Former Goldman Sachs director Rajat Gupta arrested

Former Goldman Sachs director Rajat K. Gupta was arrested by FBI agents in New York on charges that he leaked corporate secrets to a hedge fund manager, making him the highest-ranking corporate executive implicated in the government’s long-running crackdown on insider trading.

Gupta, who was also a director of Procter & Gamble, is accused of supplying inside information about both companies to Galleon Group hedge fund founder Raj Rajaratnam, who used the information to make illegal, profitable trades and avoid millions of dollars of losses, prosecutors said.

In one instance, Rajaratnam placed trades based on the information within 39 seconds of learning it from Gupta, authorities said. Gupta’s arrest comes less than two weeks after Rajaratnam was sentenced to 11 years in federal prison for insider trading.

Preet Bharara, the U.S. attorney for Manhattan, said Gupta violated the trust of Goldman and Procter & Gamble and “became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam.”

Gupta pleaded not guilty to one count of conspiracy to commit securities fraud and five counts of securities fraud, charges that carry a potential penalty of 105 years in prison. He was freed on $10 million bail, and conditions require him to remain in the continental United States. An April 9 trial date was set.


His attorney, Gary Naftalis, said in a statement that Gupta never intended for Rajaratnam to trade on anything they discussed. He said Gupta spoke to Rajaratnam because he had $10 million invested in one of Galleon Group’s funds.

“Mr. Gupta is innocent of any of these charges,” Naftalis said in the statement. “He has always acted with honest and integrity. 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 arrest marks the latest insider-trading case brought by the U.S. attorney, who has said recently that the practice is “rampant” on Wall Street. In all, 56 people have been charged in insider-trading cases since Bharara took over shortly before Rajaratnam’s October 2009 arrest. Of those people, 51 have been convicted and 21 sentenced to prison terms ranging from no time to 11 years, the longest prison term ever given in an insider-trading case.

The indictment unsealed in U.S. District Court in Manhattan after Gupta’s arrest does not allege that Gupta personally profited from any information he provided to Rajaratnam. But it does accuse Gupta of making lightning-quick telephone calls to Rajaratnam after receiving inside information in Goldman and Procter & Gamble board meetings, giving him valuable secrets on which he traded.

On Sept. 23, 2008, the indictment alleged, Goldman’s board agreed in a telephone meeting to accept a $5-billion investment from Warren Buffett’s Berkshire Hathaway. About 16 seconds after disconnecting from that call and just minutes before the markets closed, Gupta telephoned Rajaratnam, the indictment said.

Two minutes before the markets closed that day, Rajaratnam purchased $27 million worth of Goldman Sachs stock, the indictment said. He sold the stock one day later for an “illegal profit” of about $840,000, prosecutors said in the indictment.

One month later, the indictment alleged, Gupta learned in a Goldman board meeting that the company was going to report a $2-a-share loss, which was substantially worse than analyst projections. About 23 seconds after disconnecting from that call, prosecutors alleged, Gupta telephoned Rajaratnam and spoke to him for about 13 minutes, disclosing Goldman’s plans to release the bad news.

The next morning, Galleon dumped all its Goldman holdings, avoiding a loss of potentially millions of dollars, the indictment said.

In total, prosecutors say that Rajaratnam’s Galleon Group hedge funds secured profits or avoided losses of $23 million thanks to information from Gupta. They say Gupta stood to gain because of his business partnerships with Rajaratnam, including a private equity fund that they co-founded to invest in projects in Asia.

Gupta was charged with one count of conspiracy to commit securities fraud and five counts of securities fraud. The charges carry a maximum punishment of more than 100 years in federal prison. He was ordered released on a $10-million bond secured by his Westport, Conn., home; his trial is set to begin April 9.

After his arraignment, Gupta declined to comment on the charges.

What sets the Gupta prosecution apart from Rajaratnam’s is there’s no evidence he personally traded on inside information.

“Under those circumstances this might give him a defense that although he told Raj about the information, it was done so in trust and confidence and not to be used for trading,” said Thomas Gorman, a partner at the Washington office of international law firm Dorsey & Whitney. “The two men do in fact have a long personal and business relationship which would support that claim.

“The government will argue that he … profited by enhancing his friendship and business relation with Raj, which is sufficient for an insider-trading claim.”

Gupta surrendered Wednesday to the FBI in Manhattan at 5:15 a.m. Eastern time, a stunning fall from grace for a man who was once one of the most respected figures in corporate America. In addition to serving on the boards of Goldman and Procter & Gamble, he was a director of AMR Corp., parent of American Airlines.

Stuart Slotnick, a former prosecutor who now practices white-collar criminal defense, said the Gupta prosecution represents a widening of the crackdown on insider trading.

“Not only are they going to go after the tippees but they are going to go after the tippers,” Slotnick said. “The U.S. attorney’s office is not hesitant to ultimately go after people in positions of great wealth and power.”

The Associated Press was used in compiling this report.