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    Ex-Goldman director Gupta charged in insider case

    NEW YORK (Reuters) - Rajat Gupta, who sat on the boards of some of America's most prestigious companies, was arrested and charged on Wednesday with being the "illegal eyes and ears" for his friend Raj Rajaratnam, the central figure in a broad U.S. crackdown on insider trading at hedge funds.

    Gupta, 62, a former director of Goldman Sachs Group Inc, Procter & Gamble and former global head of the McKinsey & Co consultancy, is the most prominent executive to face insider-trading charges since Rajaratnam was arrested in October 2009.

    At the start of his court appearance on five counts of securities fraud and one count of conspiracy, the Manhattan federal courtroom was silent but for the sound of Gupta slowly leafing through a copy of the 21-page indictment. It was his first opportunity since he surrendered to FBI agents on Wednesday morning to read the allegations against him.

    His defense lawyer entered a plea of not guilty on charges tied to what prosecutors say were Gupta's leaks of Goldman and Procter & Gamble secrets to Rajaratnam in 2008 and 2009. U.S. District Judge Jed Rakoff set a trial date of April 9, 2012 as Gupta sat calmly with his arms folded.

    Earlier, another judge granted Gupta's release on $10 million bail, secured by his home in Westport, Connecticut, with travel restrictions. Moments before U.S. Magistrate Judge Kevin Nathaniel Fox walked into the courtroom, a lawyer handed Gupta a salmon-colored designer tie that he knotted swiftly in the collar of his blue dress shirt.

    Two weeks ago, Galleon Group founder Rajaratnam, 54, was sentenced to 11 years in prison -- the longest sentence ever in an insider-trading case -- for his conviction in May on 14 criminal counts. The Galleon case caught many of the fund manager's associates on secretly recorded phone calls.

    Gupta's lawyer, Gary Naftalis, said in a statement that there were legitimate reasons for communications between his client and Rajaratnam, including a $10 million investment that Gupta had in a fund managed by the Galleon founder. Gupta lost the entire amount, Naftalis said.

    "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," Naftalis said.

    He said Gupta did not trade in any stocks and did not tip Rajaratnam so he could trade.

    Manhattan U.S. Attorney Preet Bharara said in a statement that Gupta betrayed the trust he had with top companies.

    "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," Bharara said.

    Some legal experts said that unlike in the case of overwhelming phone-tap evidence against Rajaratnam, prosecutors might have a tougher time convincing a jury of Gupta's guilt.

    "How credible is the evidence that he actually disclosed information he knew to be confidential to Rajaratnam? Is this going to be triple hearsay?" asked Michael Kendall, head of the white-collar group of McDermott Will & Emery and a former federal prosecutor. "If there's no financial benefit, that makes it easy to offer up an alternative explanation."

    Gupta also faces civil charges brought by the U.S. Securities and Exchange Commission. The SEC said Rajaratnam's funds made more than $23 million on Gupta's information.

    The criminal charges carry a maximum prison sentence of 25 years.

    MCKINSEY'S GLOBAL HEAD

    Gupta was global head of McKinsey for nine years until he retired in 2007. He won a seat on the board of powerful Wall Street bank Goldman in 2006 and left in May 2010, seven months after Rajaratnam's arrest. He was also a director at P&G; and American Airlines Corp.

    Goldman Sachs spokesman Stephen Cohen declined to comment on Wednesday. Representatives from P&G;, American Airlines and McKinsey also declined comment.

    Gupta was born in India and made his name in the U.S. corporate world after graduating with an MBA from Harvard Business School. Rajaratnam was born in Sri Lanka and became a billionaire through his New York hedge fund business.

    The SEC said Gupta had business dealings with Rajaratnam and "stood to benefit from his relations" with him; Gupta was an investor in Galleon entities that "traded -- and handsomely profited -- based on Gupta's illegal tips."

    The government contends that Gupta provided Rajaratnam with advance knowledge of Warren Buffett's $5 billion investment in Goldman at the height of the 2008 financial crisis, as well as information about Goldman's surprise fourth-quarter loss in 2008 and its first as a public company, and P&G; quarterly earnings in late January 2009.

    The accusations were revealed before and during Rajaratnam's trial. Prosecutors previously described Gupta as an unindicted co-conspirator, but had not lodged formal charges.

    Goldman Chief Executive Officer Lloyd Blankfein testified at the trial as a prosecution witness about Gupta's conduct on the bank's board. Prosecutors also played secretly recorded telephone conversations to the jury in which Rajaratnam told Galleon employees about information he received from Gupta.

    Wednesday's indictment said that on October 23, 2008 Gupta called Rajaratnam 23 seconds after disconnecting from a Goldman board call and spoke to Rajaratnam for 13 minutes, disclosing negative interim earnings results.

    In one recording played at the trial, Rajaratnam was on a call with David Lau, chief of Galleon's Singapore branch, on October 24, 2008. They discussed a tip he got from a board member that Goldman was on its way to a surprise fourth-quarter loss, its first as a public company.

