The Raj Rajaratnam/Galleon Group, Anil Kumar, and Rajat Gupta inside trading cases are parallel and related civil and criminal actions by the U.S. Securities and Exchange Commission and the United States Department of Justice against three friends and business partners: Galleon Group hedge fund founder-owner Raj Rajaratnam and former McKinsey & Company senior executives Anil Kumar and Rajat Gupta. In these proceedings, the men were confronted with insider trading charges: Rajaratnam was convicted, Kumar pleaded guilty and testified as key witness in the criminal trials of Rajaratnam and Gupta, and Gupta was convicted in United States District Court for the Southern District of New York in Manhattan in June 2012.
Rajaratnam charges and trial On October 16, 2009, defendants Raj Rajaratnam and Anil Kumar were arrested and indicted for insider trading and conspiracy. The charges stemmed from an investigation by the United States Attorney's Office (USAO) into allegations that Rajaratnam conspired in insider trading of stock for several large companies. Rajaratnam was found guilty on all 14 charges and sentenced to 11 years in prison for profiting from tips he received from Robert Moffat, Anil Kumar, Rajiv Goel, and Roomy Khan. Danielle Chiesi was sentenced to 30 months in prison with 2 years of supervised release.
During the discovery phase of the criminal trial, the USAO turned over to the defendants the contents of 18,150 wiretapped communications involving 550 different people, which were recorded over the course of sixteen months from ten telephones, including home, office and mobile lines belonging to the defendants.SEC v. Rajaratnam, 622 F.3d 159 (2nd Cir. 2010) (opinion full text).
Kumar maintained a low profile outside McKinsey until an October 2009 arrest in conjunction with an ongoing and wide-ranging US governmental investigation into insider trading.de la Merced, Michael. “Hedge Fund Chief Is Charged With Fraud”. The New York Times. October 16, 2009. Former mentor Rajat Gupta was later arrested by the FBI in a related case,Rothfield, Michael, Susan Pulliam and Chad Bray. “Ex-Goldman Director Gupta Charged in Insider Case”. The Wall Street Journal. October 26, 2011. prompting inquiries into McKinsey's senior leadership and business model.Gapper, John. “McKinsey Model Springs a Leak”. The Financial Times. March 9, 2011.Salmon, Felix. “McKinsey's Corrupted Culture”. Reuters. March 9, 2011.
As of December 2009, Kumar was no longer at the consultancy.Bray, Chad, “Galleon Figure Kumar No Longer with McKinsey”. The Wall Street Journal. December 4, 2009. In January 2010 he pleaded guilty to insider trading chargesKouwe, Zachery. “Guilty Plea in Galleon Insider Trading Case”. The New York Times. January 7, 2010. and was the government's star witness in March 2011 in U.S. v Rajaratnam against his billionaire friend and Galleon Group founder Raj Rajaratnam.Rothfeld, Michael and Susan Pulliam. “Calling Miss Manners: Tapes in Galleon Case Show Some Snark”. The Wall Street Journal. March 17, 2011.Rothfeld, Michael, Susan Pulliam and Chad Bray. “Fund Titan Found Guilty”. The Wall Street Journal. May 12, 2011. In the sprawling case his involvement was unusual; according to a Reuters blog, “He’s the only informant who could be considered even more successful than Raj was, at least professionally if not in terms of raw cash. Raj had money, more money than he really knew what to do with, but Kumar had much more societal acceptance and prestige.”Salmon, Felix. “How to Set Up An Insider-Trading Network”. Reuters. May 12, 2011. He settled with the SEC in May 2010 for $2.8 million, the amount after gains he received from Rajaratnam through a Swiss bank account in a domestic worker's name.Bray, Chad. “Kumar Settles SEC Charges in Galleon Case”. The Wall Street Journal. May 17, 2010. Gupta, Rajaratnam, and Kumar were all close friends and had founded the $1.3-billion private equity firm New Silk Route together, though Rajaratnam and Kumar withdrew before the firm began operation.Scannell, Kara. “Insider Trading Star Witness Challenged”. The Financial Times. March 17, 2011.
