June 25, 2024

DealBook: With Gupta’s Arrest, Insider Inquiry Goes Beyond Wall Street

Rajat Gupta at his home in Westport, Conn., on Wednesday morning.Douglas Healey for The New York TimesRajat Gupta at his home in Westport, Conn., on Wednesday morning.

8:46 p.m. | Updated

Rajat K. Gupta, a former director at Goldman Sachs and Procter Gamble, pleaded not guilty Wednesday to insider trading charges, setting the stage for a courtroom battle that will extend the government’s broad crackdown on Wall Street to the corporate boardroom.

On Wednesday, a federal grand jury in Manhattan charged Mr. Gupta, 62, with one count of conspiracy to commit securities fraud and five counts of securities fraud. He is accused of sharing corporate secrets about Goldman and Procter Gamble with Raj Rajaratnam, the co-founder of the Galleon Group who was sentenced to 11 years in prison earlier this month for insider trading.

The details of the indictment, many of which came out during Mr. Rajaratnam’s trial and a previous action by the Securities and Exchange Commission, could prove explosive; he is the first executive from the upper echelons of corporate America to be implicated in the far-reaching scandal.

“Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders,” Preet Bharara, the United States attorney in Manhattan, said in a statement. “As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr. Gupta’s breach of duty.”

A stoic Mr. Gupta, wearing a navy blue suit and red tie, pleaded not guilty to all charges. He is set to be released on a $10 million bond, secured by his home in Westport, Conn., and will turn over his passport.

“The facts in this case demonstrate that Mr. Gupta is innocent of any of these charges and that he has always acted with honesty and integrity,” Gary P. Naftalis, a lawyer for Mr. Gupta, said in a statement.

Judge Jed S. Rakoff, a federal judge in Manhattan, has been assigned to the case, set for trial on April 9, 2012. He ruled on a matter between Mr. Gupta and the S.E.C. this summer.

The government has taken aggressive action against insider trading. In the last two years, the government has charged 56 people with swapping illegal tips, including Mr. Gupta; of those, 51 have pleaded guilty or have been convicted.

With Mr. Gupta, the campaign has moved beyond financial professionals. As the head of McKinsey Company, the prominent consulting firm, Mr. Gupta advised some of the world’s most influential people, rubbing elbows with the chief executive of General Electric, Jeffrey R. Immelt, and the former President Bill Clinton.

Mr. Gupta’s case has been tricky for the government. Although his name came up repeatedly at Mr. Rajaratnam’s trial, both in testimony and in secretly recorded phone conversations, the Justice Department never brought charges against him.

The S.E.C. filed an administrative action against Mr. Gupta. In response, he filed a separate lawsuit, asking to move the case to federal court, where it would be heard by a jury.

Judge Rakoff allowed Mr. Gupta’s suit to move forward in July, saying the S.E.C. took a “cavalier approach” in approving the administrative proceeding. The agency later dropped the matter, but reserved the right to refile.

On Wednesday, the S.E.C. filed a civil complaint against Mr. Gupta and Mr. Rajaratnam, claiming an “extensive insider trading scheme.” It mirrored the agency’s earlier action against Mr. Gupta.

“Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets to the disadvantage of investors, shareholders, and fellow directors,” Robert S. Khuzami, director of the S.E.C.’s division of enforcement, said in a statement.

According to the indictment, Mr. Gupta gave Mr. Rajaratnam advance word of Warren E. Buffett’s $5 billion investment in Goldman during the financial crisis. After hanging up from a special board meeting in September 2008, Mr. Gupta called Mr. Rajaratnam within 16 seconds, prosecutors said. Moments later, Mr. Rajaratnam purchased shares in Goldman, ultimately netting about $840,000, according to the indictment.

The next month, Mr. Gupta ostensibly informed Mr. Rajaratnam that Goldman would report an unexpected quarterly loss. Acting on the tip the next day, Mr. Rajaratnam, sold off shares in the company, saving millions of dollars, the indictment stated.

Mr. Gupta is also accused of tipping Mr. Rajaratnam about Procter Gamble’s quarterly sales projections, which were going to be weaker than predicted. Mr. Rajaratnam promptly bet against the company’s stock, the indictment says.

The government has said that Mr. Gupta was eager to deepen his personal and financial ties with the billionaire hedge fund manager, which predate the alleged tips. From 2003 to 2005, Mr. Gupta had money in at least two of Mr. Rajaratnam’s hedge funds, an investment valued at about $2.5 million by March 2005, according to the indictment.

The two men also started several financial ventures together, including Voyager Capital Partners, financed with $10 million from Mr. Gupta and $40 million from Mr. Rajaratnam. The investment fund allocated some money to Galleon hedge funds, including ones managed by Mr. Rajaratnam.

