(Bloomberg News) Rajat Gupta, the former Goldman Sachs Group Inc. director and McKinsey & Co. managing director who rose to the pinnacle of Wall Street, was sentenced to two years in prison for passing inside tips to his business partner.

Gupta, who ran McKinsey from 1994 to 2003, was sentenced yesterday by U.S. District Judge Jed Rakoff in Manhattan for leaking stock tips to Galleon Group LLC co-founder Raj Rajaratnam. Gupta, 63, was convicted by a jury in June of one count of conspiracy and three counts of securities fraud.

Rakoff ordered Gupta to report to prison on Jan. 8 and fined him $5 million, rejecting a bid to allow him to remain free pending appeal. The judge said he would recommend to U.S. Bureau of Prisons officials that Gupta serve his term at the federal prison in Otisville, New York.

The evidence that Gupta passed illegal information about New York-based Goldman Sachs to Rajaratnam, his friend and business partner, "was not only overwhelming, it was disgusting in its implications," Rakoff said in court.

Gupta leaked information about a $5 billion investment in Goldman Sachs by Warren Buffett's Berkshire Hathaway Inc. on Sept. 23, 2008, and a tip on a quarterly loss. Rakoff said yesterday he was especially troubled by Gupta's actions during this tumultuous period.

'Possible Ruin'

"With Goldman Sachs in turmoil but on the verge of being rescued from possible ruin by an infusion of $5 billion, Gupta, within minutes of hearing of the transaction, tipped Rajaratnam, so that the latter could trade on this information in the last few minutes before the market closed," the judge said just before he imposed sentence. "This was the functional equivalent of stabbing Goldman in the back."

Prosecutors had sought a prison term for Gupta of as long as 10 years in prison. Assistant U.S. Attorney Richard Tarlowe yesterday argued that Gupta's crimes warranted a substantial prison time because of his prominence in the business world and the egregiousness of his crimes. Tarlowe said a sentence of probation would give the impression that there is "a two-tier system of justice."

While Gupta didn't personally profit, his tips allowed Rajaratnam to earn millions of dollars, Tarlowe said.

"The crime is so serious because of the position that was held, and that is why the fall from grace is more steep," Tarlowe said.

Clear Message

"It is very important that the message be clear to that community, to that target audience, that this is insider trading," Tarlowe said. "If you are a senior executive, if you tip another professional, another prominent businessperson, a hedge fund manager, even if you do it using your regular phone from your executive suite, that is insider trading and that will be punished severely."

Gupta requested probation and community service. His lawyer, Gary Naftalis, had proposed that he work with needy children in New York or the poor in Rwanda. Citing Gupta's good works and saying he'd suffered enough with his reputation destroyed, Naftalis argued yesterday that his client should be granted leniency.

"The fall from grace that Mr. Gupta has suffered or experienced as a result of this matter is as steep as I have ever seen anyone in any case that I have ever seen," Naftalis said. "This was an iconic figure, someone who had been a role model for people around the globe for his work."

Gupta served on the boards of Procter & Gamble Co. and AMR Corp. and won praise for his charity from Microsoft Corp. Chairman Bill Gates and former United Nations Secretary-General Kofi Annan. As McKinsey's youngest managing director, he almost tripled the firm's revenue.

'Extraordinary' Life

Gupta's life "has been an extraordinary one," Naftalis said yesterday in court. The lawyer said his client has made "extraordinary contributions that have tangibly helped many, many people on this planet." His crimes are a "total aberration in an otherwise laudatory life," Naftalis said. "This is a man who has suffered punishment enough."

Rakoff said he agreed with the description of Gupta's good works.

"I think the record, which the government really doesn't dispute, is that he's a good man, but the history of this country and the history of the world are filled with good men who do bad things, so I don't think that's the end of the subject," Rakoff said.

Rwanda Proposal

Rakoff yesterday called Naftalis's suggestion about community service in Rwanda "very innovative," adding that he believed some period of incarceration was necessary.

"I thought, ah, this was the Peace Corps for insider traders," the judge told Naftalis. "But I think if everything you told me about Mr. Gupta's character is correct, and I think it is, he would be doing this regardless of a court order or not. So looking at it in a cynical kind of way, it is not punishment."

Rakoff, who has long criticized the federal sentencing guidelines, which are advisory, said he needed to consider the totality of Gupta's crimes in fashioning a sentence.

"The court can say without exaggeration that it has never encountered a defendant whose prior history suggests such an extraordinary devotion, not only to humanity writ large, but also to individual human beings in their time of need," Rakoff said.

Picture Darkens

"But when one looks at the nature and circumstances of the offense, the picture darkens considerably," Rakoff said. "In the court's view, the evidence established, to a virtual certainty, that Mr. Gupta, well knowing his fiduciary duties, brazenly disclosed material nonpublic information to Mr. Rajaratnam at the very time, September and October 2008, when our financial institutions were in immense distress."