    "I just heard from somebody who's on the board of Goldman Sachs, they are gonna lose $2 per share," Rajaratnam was heard saying. "So what he (the board member) was telling me was that, uh, Goldman, the quarter's pretty bad."

    The case is USA v Rajat K. Gupta, U.S. District Court for the Southern District of New York, No. 11-907.

    (Reporting by Grant McCool, Basil Katz, Alison Frankel and Jonathan Stempel, editing by Gerald E. McCormick, Lisa Von Ahn, Dave Zimmerman, Robert MacMillan and Bernard Orr)

    115 comments

    • A_Kryzer 2 days ago
      I say prosecute every bank and rating agency and that had their hands in the blatant fraud brought against investors and paid for by bailout money. Fines are not enough when they can borrow money for virtually no interest. They knew they were selling garbage derivative bundles screwing people out of hard earned money. Send them to real prison not the country club prisons these people usually get and collect all monies lost to pay back investors. How will anything change on Wall Street until this happens.
    • joe  •  Quito, Ecuador  •  2 days ago
      Insider trading has gone on for years. The fed has turned a blind eye for long enough.It is time to clean up wall street and expose these wizz kids for what they are, CRIMINALS
    • Hoosier Daddy Yesterday
      Tip of the iceberg. Seak and you shall find. There's a thin line between the insiders who market their knowledge to the highest bidfder; the consumer who'll take the money and run; lobbyists who see opportunity in legislation and The Congress, who won't be digging too deep, trust me.
    • Deborah 2 days ago
      A special prison for White collar crime. It is called a chain gang building roads and bridges. Black and white stripes with sledge hammers/ picks/ jack hammers. Make them work hard labor. Put a sign on thier back I am a theif and robbed your 401k and your pension.
    • skepticaleye Yesterday
      Insider trading is just one of the many moral failures of the Wall Street ethic that has fueled Occupy Wall Street. It's time to end this foul game!
    • wildcat  •  Kuala Lumpur, Malaysia  •  Yesterday
      Well folks now we know how these people get unusually rich. Start a company. Get a connection. then start cheating. A few got caught, But many more out there that are still free.
    • Martin 2 days ago
      Hope he spends as much time in jail as a poor black man would were he to steal a can of tuna to fight off hungar.
    • TallDudeRetired 2 days ago
      When will the SEC start prosecuting Lloyd Blankfein, Richard Fuld, Anthony Mozillo, and Ken Lewis for their part in taking down the US financial system. How long can the GOP with the TEA PARTY protect these individuals by making the SEC inept and incompetent.
    • 2 days ago
      Time for higher taxes on top %1 income takers.
    • Falcon 2 days ago
      I say empty the prisons of all the meth and crackheads to make room for the bankers and Wall Street criminals. The meth and crackheads don't scare me because they are already killing themselves, the people that SCARE ME WEAR A THREE PIECE SUIT.
    • ur just a bunch of yahoos 2 days ago
      Who produces these monsters? Harvard Business School, Stanford Business School, Yale Law School... The top US schools mainly teach how to lie, cheat, steal, and dodge the law - they NEVER give a hoot about ethics and right vs. wrong.
    • marty s 2 days ago
      There are a few thousand other corporate bigwigs who should be in the dock with him!
    • Janice  •  Cincinnati, United States  •  2 days ago
      One down about a thousand to go.
    • Good Spotty  •  Union, United States  •  2 days ago
      Again, MAJOR criminal activity on Wall Street or NY (bad cops) and it wasn't protesters.

      Remember these insider trading deals steal your grandma's money!
    • elephant-hunter 2 days ago
      put them and all the crooked republicans in prison.
    • Letitgo 2 days ago
      Well that is a start...Maybe Paulson should get his passport updated as well as all those Goldman Scumbags..Gee Lloyd Blankfein is your fingers clean??? Wall Street should be very happy with what they have done to the Corportocracy and the Ineptocracies that are considered todays Governments..
    • BlueTiger 2 days ago
      Let the law takes it's course. And when it's done taking it's course, the allegations would most likely be proven to be true. Then spare no effort to drag this guy to jail by his nuts for maximum prison sentence for his offenses!

      Molesting, raping and attempting to murder the US economy with impunity should be intolerable.
    • wayne 2 days ago
      if convicted which country club will they send him, they never go to a real prison
    • Pecunia rules! 2 days ago
      Why do wealthy criminals get to surrender to the FBI, so long after committing their crimes??
      At least he had time to destroy much of the evidence....he will probably get a small fine ($ 5 billion), probation (for life or 18months with good behavior); community service on Wall Street or the Federal Reserve. In 2015 he will be qualified to run for the GOP's president of 2016!!
    • Don 2 days ago
      EVERYONE associated with Wall Street engages in "insider trading". They steal from us working stiffs and should all be locked up.
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