“There were legitimate reasons for any communications between Mr. Gupta and Mr. Rajaratnam,” Mr. Naftalis, Mr. Gupta’s lawyer, said in a statement. “Mr. Gupta lost his entire investment in the fund at the time of the events in question, negating any motive to deviate from a lifetime of probity and distinguished service.”

In past Galleon-related trials, the government relied heavily on the use of wiretaps and recordings to make its case. But prosecutors may not have the same breadth of evidence this time, since the Goldman discussions between Mr. Rajaratnam and Mr. Gupta were not taped. Instead, the government has conversations between Mr. Rajaratnam and his employees.

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

That could present a challenge. The judge could disallow the calls as hearsay, meaning they would be deemed too unreliable to pass court muster.

U.S. v. Rajat K. Gupta

Article source: http://dealbook.nytimes.com/2011/10/26/gupta-surrenders-to-authorities-on-insider-trading/?partner=rss&emc=rss

DealBook: Stack of Evidence Sealed Galleon Guilty Verdict, Juror Says

Raj Rajaratnam leaving federal court after his conviction.Andrew Burton/Getty ImagesRaj Rajaratnam leaving federal court after his conviction.

“Dear Honorable Judge Holwell,” the handwritten note from the foreman read last Wednesday morning, “the jury has come to a unanimous decision.”

Then, minutes later, the stress and emotion that had been building for two months spilled out into the tight quarters of the deliberation room at the United States District Court in Manhattan. Tears flowed. Jurors hugged, trading words of comfort, while others stepped into the bathroom to compose themselves. One juror asked that they say a prayer, so the group huddled and prayed.

They prayed, said Leila Gonzalez Gorman, one of the jurors, for the witnesses, their families, their children and their parents. And they prayed for Raj Rajaratnam, the billionaire hedge fund manager whom they had just found guilty of all 14 counts of conspiracy and securities fraud brought against him, capping one of the largest insider trading cases in a generation.

Still, for all the emotion at the end, Ms. Gorman said the jury was clear-eyed and confident about the decision it handed to Judge Richard J. Holwell.

“My impression was that he thought he could get away with what he was doing because he never got his hands dirty,” said Ms. Gorman, a 44-year-old second grade teacher from Westchester County.

“He was the mastermind, and everything pointed to the mastermind,” she added.

In a wide-ranging interview in the lobby of her apartment building on Saturday, Ms. Gorman talked about the trial that consumed more than two months of her life and the lives of her fellow jurors. She said the jury — a hodgepodge of government workers, teachers and professionals from Westchester County, Manhattan and the Bronx — was swayed by the constellation of evidence and witness testimony that showed that Mr. Rajaratnam had carefully collected illegal tips and based his trades on that information.

Since the jury announced its verdict, much of the focus has been on the government’s wiretap evidence that caught Mr. Rajaratnam swapping stock tips with a range of sources. Yet Ms. Gorman said the recordings were not necessarily the smoking guns.

“I wouldn’t exactly say the tapes were the most convincing,” she said. “There were numerous things that were convincing. We looked at e-mails, we matched conversations, we looked at the graphs.” The jurors, armed with a pile of sticky notes and colored markers, meticulously pooled their notes together to reconstruct the timeline around Mr. Rajaratnam’s trades in stocks like Clearwire and Intel.

She said the timing of his trades — often struck minutes after telephone calls with his informants — was simply too uncanny.

“We said, ‘On this day he was going short, short, short,’“ she said. “So how would you know that, unless you had a little birdie whispering in your ear?”

She added, “He knew exactly when to go big.”

In part, Ms. Gorman formed a negative opinion of Mr. Rajaratnam because of the name of his hedge fund, the Galleon Group.

“Galleon buccaneers, those are pirates, and he named his company after pirates,” she said. “And if you look at the history of pirates, they’re thieves.”

The jury also formed strong impressions of the witnesses, a cast of characters that included the chief executive of Goldman Sachs, Lloyd C. Blankfein, and members of Mr. Rajaratnam’s once-tight inner circle. The defense repeatedly attacked the credibility of the government’s cooperating witnesses, but Ms. Gorman said she didn’t buy it. She said she believed the testimonies of Rajiv Goel, Anil Kumar and Adam Smith — the government’s three main witnesses.

The testimony of Mr. Blankfein also had a lasting impact — but not because she was starstruck. Ms. Gorman said she didn’t really know who he was.

“When they said he is the C.E.O. of Goldman Sachs, I said to myself, ‘Oh my God, I hope he’s not one of these guys, what is going on here?,” she said. Mr. Blankfein testified that a former Goldman director had leaked confidential board discussions to Mr. Rajaratnam.

