Rajat Gupta Convicted Of Insider Trading

(Bloomberg News) Rajat Gupta, who reached the pinnacle of corporate America as managing partner of McKinsey & Co. and as a director at Goldman Sachs Group Inc. and Procter & Gamble Co., was convicted by a federal jury of leaking inside information to hedge-fund manager Raj Rajaratnam.

Gupta, 63, was found guilty of securities fraud and conspiracy by a federal jury in Manhattan today in its second day of deliberations. Securities fraud carries a maximum prison sentence of 20 years, and conspiracy carries a five-year maximum. Gupta will remain free on bail until his sentencing on Oct. 18.

Gupta showed no reaction while the verdict was read. The outcome is a victory for the office of Manhattan U.S. Attorney Preet Bharara and the Federal Bureau of Investigation in their assault on insider trading, which used tools normally employed against organized crime, including phone taps and informants.

"Having fallen from respected insider to convicted inside trader, Mr. Gupta has now exchanged the lofty board room for the prospect of a lowly jail cell," Bharara said in a statement. "Violating clear and sacrosanct duties of confidentiality, Mr. Gupta illegally provided a virtual open line into the board room for his benefactor and business partner, Raj Rajaratnam."

Gupta is the most prominent of those convicted at trial or to plead guilty since the nationwide crackdown began in October 2009. To date, the U.S. has brought cases against 66 traders and their sources from Wall Street to Silicon Valley. No one has won an acquittal; six cases are pending.

Besides his tenure at Goldman Sachs and McKinsey, which he ran from 1994 to 2003, the Kolkata-born Gupta served on the boards of the Rockefeller Foundation and the Bill & Melinda Gates Foundation. He is also a co-founder of the Indian School of Business in Hyderabad.

He has raised millions of dollars for education and health- care programs, served as an adviser to the United Nations and counseled chief executives including Lloyd Blankfein of Goldman Sachs, who was a prosecution witness at the trial. He lives in a waterfront home in Westport, Connecticut.

Richard Scheff, chairman of Philadelphia-based Montgomery, McCracken, Walker & Rhoads LLP, said a conviction would be "extremely" significant.

"It doesn't get much higher," Scheff, who specializes in white-collar criminal investigations, said in an interview before the verdict. "The conviction sends the message that no one is off limits."

Rajaratnam, who co-founded Galleon Group LLC, was convicted at trial last year and sentenced to 11 years in prison, a record at the time for insider-trading crimes. He's appealing the verdict.

"Raj Rajaratnam was a very manipulative man," Richard Lepkowski, 51, the jury foreman, said in an interview after the verdict. "Mr. Rajaratnam made it easy for Mr. Gupta to break the law."

Gupta is the latest object lesson in what happens to business leaders who lose their bearings, said Georges Ugeux, a former New York Stock Exchange official and now chief executive officer of New York-based Galileo Global Advisors LLC.

"They start to believe they are so brilliant, they are so powerful, and they behave like they are above the law," Ugeux said before the verdict was handed down. "There will always be people who will go over the line, but there are others who will see the price someone like Gupta has paid, and say it's not worth it."

Gupta was found guilty of leaking tips to Rajaratnam, 55, about New York-based Goldman Sachs. The jury acquitted him of a charge of leaking information about Cincinnati-based P&G and for one alleged Goldman Sachs tip.

Prosecutors said Gupta tipped Rajaratnam about Goldman Sachs's earnings in the first quarter of 2007 and fourth quarter of 2008, and with news that Warren Buffett's Berkshire Hathaway Inc. would make a $5 billion investment in Goldman Sachs on Sept. 23, 2008. Gupta also told Rajaratnam that P&G's organic sales growth would fall below estimates, the government said.

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

The key prosecution claim focused on the Berkshire Hathaway investment in Goldman Sachs on Sept. 23, 2008, as the stock market plunged following the collapse of Lehman Brothers Holdings Inc.

At the trial, Blankfein testified that 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.

Rajaratnam got off a call and hurriedly told Ananth Muniyappa, then a Galleon trader, to buy Goldman Sachs stock, Muniyappa testified. Galleon bought 267,000 shares. Prosecutors played a wiretapped recording of a Rajaratnam phone call from the next day.

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

Other evidence focused on Galleon's sale of 150,000 Goldman Sachs shares on Oct. 24, 2008, when the bank was losing money while Wall Street expected a profit.

