His lawyer says the crim­i­nal case against Rajat Gupta is backed by weak ev­i­dence. But an anti-wall Street mood may see him get con­victed for in­sider trad­ing.

India Today - - BUSINESS & ECONOMY - By Dhi­raj Nayyar

Di­wali brought lit­tle joy for the once iconic Rajat Gupta, 62, who in 1994 be­came the first per­son born out­side the US to head Mck­in­sey, a pres­ti­gious man­age­ment con­sult­ing firm. In that ca­pac­ity, he was also the first per­son of In­dian ori­gin to head a ma­jor global firm. On the morn­ing of Oc­to­ber 26, Gupta sur­ren­dered to the FBI, which ar­rested him in New York, on charges of in­sider trad­ing. He was later re­leased on bail on a surety of $10 mil­lion (Rs 50 crore).

Gupta has been charged with five counts of se­cu­ri­ties fraud and one count of con­spir­acy to com­mit se­cu­ri­ties fraud. The charges, if proved, carry a max­i­mum term of 105 years in prison. His trial be­gins on April 9. The US au­thor­i­ties are de­ter­mined to nail Gupta, the most prom­i­nent non-wall Street face among those caught in the Raj Ra­jarat­nam in­sider trad­ing case. Ra­jarat­nam was con­victed of mak­ing mil­lions by trad­ing stocks on the ba­sis of il­le­gal tip-offs in May and was sen­tenced to 11 years in prison in Oc­to­ber. Gupta’s con­vic­tion will send out a strong mes­sage on cor­po­rate wrong­do­ing to board­rooms across Amer­ica, and not just in Wall Street.

Gupta’s down­fall is al­most as re­mark­able as his rise. Born in Kolkata, he lost both his par­ents be­fore he was 18. He earned a schol­ar­ship to study me­chan­i­cal en­gi­neer­ing at IIT, Delhi, and boarded a plane for the first time en route to Har­vard Busi­ness School to do an MBA. He joined Mck­in­sey af­ter Har­vard and rose rapidly through the ranks to be­come its chief ex­ec­u­tive. Dur­ing his nine-year stint as head of Mck­in­sey, the smooth and ar­tic­u­late Gupta, who likes to quote from the Gita in con­ver­sa­tion, came to know most of the lead­ing CEOS of Amer­ica on a first-name ba­sis.

He also be­came con­sid­er­ably wealthy. He owns a ranch in Colorado, a five-acre es­tate in West­port, Con­necti­cut, which is now the col­lat­eral for his bail surety, and a multi-mil­lion dol­lar wa­ter­front home in Florida. He did a lot of phil­an­thropic work: he helped set up the In­dian School of Busi­ness in Hy­der­abad and the Pub­lic Health Foun­da­tion of In­dia. In 2005, he was ap­pointed spe­cial ad­vi­sor to then UN sec­re­tary gen­eral Kofi An­nan on man­age­ment re­form.

But Gupta wanted more. Done with Mck­in­sey, he wanted to move into the world of pri­vate eq­uity and hedge funds, from where the new­est and rich­est poster boys of cor­po­rate Amer­ica were emerg­ing in the boom years be­tween 2000 and 2008. The bil­lion­aires club at­tracted him. Ra­jarat­nam was one of them. Ra­jarat­nam said of Gupta, “He’s en­am­oured with (Henry) Kravis (boss of a big pri­vate eq­uity firm), and I think he wants to be in that cir­cle. That’s a bil­lion­aires cir­cle...i think he sees an op­por­tu­nity to make $100 mil­lion (Rs 500 crore) over the next five-10 years with­out do­ing a lot of work.” That de­sire locked him into a cosy re­la­tion­ship with Ra­jarat­nam.

Still, six months ago, Gupta was off the hook from the prospect of go­ing to prison when US au­thor­i­ties de­cided not to press crim­i­nal charges against him in the Ra­jarat­nam case. On March 1, 2011, the US Se­cu­ri­ties and Ex­change Com­mis­sion ( SEC), Amer­ica’s stock mar­ket reg­u­la­tor, filed a civil case against Gupta in a SECdes­ig­nated court. Un­der US law, it is eas­ier to se­cure a con­vic­tion in civil ad­min­is­tra­tive pro­ceed­ings than in a crim­i­nal case: con­vic­tion in the former is guided by the prin­ci­ple of ‘pre­pon­der­ance of ev­i­dence’ while con­vic­tion in the lat­ter de­pends on ‘proof be­yond rea­son­able doubt.’