Before he was sentenced, Gupta briefly addressed the court.

"I lost my reputation that I built over a lifetime," he said. "The last 18 months have been the most challenging period of my life since my parents died when I was a teenager."

While Gupta didn't take responsibility for his conviction, he apologized to his family, friends and McKinsey & Co., as well as the institutions he helped create, such as the Indian School of Business, the Public Health Foundation of India and the America India Foundation.

"Your Honor, as I come before you to be sentenced, the overwhelming feelings in my heart are of acceptance of what has happened, of gratitude to my family and friends, and of seeking forgiveness from them as well," Gupta said. "It is with these feelings that I hope to move forward and dedicate myself to the service of others."

400 Letters

In his bid for leniency, Naftalis said Gupta's crimes were limited to a two-month span in 2008 and presented some 400 letters to the judge chronicling Gupta's good works.

Naftalis also told Rakoff that he would file an appeal challenging the judge's decisions on evidence during the trial, including allowing the use of a recording of a wiretapped phone call.

Gupta declined to comment as he left the courthouse with his wife, Anita, and four daughters.

"''Mr. Gupta maintains his innocence and will vigorously pursue an appeal,'' Naftalis said. ''We continue to believe that the facts of this case demonstrate that Mr. Gupta is innocent of all of these charges, and that he has always acted with honesty and integrity.''

'Sad Chapter'

Goldman Sachs said yesterday in a statement that it was ''disappointed that Mr. Gupta breached his duties as a director and violated our shareholders' and the firm's trust." It said it hoped Gupta's sentencing "brings this sad chapter to a close."

Since August 2009, prosecutors in the office of Manhattan U.S. Attorney Preet Bharara have charged at least 72 people with insider trading. The Galleon case was part of a federal initiative by Bharara's office and the Federal Bureau of Investigation in New York, called "Perfect Hedge," that used techniques such as informants and wiretaps, commonly used to combat drug dealers and organized crime figures, against white- collar defendants.

"Rajat Gupta now must face the grave consequences of his crime -- a term of imprisonment," Bharara said in a statement. "His conduct has forever tarnished a once-sterling reputation that took years to cultivate."

The jury acquitted Gupta of charges that he leaked information that Cincinnati-based P&G's organic sales growth would fall below estimates and that he tipped Rajaratnam, 55, about Goldman Sachs's earnings in the first quarter of 2007.

Wiretaps

Rajaratnam is serving 11 years in prison for trading on tips from Gupta and others.

Unlike the Rajaratnam prosecution, which was based on dozens of wiretaps of his mobile-phone conversations, the case against Gupta was largely circumstantial and built on trading records, business relationships, telephone records and comments by Rajaratnam or others about Galleon's sources of information.

At the trial, Goldman Sachs Chief Executive Officer Lloyd Blankfein testified that on Sept. 23, 2008, he briefed his board over the phone on the Buffett investment beginning at 3:15 p.m.

Within a minute after the call with the directors concluded at 3:53 p.m., Rajaratnam answered a call on his private line from a McKinsey conference room being used by Gupta, according to phone records and testimony.

On a Sept. 24, 2008, wiretap played for the jury, Rajaratnam spoke to a Galleon trader describing why he had directed Galleon to buy Goldman Sachs shares the day before, just before the market closed.

'Something Good'

"I got a call at 3:58, right?" Rajaratnam could be heard telling another trader. "Saying something good might happen to Goldman."

The jury also heard one wiretapped conversation between Gupta and Rajaratnam in which Gupta told him about board discussions about purchasing a commercial bank.

Rakoff said that during his 17 years as a judge, he had never encountered a defendant like Gupta. The judge added that Gupta's prominence meant he had to be sentenced to prison.

"Insider trading is an easy crime to commit but a difficult crime to catch," Rakoff told Gupta. "Others similarly situated to the defendant must therefore be made to understand that when you get caught, you will go to jail."

Rakoff has sentenced at least nine defendants other than Gupta for insider trading, including seven who pleaded guilty and two whom he jailed after they were found guilty by juries. Rakoff has a track record of imposing sentences that are half what the government recommends.

Average Sentences

From Jan. 1, 2011 to July of this year, federal judges in Manhattan sent the average insider-trading violator to prison for more than 22 months, according to an analysis of sentencing data by Bloomberg News. That was a 20 percent increase from the average term of 18.4 months during the previous eight years.

Over the same 18-month period, the average sentence after trial was 58 months, compared with 22 months during the same time for 18 defendants who pleaded guilty. Of the dozen defendants who pleaded guilty and agreed to cooperate with the U.S. insider-trading probe during that time, 11 avoided prison altogether. One got six months.

The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).