On October 26, 2011 the United States Attorney's Office filed charges against Rajat 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.”Hurtado, Patricia, "Rajat Gupta Surrenders to Federal Authorities", Bloomberg, October 26, 2011. Retrieved 2011-10-26. "The tips generated 'illicit profits and loss avoidance' of more than $23 million, the [SEC] alleged in [the] lawsuit. '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,' said Manhattan U.S. Attorney Preet Bharara, whose office is prosecuting the case."Hurtado, Patricia, David Glovin and Chris Dolmetsch, "Ex-Goldman Director Gupta Indicted in Probe of Rajaratnam Trades", Bloomberg Businessweek, October 27, 2011.
Origins of the case On Friday October 16, 2009, Raj Rajaratnam was arrested by the FBI and accused of conspiring with others in insider trading in several publicly traded companies. U.S. Attorney Preet Bharara put the total profits in the scheme at over $60 million, telling a news conference it was the largest hedge fund insider trading case in United States history. Jim Walden, an attorney for Mr. Rajaratnam, said his client is innocent and will fight the insider-trading charges.
Rajaratnam allegedly profited from information received from: Robert Moffat, a senior executive of IBM considered next in line to be CEO Anil Kumar, a senior executive of McKinsey and close friend of Gupta (its former CEO) who was later also accused of passing information to Rajaratnam Rajiv Goel, a midlevel Intel Capital executive Roomy Khan, previously convicted of wire fraud for providing inside information from her employer, Intel, to Rajaratnam.USDC NDCA case no. 5:01-cr-20029-JW USA v. Khan It was reported that Rajaratnam, Goel and Kumar were all part of the class of 1983 from Wharton school.
The Sri Lankan stock market fell sharply after his arrest on insider trading charges in October 2009. Sri Lanka's Securities and Exchange Commission is reviewing the active stock trading of Raj Rajaratnam with a view of identifying any insider trading.
It said he also conspired to get confidential information on the $5 billion purchase by Warren Buffett’s Berkshire Hathaway of Goldman Sachs preferred stock before the September 2008 announcement of that transaction. The Wall Street Journal reported in April that a former member of the board of directors of Goldman Sachs and former McKinsey & Company chief executive Rajat Gupta told Rajaratnam about Berkshire's investment before it became public. Gupta stood to profit as would-be chairman of Galleon International, a co-founder of New Silk Route with Rajaratnam, and as a friend of Rajaratnam. In March 2011 Gupta was charged in an administrative proceeding by the SEC. Gupta maintained his innocence, countersued, won dismissal of the administrative charge, then was arrested on criminal charges.
Gupta charges and trial 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.James, Frank, "Goldman Sachs Director Tied To Insider-Trading Scandal", NPR "two-way" blog, April 23, 2010 12:47 pm. Retrieved 2011-03-01. 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."ISB aiming to be world No.1: Gupta" , The Financial Express, August 6, 2010 at 1408 hrs IST. 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.Lattman, Peter and Susanne Craig, "Goldman C.E.O. Could Testify in Galleon Trial", The New York Times DealBook, March 3, 2011, 11:15 pm. Retrieved 2011-03-04.
Gupta "vigorously denied the SEC accusations.""Ex-Goldman Director Charged With Insider Trading", The Associated Press via NPR, March 1, 2011. Retrieved 2011-03-01. 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 caseSharma, Amol, "Rajat Gupta: Indian Business Hero Under Fire", The Wall Street Journal RealTimeIndia, May 6, 2010, 5:54 PM IST. Retrieved 2011-03-03. 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."Popper, Nathaniel, "Rajat Gupta, former Goldman Sachs director, faces SEC accusations", The Los Angeles Times, March 2, 2011. Retrieved 2011-03-03. The lost investment was specified to be "USD 10 million ... in the Galleon Buccaneers Voyager Fund."
Naftalis said on March 1 that "Gupta is not accused of receiving anything in exchange for information." Yet a week later in U.S. v Rajaratnam it emerged that "Mr Rajaratnam ... might pay Mr Gupta with a large stake in the fund, and that Mr Rajaratnam loaned Mr Gupta money so he could increase his investment in a Galleon 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."