dowd said. Therefore, “you cannot convict Raj of conspiracy to insider trade.”

The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

While the government stressed that the tips afforded Mr. Rajaratnam an advantage over ordinary investors, Mr. Dowd cited one that lost the hedge fund money.

“This is the first insider trading case in history where the government claims the defendant lost $67 million,” Mr. Dowd said.

Mr. Dowd also brought up Adam Smith, the former Galleon portfolio manager and an important government witness.

“We haven’t talked about Smith, but you can’t believe him either,” Mr. Dowd said, leaning over the lectern. “Smith has changed his story so many times that he doesn’t know whether he’s coming or going.”

Throughout his statement, Mr. Dowd reinforced the defense assertion that all of alleged inside information was already public. During their case, the defense inundated jurors with news articles and research reports speculating on the deals and events that form the government’s case against Mr. Rajaratnam.

“That’s how things work in the real world,” he said, raising his voice slightly. “In the real world, these deals were public weeks and months before their announcement.”

He even argued at one point that the alleged tipsters themselves should have read some of the reports. When Mr. Kumar allegedly tipped Mr. Rajaratnam that eBay was set to lay off employees, for instance, he did not have an exact number, Mr. Dowd said.

“Ladies and gentlemen, if Kumar couldn’t figure out the number of layoffs, it’s because he hadn’t read the newspaper,” he said.

Mr. Dowd spared jurors from having to review again the hundreds of exhibits they’d seen last week.

“The government can’t stand it when I show you these articles,” he said.

Mr. Dowd repeatedly reminded jurors that there needed only to be reasonable doubt for them to acquit his client — even in instances where bits of the alleged tip were not yet public.

“You can’t convict Raj by splitting hairs,” he told jurors.

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