On March 19, 2010, it was announced that Gupta had decided not to stand for re-election to the Goldman Sach's board of directors. At the time this was seen as a reaction to the insider trading implications; however, wiretaps released over a year later in
U.S. v Rajaratnam of Anil Kumar speaking to Rajaratnam reveal an anticipated conflict-of-interest with a senior advisory role at
Kohlberg Kravis Roberts. Gupta has since stepped down as senior advisor to KKR. On April 15, 2010, the
Wall Street Journal reported that federal prosecutors in the United States were investigating Gupta's involvement in providing insider information to Rajaratnam during the
2008 financial crisis, in particular the
$5 billion Berkshire Hathaway investment in Goldman Sachs at the
height of the crisis. Coverage of the event noted that Anil Kumar — who, like Gupta, had graduated from
IIT, was a longtime highly regarded senior partner at McKinsey, and had also co-founded the
ISB — had already pleaded guilty to charges in the same case. Gupta, Kumar, and Rajaratnam were all close friends and business partners. When Goldman Sachs CEO
Lloyd Blankfein asked Gupta about his insider trading rumors breaking in the press, Gupta replied, “I wouldn’t have had anything to do with that." On March 1, 2011, the
SEC filed an administrative civil complaint against Gupta for insider trading. It is alleged that he illegally tipped Rajaratnam with insider information about Goldman Sachs and
Procter & Gamble while serving on the boards of both companies. Rajaratnam, it is alleged, "used the information from Gupta to illegally profit in hedge fund trades. ... The information on Goldman made Rajaratnam's funds $17 million richer. ... The Procter & Gamble data created illegal profits of more than $570,000 for Galleon funds managed by others," the SEC said. "After a [Goldman Sachs] board call ... Mr. Gupta is said to have hung up the phone and called Mr. Rajartnam 23 seconds later. The next morning, the SEC says, Galleon funds sold their Goldman holdings, avoiding losses of more than $3 million,"
The New York Times continued. Gupta "vigorously denied the SEC accusations." His white-collar criminal attorney
Gary Naftalis of
Kramer Levin Naftalis & Frankel LLP "strongly denied that [Gupta had] done anything wrong" in 2010 when Gupta's name was first mentioned relative to the case and said in March 2011 that the SEC charges were "totally baseless." Naftalis went on to say "that Gupta is not accused of receiving anything in exchange for information provided [and that] Gupta lost his entire investment in Galleon by fall 2008." The lost investment was specified to be "USD 10 million ... in the Galleon Buccaneers Voyager Fund." It also emerged that Mr. Gupta was in talks to become chairman of Galleon International, and therefore also stood to profit. Wiretaps in
U.S. v Rajaratnam were later played of Gupta asking Rajaratnam, "I want ... us to keep having the dialog as to ... how I can be helpful in Galleon International [and] Galleon Group." After Rajaratnam's conviction and the revelations about to Gupta in the Rajaratnam trial, the difficulty of SEC's proving even the civil charges against Gupta was still deemed considerable by observers. Among other aspects, the May, 2011,
Bloomberg report noted that, "[r]emarkably, none of Gupta's alleged criminal tips to Rajaratnam appear to have been captured on the FBI's wiretaps." But the report also noted a March 2010 e-mail from Gupta to Ajit Rangnekar, dean of the Indian School of Business, with denials, assertions and, in the reporter's opinion, "obvious inaccuracies," leaving many questions on how the cases and story would yet unfold. Gupta also served on the board of and Procter & Gamble (P&G), but stepped down immediately on March 1, 2011 "to prevent any distraction to the P&G board and our business," said a spokesman. On March 10, 2011, Gupta stepped down as chair of the
International Chamber of Commerce “until a satisfactory resolution of the case." On March 15 he stepped down as chairman of the
Public Health Foundation of India. On March 20 he resigned as chairman of the Indian School of Business, after some controversy at the school and in India. On March 29 he stepped down as advisor to the Gates foundation. By April 2011 he had resigned from every board chairmanship or membership. In the high-profile insider trading case
U.S. v Rajaratnam unfolding near the same time (March 2011), wiretaps were played of Gupta describing to Rajaratnam elements of the confidential meetings of the board of directors of Goldman Sachs, including its possible willingness to purchase commercial bank
Wachovia or insurer
AIG. The call can simply be construed as one friend calling another for help in preparing for a meeting with
Gary Cohn, Goldman's president.
(“AIG was definitely in the discussion mix.”) •
habituality Gupta's information to Rajaratnam was delivered very casually, as though it were not uncommon. A
Bloomberg profile quotes a CEO saying the wiretaps "sounded to him just like Gupta consulting a client." Yet the tapes reveal Gupta divulging confidential (if not material nonpublic) information, and Gupta asking Rajaratnam for career advice.
