Wall Street Scandal SEC accuses Ex- McKinsey Rajat Gupta for insider trading

B&B News Network On March 4, 2011 - 1:57pm

The United States Securities and Exchange Commission (SEC) has accused Ex-Managing Partner of McKinsey Rajat Gupta, of committing insider trading. The SEC has accused Rajat Gupta of passing insider information that helped a hedge fund manager Raj Rajaratnam (of Galleon Management) to illegally profit from Warren Buffett’s $5 billion (Rs. 22,500 crore) investment in Goldman Sachs at the peak of the 2008 recession. SEC alleged that the total illicit profits made by the Galleon Tech funds by virtue of their trading based on Rajat Gupta’s material non-public information concerning Goldman Sachs’s second quarter of 2008 results exceeded $13.6 million (Rs. 61 crore) and may have gained upto $18 million (Rs. 81 crore).

Rajat Gupta is represented by star defense attorney and Partner Gary P. Naftalis of Kramer Levin Naftalis & Frankel LLP.

Indian born Sanjay Wadhwa is at the helm of affairs in the SEC’s Market Abuse Unit (New York) while Attorney for South District of New York Preet Bharara will be leading the trial. The SEC will also be represented by Kevin McGrath and Valerie Szczepanik of the New York Regional Office.

Gary Naftalis issued a press statement calling the SEC allegations totally baseless, noting that there is no accusation his client traded in any of the securities at issue and that Gupta lost his entire $10 million (Rs. 45 crore) investment in the Galleon Group fund mentioned in the SEC's charge.

Galleon has hired Akin Gump’s John Dowd to represent him and Galleon before the SEC. Yesterday, Galleon’s lawyers claimed that the SEC action against Rajat Gupta was simply an effort to destroy a favourable witness. “There is no case, absolutely none”, claimed John Dowd.

The US Securities and Exchange Commission has accused Gupta on the following six grounds:

Disclosed material non-public information to Raj Rajaratnam concerning Berkshire’s $5 billion investment in Goldman Sachs.
Disclosed material non-public information to Rajaratnam concerning Goldman Sachs’s financial results for the fourth quarter of 2008.
Disclosed material non-public information to Rajaratnam concerning Goldman Sachs’s financial results for the second quarter of 2008.
Disclosed material non-public information to Rajaratnam concerning Procter & Gamble’s financial results for the quarter ending December 2008.
Gupta’s fiduciary duty to keep confidential all material, non-public information about Goldman Sachs.
Gupta’s fiduciary duty to keep confidential all material, non-public information about Procter & Gamble.

ET has reported Rajat Gupta’s response to the investigation. In his email to as the Chairman of the Indian School of Business (ISB), he said, “I am stunned and shocked by the proposed action. Let me assure you, I have done nothing wrong. The SEC’s allegations are totally baseless. I am informed by my lawyers that the case is based on speculation and unreliable third-hand hearsay”.

WSJ Law Blog has been following this case in great detail. There is an interesting read about Galleon’s lawyers moving the court to use their Blackberry cellphones inside court premises. The judge who denied the use of Blackberry questioned why nine lawyers who represent Galleon needed to use their Blackberry.

Gupta is an alumni of the Harvard Business School and the Indian Institute of Technology. Gupta was previously the Managing Partner of McKinsey and has also served on the Boards of Goldman Sachs Group and Proctor & Gamble (P & G). The accusation points out to disclosing confidential non-public information obtained by Gupta during his duties as a Member of the Board of Directors of the Goldman Sachs and P & G. Gupta shared confidential non-public information with Raj Rajaratnam, Managing Partner of hedge fund investment company Galleon Management. Rajaratnam in turn, either caused the Galleon hedge funds that he managed to trade based on the confidential non-public information, or passed the information on to others at Galleon and caused trades based on the information.

Gupta along with Rajaratnam (and others) is also, the Founding Partner and the Chairman of New Silk Route Partners LLC, an investment firm that was originally called Taj Capital Partners.

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Comments

georges

March 5, 2011 - 6:46pm

I have gone through the SEC order against Rajat Gupta. As it is a civil adjudication, there is enough material to nail down Mr Gupta. His claim that there is no recording of the phone conversation, is very weak defence. Pleas see Supreme Courts decision in Collector of Customs v/s D. Bhoormull (AIR 1974 SC 859)where it laid down no exact evidence is required. Even our own SEBI is using this case. Eventually Mr Gupta will settle with SEC, like many others previously, and then say there is no order holding him guilty. Very interestingly,another Indian victor menezes, erstwhile vice-chairman was also charged for insider trading by SEC in 2005. And he too settled with SEC.Above is only legalise. It is very sad to see that even after such vast experience in corporate life, people like Rajat Gupta and Victor Menzes, resort to these kind of illegalities to make money. It makes one wonder, whether they build there entire careers on such shady dealings???

narayana

March 6, 2011 - 9:09am

it is outrageous to suggest that a respected individual is being framed in a case like this.mr. gupta has earned enough money and enough respect in his career,he does'nt need to go for a few million dollars more by doing such cheap antiques.i think there might be another reason involved.

Susanna Kurian ...

March 6, 2011 - 3:40pm

I am shocked by this news that SEC charges Rajat Gupta of insider trading.If proved true, I would want to understand his motive......All the credibility he has earned has been lost with this foolish act.I can only rationalise , at the end of the day we all are ONLY human.

Georges

March 7, 2011 - 11:40am

Narayana and Susanna.... I am equally shocked at this news. But law has no place for such emotions and hero worship. It has to go by cold facts and evidence SEC is equally credible insitution, and would not charge any one lightly. Please see SEC complaint, its copy is easily availble on internet. It has cited 3 incidents spread over 4 to 5 months, and its case is supported by call reoords. There is no recording of coversations. There are precedent cases, where in such circumstances in civil adjudication, charges have been upheld. I am absolutely sure that similar to Victor Meznes, erstwhile Chairman of Citibank, Mr Gutpa would compromise with SEC. It also reminds me of recent case of SEBI against Anil Ambani companies. After obtaining consent order from SEBI, Anil Ambani went to town claiming that there was no adverse findings against his companies!!!!

BizDisrupt

May 18, 2011 - 11:36pm

It is actually extremely hard for me to believe that Nobody at McKinsey knew about Gupta's parallel consulting activity!!Specially when it was public news that Gupta set up a Private Equity fund with 3 corrupted(?) investors who paid fines to the SEC to settle with the latter.=> When will we have honest, righteous, and exemplary Executives managing companies??