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Indictment reveals insider-trading charges against Rajat Gupta [Updated]

October 26, 2011 |  8:57 am


Prosecutors unsealed an indictment detailing insider-trading charges against one of the kings of American finance, Rajat Gupta, who surrendered to authorities earlier Wednesday morning.

A grand jury charged Gupta, the former head of the McKinsey & Co. consulting firm, with five counts of securities fraud and one count of conspiracy to commit securities fraud for providing inside information to hedge fund magnate Raj Rajaratnam, who was recently convicted and sent to prison for 11 years for insider trading. 

The complaint, unsealed in Manhattan federal court, says that Gupta, 62, provided Rajaratnam with information he had learned as a board member of Goldman Sachs and Procter & Gamble in 2008 and 2009. In one instance, Rajaratnam placed trades based on the information within 39 seconds of learning it from Gupta, authorities said.

PHOTOS: High-profile crime: A modern history

In total, prosecutors say that Rajaratnam's Galleon Group hedge funds made 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 could face up to 20 years in prison for each count of securities fraud, according to prosecutors. The Securities and Exchange Commission separately filed a civil lawsuit against Gupta on Wednesday morning.

In a statement, the Manhattan U.S. attorney, Preet Bharara, said: "Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders. As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr. Gupta's breach of duty."

The case is the latest insider-trading case brought by the U.S. attorney, who has said recently that the practice is "rampant" on Wall Street. The charges against Gupta, though, represent the highest profile figure ensnared in the wide-ranging investigation.

Gupta was first fingered in the probe earlier this year when the SEC accused him in regulatory proceedings of improperly sharing information he learned as a member of Goldman's board of directors.

Gupta was accused at the time of passing information to Rajaratnam about Warren Buffett's $5-billion investment in Goldman at the height of the financial crisis. The revelations came just days before Rajaratnam's trial on insider-trading charges began.

Since Gupta was accused, though, his case had mostly gone quiet, and there was some speculation that it was being dropped. Gupta sued the SEC this summer, accusing the agency of treating him unfairly by pursuing him through administrative proceedings rather than the more typical lawsuit or criminal charges.

In a dramatic turn in the case, Gupta surrendered to the FBI to face criminal charges at 5:15 a.m. Wednesday morning at the agency's Manhattan headquarters. An FBI spokesman said Gupta has been processed and would be formally arraigned in front of a judge later in the day.

[Updated at 9:55 a.m.: Gupta's lawyer, Gary Naftalis, said that the charges are "totally baseless" and that Gupta lost the investment he made with Rajaratnam.

"The facts in this case demonstrate that Mr. Gupta is innocent of any of these charges and that he has always acted with honesty 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," Naftalis said in a statement. "We are confident that these accusations – which are based entirely on circumstantial evidence – cannot withstand scrutiny and that Mr. Gupta will be completely exonerated of any wrongdoing."]

Gupta's arrest marks a low point in the downward arc of a man who once was one of the most trusted figures in the corporate world, conferring with the most important figures of American finance. Within days of the civil case being made public in March, Gupta resigned from his positions on several corporate boards, including Procter & Gamble and American Airlines parent AMR Corp.


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Rajat Gupta, former Goldman Sachs director, accused of insider trading

-- Nathaniel Popper

Photo: Rajat Gupta, shown in 2008, has surrendered to the FBI. Credit: Mackson Wasamunu / Reuters