(“I wanted to get your straight opinion on whether you think I should do this KKR thing.”) •
fragmentation In another tape, Anil Kumar asks Rajaratnam, "It’s now reached a point where it’s physically and humanly impossible to do the things he’s doing, right?" and the two wonder about Gupta's "fragmented" state. In another wiretap, Rajaratnam suggests to Kumar that Gupta "seemed tormented" at their last meeting. As the tapes were released McKinsey was holding its regular annual partners conference, and according to a spokeswoman was "monitoring the matter and taking it seriously as you would expect.” They later released a statement saying they were "appalled and deeply dismayed." The firm has come under heavy criticism for having its former longtime senior partners and leaders (Gupta and Kumar) as well as a junior partner (Palecek) all involved in the insider trading scandal. On March 18, 2011 Gupta countersued the SEC (SDNY 11 Cv. 1900). The court filing read, "Mr. Gupta denies all allegations of wrongdoing and stands ready to mount a defense against each and every one of the Commission's charges. Yet under current Commission rules, Mr. Gupta would be deprived of a jury trial, the right to use the discovery procedures of the federal court to shape his defense and the protections of the federal rules of evidence, which were crafted to bar unreliable evidence." It is not known whether the provisions of
Dodd-Frank (the law allowing for SEC administrative proceedings in this instance) may be applied retroactively to before the law's existence, as the SEC has claimed in charging Gupta. On March 23, 2011 Goldman Sachs CEO Lloyd Blankfein testified that Gupta had in fact divulged board-privileged material to Rajaratnam, though the particular information was allegedly confidential and not material nonpublic (the legal standard for insider trading). In July 2011, U.S. District Judge Rakoff refused to throw out the countersuit against the SEC and in August, Gupta and the SEC agreed to drop their respective actions against each other. The judge had drawn attention to the fact that all 28 other SEC actions stemming from the Galleon case had been filed in federal court. As part of the August agreement, the SEC agreed to file any future charges against Gupta in federal court in New York where they would be assigned to Rakoff. There was no comment on whether such charges would be filed. Just over three months after the SEC allegations of insider trading, Goldman Sachs shareholder James Mercer filed suit against Gupta "seeking to recover any 'short-swing' profits on Goldman's behalf." In late September, 2011,
The Wall Street Journal reported that federal prosecutors were "fully committed" to filing criminal charges and were "moving closer toward bringing" them. They had previously sparred over how, when, and whether to arrest or sue Gupta, in "a bitter dispute between federal prosecutors and securities regulators." On October 26, 2011 the United States Attorney's Office filed charges against Gupta. He was arrested in New York City by the FBI and pleaded not guilty. He was released on $10 million bail (secured by his Connecticut house) on the same day. Gupta's lawyer wrote in an e-mail quoted in
Bloomberg, “Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless .... 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.” also previewed a Gupta no-
quid pro quo defense plan on
Bloomberg the day of the arrest. Three days before Gupta's arrest, Rajaratnam was reported to have said that the prosecutors had wanted him to wear a wire and tape his conversations with Gupta. "It was Rajaratnam’s understanding that were he to plead guilty and wear a wire, he might be offered a sentence of as little as five years. With good behavior, he could be out in 85 percent of that time," the report continued. Rajaratnam did not — and has not ever, at time of writing — cooperated with federal prosecutors. He has been sentenced to 11 years in prison. The trial on six counts of securities fraud and one count of conspiracy will commence before Judge Rakoff May 21, 2011. The case is U.S. v. Gupta, 11-cr-00907,
U.S. District Court, Southern District of New York (Manhattan). The date represents a six-week delay granted the defense after the prosecution broadened the indictment, adding a new charge based on a March 12, 2007, conference call and also regarding Goldman information. Each of the fraud counts carries up to 20 years in prison and the conspiracy count up to five years. Gupta also faces a fine of as much as $5 million, prosecutors said. They also said that his "investments with Rajaratnam -- $10 million and an ownership stake in at least two funds -- gave him the motive to engage in insider trading", according to one news report. The parties also discussed another possible Rajaratnam "tipster" being investigated at Goldman. The second individual had no relation to the Gupta charges and the judge agreed with the prosecution to keep the witness statements on the individual under seal. David Loeb, a Goldman Sachs managing director, Henry King, a Goldman Sachs analyst, and Matthew Korenberg, a Goldman Sachs analyst, are being investigated by the government as tippers to hedge funds. The same day as US v. Gupta, the SEC sued Gupta again (this time not in an administrative proceeding) over civil claims related to the criminal charges in US v. Gupta. In April, 2012, another charge relating to passing P&G information was added by the prosecution. Gupta's lawyers said that "newly added charges -- like the ones brought last year -- are not based on any direct evidence, but rely on supposed circumstantial evidence". More new charges based on new information may follow. Also in April,
CNBC reported that the
U.S. Attorney's office in Los Angeles was investigating an unnamed current Goldman employee for providing inside information about Apple and Intel to Rajaratnam. The defense has maintained that "the wrong person is on trial". In early May, 2012, a pre-trial defense motion for access to SEC settlement-negotiation documents was denied by Judge Rakoff. Also in early May, the prosecution made a motion to play in trial three FBI wiretaps of two Rajaratnam "conversations with his principal trader and another with Galleon's then portfolio manager" related to the Goldman Sachs information. As well, details of wiretap recordings and trading activity related to the charges were analyzed at length in the media, assessing the strengths and weaknesses of the prosecution's and defense's cases. On June 15, 2012, Gupta was found guilty of conspiracy and three counts of securities fraud. He was acquitted on two counts of securities fraud in federal court in New York. He was sentenced to two years in prison and fined $5 million. In March 2016, Gupta completed the last two months of his sentence under house arrest.
FriendsofRajat.com "[W]orld-renowned speaker
Deepak Chopra and
Mukesh Ambani, the ninth-richest man in the world [and] ... chairman of
Reliance Industries", were among supporters of Gupta's registered on a
friendsofrajat.com website prior to the trial. The site was established by retired McKinsey associate of Gupta's Atul Kanagat. This has come into play in the trial of Gupta for character witness purposes. ==Relationships of Rajaratnam, Gupta and Kumar==