Hire Wire Sep 21 2011

Ex-Goldman Director Gupta in Fed's Crosshairs

By michael rothfeld
Prosecutors Edge Closer to Case Against Former Board Member Tied to Rajaratnam

Federal prosecutors are moving closer toward bringing criminal charges against Rajat Gupta, a former Goldman Sachs Group Inc. director who allegedly leaked inside information about the Wall Street giant at the height of the financial crisis, according to people familiar with the situation.

The Manhattan U.S. attorney's office and the Securities and Exchange Commission have maneuvered for months to determine whether and how to proceed against Mr. Gupta, who has denied any wrongdoing. The SEC dropped a civil administrative proceeding against Mr. Gupta last month but said it was "fully committed" to refiling the charges in federal court. It now plans to wait for any criminal charges to be brought by the Justice Department, and it could hold off until any criminal proceedings are completed, these people say.

No final decision has been made, according to the people familiar with the situation, and the timing of that decision couldn't be determined. Prosecutors could decide at any time not to proceed, these people say. Representatives for the Manhattan U.S. attorney's office and the SEC declined to comment.

Gary Naftalis, Mr. Gupta's lawyer, said in a statement that "any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless." He said Mr. Gupta has never been accused of trading in any securities in connection with the allegations or engaging in any quid pro quo.

Mr. Gupta, 62 years old, is the most prominent business figure involved in federal insider-trading investigations that have snared dozens of traders, public-company employees and others in recent years. He is a former managing director of the international consulting firm McKinsey & Co. and a former director at Goldman and other firms.

Mr. Gupta had been a pillar of the South Asian business community in the U.S. until prosecutors referred to him as a co-conspirator in the insider-trading trial of Galleon Group co-founder Raj Rajaratnam, who was convicted of securities fraud and conspiracy in May. Prosecutors are recommending a prison sentence of as many as 24 years, five months for Mr. Rajaratnam, which would be the longest-ever insider-trading imprisonment. Sentencing is scheduled for next week.

In the past two years, Manhattan prosecutors have charged 54 people with insider trading; 50 have been convicted or pleaded guilty.

In the civil administrative case it rescinded, the SEC alleged Mr. Gupta leaked the information at a time when he "stood to benefit from his relationship with Rajaratnam" because they had a variety of business dealings and Mr. Gupta was invested in, and director for, a Galleon fund.

In Mr. Rajaratnam's trial this year, prosecutors introduced as evidence phone records showing Mr. Gupta called Mr. Rajaratnam minutes after learning at a Goldman board meeting in September 2008 that Warren Buffett's Berkshire Hathaway Inc. would invest $5 billion in the firm. The next month, he allegedly tipped Mr. Rajaratnam that Goldman would report its first quarterly loss as a public company.

"I heard yesterday from somebody who's on the board of Goldman Sachs that they are going to lose $2 per share," Mr. Rajaratnam told a Galleon portfolio manager in a wiretapped phone call on Oct. 24, 2008. "The Street has them making $2.50." Based on those tips, Galleon generated a profit and avoided a loss, for a total benefit of $4.6 million, according to evidence at Mr. Rajaratnam's trial. Mr. Gupta hasn't publicly addressed the allegations that emerged at the trial.

Prosecutors also played for jurors a tape of Mr. Gupta, in another wiretapped call, telling Mr. Rajaratnam the Goldman board had discussed buying a commercial bank.

There have been several fits and starts in Mr. Gupta's case, both because of friction between prosecutors and the SEC and because of a tense relationship between the SEC and U.S. District Judge Jed Rakoff, according to people familiar with the situation. Judge Rakoff has been presiding over many federal insider-trading cases in New York and has a history of issuing legal setbacks to the regulator.

The SEC filed its civil case against Mr. Gupta on March 1, as Mr. Rajaratnam's trial was about to begin, using expanded powers under the financial-regulatory overhaul legislation to seek fines in a civil administrative proceeding. At the time, prosecutors were considering a criminal case against Mr. Gupta but weren't ready yet, the people familiar with the matter said. They objected to the SEC's move, they told Mr. Rajaratnam's lawyer, John Dowd, according to a filing he made in court at the time.

SEC officials took the unusual step of bringing an administrative case against Mr. Gupta, people familiar with the matter say, partly because Judge Rakoff in the past has declined to allow the SEC to put cases on hold for various reasons. If the SEC's case wasn't put on hold, it might have led to disclosures that could have hampered criminal proceedings, a person familiar with the matter says. The SEC was concerned disclosure of documents and witness testimony involved in a civil-court action could jeopardize the criminal trial of Mr. Rajaratnam, as well as any future criminal case against Mr. Gupta, this person says.

The SEC brought the case when it did because of concerns that Mr. Gupta remained on the boards of three public companies, according to the people familiar with the matter. Mr. Gupta resigned from the boards of American Airlines parent AMR Corp., Harman International Industries Inc., and Procter & Gamble Co. after the SEC filed its action. Mr. Naftalis, Mr. Gupta's lawyer, has previously said the SEC hadn't communicated any concerns about his continuing to serve as a director before any potential charges against him were resolved.

In the civil administrative proceeding, Mr. Gupta wouldn't have the same rights to obtain evidence or to depose witnesses. The case was overseen by an administrative law judge reporting to the SEC, and the commission itself could have decided the outcome.

The risk that Judge Rakoff will still refuse to allow the SEC to put a civil case on hold is one reason the agency now intends to wait until after any criminal case involving Mr. Gupta to file civil-court allegations, the people familiar with the situation said.

The SEC ultimately abandoned the civil proceeding after Mr. Gupta sued, alleging the SEC violated his constitutional rights by treating him differently than others charged in the Galleon investigation. Mr. Gupta's suit was assigned to Judge Rakoff. The SEC sought to have the case dismissed, but Judge Rakoff refused in a ruling that dripped with skepticism about the SEC.

"A funny thing happened on the way to this forum," the judge wrote, in a riff on the musical by Stephen Sondheim. He said the suit presented "the unusual case where there is already a well-developed public record of Gupta being treated substantially disparately from 28 essentially identical defendants, with not even a hint from the SEC...as to why this should be so." Before it had to come before Judge Rakoff and explain itself, the SEC dropped the civil administrative proceeding. Judge Rakoff declined comment.

Michael Rothfeld, Susan Pulliam and Jean Eaglesham are reporters for The Wall Street Journal, where this article originally appeared.

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