“But when he actually talked, I thought, ‘Oh good, he’s honest.’”

She warmed to his appearance and his demeanor, a “cute little smirk, a painted-on smile, well-spoken, bright-eyed,” she said. But it seems the Wall Street titan did not hold a candle to the three clean-cut prosecutors — Jonathan Streeter, Reed Brodsky and Andrew Michaelson.

“We called them all gorgeous,” Ms. Gorman said. “They were all hot.” She nicknamed Mr. Brodsky Napoleon, a tribute to his fiery attitude and how he dramatically brushed back his dark hair with his hand. She said the female jurors often joked about calling “dibs” on the more attractive members of the courtroom.

The 12 days of deliberation were punctuated by moments of levity, but the jurors approached the case with gravity. After the group was dismissed for deliberations, the jury sat silent for about 20 minutes, absorbing the herculean task ahead. Then they dove into the files, methodically laying out all the charges and assigning specific roles. If a someone wanted to speak, the juror would have to raise a hand.

Although there were several tense moments — Ms. Gorman recalls telling one juror, “You can’t tell me not to go to the bathroom, go to hell” — she said they rarely disagreed on the facts of the case.

At the beginning of the deliberations, two jurors were less convinced of Mr. Rajaratnam’s guilt, largely moved by his philanthropic efforts in support of the Harlem Children’s Zone, a nonprofit group. Geoffrey Canada, the head of that organization, testified as a character witness for the defense.

“They were just sympathetic because he gave money to Harlem, so they wanted to see the good side.”

However, as the group analyzed the evidence, consensus quickly built. By April 29, the jurors were unanimous that he was guilty on all five conspiracy charges. Last Tuesday, the group was mainly settled on the remainder of the charges, but Wilson Thomas Jr., the alternate juror who came in as a last-minute replacement, needed a few more hours to meditate on the case.

The next day, Ms. Gorman bought several $2 scratch lottery tickets. It was her gift to her fellow jurors and a nod to a weekly tradition. On each Thursday during the trial, the group would pool their dollar bills and buy lottery tickets. She suspected they might not be together the next day.

And that morning, Mr. Thomas was ready and the jury took a final vote.

In the end, what brought down Mr. Rajaratnam was what lawyers refer to as those sticky facts, Ms. Gorman said.

“There were too many conversations and things from the testimonies that were leaning towards guilt,” she said.

Ben Protess contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=df4939f610c421a006de0819f5ba1a35

DealBook: A.I.G. Outlines Share Sale Plan

The American International Group on Wednesday laid out plans for its upcoming share offering as it moved to get off government life support.

In a regulatory filing on Wednesday, A.I.G. said it would sell 100 million shares. The government, which has a 92 percent stake in the insurer, will sell 200 million shares. After the offering, United States taxpayers will have a 77 percent stake in the company, according to the filing.

The filing did not disclose a specific price for the offering but based on the closing price of shares on Tuesday, it would amount to about $8.9 billion, much less than once anticipated. If demand is strong enough, underwriters will have the option to sell an additional 45 million shares.

A.I.G., which will not receive any money from the shares sold by the government, plans to use $550 million of its own proceed to help pay for a settlement related to several securities fraud lawsuits. The settlement was previously disclosed. The rest of the money will go toward “general corporate purposes.”

The last few months have been tough for A.I.G. On May 5, it reported that net income fell 85 percent in the first quarter, driven by charges related to the earthquake disaster in Japan and a restructuring of its government bailout. Revenue dropped 6 percent, to $17.4 billion.

Earlier this year, A.I.G. shares had surged to more than $62 but today they are trading for less than $30, the level at which the government is expected to break even on its bailout.

Even so, the offering is a big step for the company, which is looking regain its independence.

During the financial crisis, A.I.G. teetered on the verge of collapse before the government orchestrated a huge bailout. The rescue package eventually left taxpayers with a 92 percent stake in the company.

The share sale represents the latest step by A.I.G. to repay taxpayers. In January, the company paid off its debt to the Federal Reserve Bank of New York. It has also sold off various assets to raise capital as part of its plan.

The Treasury Department had indicated earlier that it would like to hold two stock sales this year, potentially bringing its stake in A.I.G. down to about 33 percent. But much will depend on market conditions and demand.

A.I.G.’s annual meeting is to take place on Wednesday.

Bank of America Merrill Lynch, Deutsche Bank Securities, Goldman Sachs and JPMorgan Chase are the main underwriters for the A.I.G. offering.

Article source: http://feeds.nytimes.com/click.phdo?i=897f4e3ef7ec4f34d490406830fafaec