Gupta’s lawyer, Gary Naf­talis, al­ways wanted the case to be tried in a fed­eral court. On April 12, Naf­talis told the SEC court, “Gupta is the only Galleon-re­lated de­fen­dant faced with

the de­nial of the right to a jury and im­por­tant pro­tec­tions avail­able only in fed­eral court.” Gupta’s de­fence team was of the view that the case wasn’t strong enough to se­cure con­vic­tion based on proof be­yond rea­son­able doubt. The SEC dropped the civil case in Au­gust. Two months later, buoyed by the con­vic­tion and sen­tenc­ing of Ra­jarat­nam, the US At­tor­ney of New York’s south­ern district, the Ferozepur-born Preet Bharara, 43, de­cided to press crim­i­nal charges. Soon af­ter Gupta’s ar­rest, the feisty Bharara, on a cru­sade to clean up Wall Street, said that Gupta was the “il­le­gal eyes and ears” of Ra­jarat­nam.

The case against Gupta is backed by strong cir­cum­stan­tial ev­i­dence but is not wa­ter­tight. Pros­e­cu­tors are re­ly­ing on Gupta’s phone records which, on more than one oc­ca­sion, re­veal that he called Ra­jarat­nam al­most im­me­di­ately af­ter con­fer­ence calls with the board of di­rec­tors of Gold­man Sachs. Gupta was a mem­ber of the board at the time (2008). On one of these oc­ca­sions, it is al­leged that Gupta passed on in­for­ma­tion about War­ren Buf­fet’s $5 bil­lion (Rs 25,000 crore) in­vest­ment in Gold­man Sachs to his friend Ra­jarat­nam who in­stantly bought a sig­nif­i­cant num­ber of Gold­man Sachs shares only to sell them at a hand­some profit af­ter the Buf­fet in­vest­ment was made pub­lic. FBI As­sis­tant Di­rec­tor-in­Charge Jan­ice Fedar­cyk said in a state­ment: “His ea­ger­ness to pass along in­side in­for­ma­tion to Ra­jarat­nam is nowhere more starkly ev­i­dent than in the two in­stances where a to­tal of 39 sec­onds elapsed be­tween his learn­ing of cru­cial Gold­man Sachs in­for­ma­tion and lav­ish­ing it on his good friend.”

In Gupta’s favour is the fact that the con­ver­sa­tion about Buf­fet’s in­vest­ment was not wire­tapped. The pros­e­cu­tor’s ar­gu­ment is based on an in­fer­ence from phone records and Ra­jarat­nam’s trad­ing ac­tiv­i­ties. That may not be enough to con­vince a jury. An­other piece of ev­i­dence is a wire­tapped con­ver­sa­tion in Oc­to­ber 2008 in which Ra­jarat­nam tells an em­ployee that “he was told by a Gold­man Sachs board mem­ber that the in­vest­ment bank was los­ing $2 (Rs 100) a share”. Gupta is not named in the con­ver­sa­tion and it is un­likely to be al­lowed as ev­i­dence on the grounds that it is hearsay. The pros­e­cu­tion has not re­vealed so far whether it has any ev­i­dence of Gupta ben­e­fit­ing fi­nan­cially from the tip-offs he gave Ra­jarat­nam.

That the au­thor­i­ties were look­ing for more ev­i­dence against Gupta be­yond the amount they had used in the Galleon case was re­vealed by Ra­jarat­nam in a re­cent in­ter­view to

Newsweek. Ac­cord­ing to Ra­jarat­nam, the pros­e­cu­tors tried to strike a bar­gain with him till as re­cently as two weeks be­fore his sen­tenc­ing. He could pro­vide proof against Gupta and earn a re­duced sen­tence, pos­si­bly as lit­tle as 5 years, against the 11 years he ul­ti­mately got. “They wanted me to plea-bar­gain. They want to get Rajat. I am not go­ing to do what peo­ple did to me. Rajat has four daugh­ters,” said Ra­jarat­nam in the in­ter­view.

Ra­jarat­nam’s con­vic­tion was se­cured with the help of three peo­ple, all friends who turned ap­provers and tes­ti­fied against him: former em­ployee Roomy Khan, former Mck­in­sey part­ner Anil Ku­mar and former In­tel ex­ec­u­tive Ra­jiv Goel. For now, Ra­jarat­nam, pained by what he views as their be­trayal, has ruled out do­ing some­thing sim­i­lar to his friend Gupta.

Gupta’s lawyer Naf­talis has fi­nally got the le­gal fo­rum he al­ways wanted. He ex­uded con­fi­dence af­ter his client se­cured bail. “The facts in this case demon­strate that Gupta is in­no­cent of any of these charges and that he has al­ways acted with hon­esty and in­tegrity,” Naf­talis said in a state­ment. The real chal­lenge for him will likely be to per­suade a jury in a coun­try that is an­gry with the shenani­gans of Wall Street and scep­ti­cal about the in­tegrity of top cor­po­rate czars in the af­ter­math of the global fi­nan­cial cri­sis as well as the deep re­ces­sion that has fol­lowed it.




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