Rajat Gupta, former McKinsey head and founder of the Indian School of Business in Hyderabad, on Wednesday pleaded not-guilty to the charges of insider trading that could put him in jail for life, if proven true.
Gupta, who is now free on bail for $10 million, surrendered to the FBI on Diwali morning and was arraigned in a New York court. He is charged with five counts of security fraud and one of conspiracy, which together could get him 105 years in jail, with millions in fine.
The former McKinsey chief, who was born in Kolkata and grew up in Delhi, is charged with passing insider tips to friend and
founder of Galleon hedge fund Raj Rajaratnam, who has been sentenced to 11 years for insider trading.
He “became the illegal eyes and ears in the boardroom” for Rajaratnam, said US attorney for Manhattan Preet Bharara, also Indian-born, whose office is prosecuting the Galleon insider trading case.
Gupta’s lawyer Gary Naftalis said, he “did not trade in any securities, did not tip Mr Rajaratnam so he could trade, and did not share in any profits.”
The charges brought against him are for insider information allegedly passed on by him as director on the boards of investments giant Goldman Sachs and consumer goods major Proctor & Gamble.
“The Inside Information included confidential information about the companies’ earnings and financial performance, as well as certain corporate transactions that were being undertaken” by them, said the indictment.
The tips were allegedly passed on from 2008 through January 2009. Rajaratnam was arrested in October after over a year under surveillance. His phone was tapped.
Within 16 seconds of wrapping up a telephonic conference of the board on September 23, 2008, to approve a $5-billion investment in Goldman Sachs by Warren Buffett, Gupta called up Rajaratnam to tell him about it.
Just two minutes before the close of the market, Rajaratnam ordered the purchase of about 217,200 shares of Goldman Sachs common stock for about $27 million, said the indictment.
The speed with which other bits of information were passed on was referred to by FBI’s assistant director in charge of investigating this case, Janice K Fedaryck, as “instant messaging”.
Goldman Sachs announced Buffet investment later that day. Its stocks opened for trading next morning $3 higher. Galleon offloaded all the 217,000 shares, netting a profit of $840,000.
In the second instance, Gupta on October 23, 2008, called Rajaratnam 23 second after receiving information about Goldman Sachs’ negative quarterly earnings, which helped Galleon save several millions.
As a director at P&G, Gupta passed on to Rajaratnam information about negative earnings through a call on January 29, 2000. The US Securities and Exchange Commission said Gupta’s tips were worth $23 million to Galleon in profits or losses saved. In all, the Rajaratnam-owned hedge fund made $90 million from insider trading involving 15 companies.
The commission earlier initiated administrative charges, but dropped them later saying it might move criminal charges when it was ready. And it did that on Wednesday, leading to Gupta’s surrender.