Jurors listened to a wiretap of Rajaratnam telling Horowitz, "I heard yesterday from somebody that was on the board of Goldman Sachs that they were going to lose $2 a share. The market has them making $2.50."

"I'm going to whack it," Rajaratnam adds.

Horowitz isn't accused of wrongdoing.

"To some extent, the Gupta case shows the old-school methods which federal law enforcement used in prosecuting insider-trading cases before the widespread use of wiretaps," Anthony Sabino, a professor of law at the Tobin School of Business at St. John's University in New York, said in an interview. "These cases were based on the building of a sequence of events and pieces of evidence and prosecutors connected the dots for the jury."

The defense assailed what it called the lack of "real, hard, direct evidence" in the prosecution's case, pointed to other leakers at Goldman Sachs and sought to show that Galleon had legitimate reasons for the trades. Defense attorney Gary Naftalis reminded jurors that there were no wiretaps of Gupta tipping Rajaratnam, and he said the two men had a falling out after Gupta lost $10 million in a Galleon fund.

Prosecutors said Gupta leaked the information because he wanted Rajaratnam's help with a new fund he was starting, as well as a slice of the "extraordinary profits" at Galleon. Gupta was to become chairman of Galleon's international fund, according to the government.

Rajaratnam, for instance, bumped up by $4 million Gupta's stake in a Galleon investment after Gupta told him about a Goldman Sachs board discussion held in St. Petersburg, Russia, prosecutors said.

"Rajaratnam offered Gupta many benefits," Assistant U.S. Attorney Richard Tarlowe said in his summation on June 13. "What was good for Rajaratnam and Galleon was good for Gupta."

Gupta was born in December 1948, 14 months after India became independent of British rule. His father, a journalist who worked for two newspapers, fought for India's independence and was jailed several times for his political activism. His mother was a teacher in a Montessori school. The family moved to New Delhi when Gupta was five.

Orphaned at 18 after both his parents died of natural causes, Gupta persuaded an unmarried aunt to live with him and his siblings, according to a 1994 interview he gave to "Business Today," an Indian magazine.

He said he was shattered by his father's death and became very studious, careful never to make a mistake that could cost him his scholarship to the Modern School, one of India's few English-language, Western-style high schools.

He ranked among the top 20 of hundreds of thousands of Indian youth who took the entrance examination in 1966 for a spot at the elite Indian Institute of Technology, according to an interview he gave to the "Economic Times" of India when he became head of McKinsey.

Gupta chose the Delhi campus and in 1971 he earned a bachelor's degree in mechanical engineering. His first job offer came from ITC Ltd., a British-owned company that sold cigarettes and ran hotels. He turned it down when he was admitted to Harvard Business School on scholarship.

Gupta became a Baker Scholar, a distinction earned by the top 5 percent of students in his graduating class in 1973. Hired by McKinsey in New York, he advanced steadily, becoming a partner at the consulting firm in 1980 and moving to Copenhagen the following year. In 1984, Gupta began overseeing all of the firm's business in Scandinavia. He moved to McKinsey's Chicago office in 1987 and became its head in 1989.

McKinsey grew rapidly under his leadership beginning in 1994. He won re-election twice, and during his three terms at the helm, the maximum the firm allows, revenue increased to $3.4 billion from $1.2 billion. The number of partners rose to 891, according to Kennedy Information LLC, a research firm that tracks the consulting industry.

After retiring in 2007, Gupta divided his time between his Connecticut home, a Manhattan apartment and a Florida getaway. He traveled to India to look for investments for New Silk Route Partners, the private equity firm he started with Rajaratnam and others, and paid visits around the world to the public companies and nonprofit boards on which he was a director.

By April 2008, his net worth was $84.1 million, according to his personal banker's testimony at the trial.

Gupta's relationship with Rajaratnam put him in the government's crosshairs. FBI agents listened in on a July 2008 phone call in which Gupta discussed Goldman Sachs business with Rajaratnam and the two bantered about Gupta's interest in joining KKR & Co., the buyout firm. Even after Rajaratnam lost the $10 million, Gupta continued to leave friendly messages, wishing Rajaratnam a happy New Year in January 2009.

Another McKinsey executive caught on the Rajaratnam wiretaps was Anil Kumar, who co-founded the Indian School of Business with Gupta. Kumar pleaded guilty to leaking tips to Rajaratnam, against whom he testified last year, and on June 5 Kumar took the witness stand against Gupta.

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