Rajat K. Gupta on Trial: The Criminal Indictment
On October 26, 2011, the FBI arrested Rajat K. Gupta, former chief executive of McKinsey & Company and director of Goldman Sachs and Procter & Gamble (“P&G”), after he was indicted by a grand jury on six counts (five counts of securities fraud and one count of conspiracy to commit securities fraud). On the same day, the Securities and Exchange Commission (“SEC”) filed a civil complaint in federal court against both Gupta and Raj Rajaratnam, the founder of Galleon Management (“Galleon”) and Gupta’s alleged co-conspirator. The civil case and the criminal charges leveled against Gupta come on the heels of the criminal trial and conviction of Rajaratnam.
The criminal indictment alleged the insider trading scheme arose from various business relationships and a personal friendship between Gupta and Rajaratnam. It was alleged that in 2008, Gupta, Rajaratnam, “and others known and unknown, participated in a scheme to defraud by disclosing material, nonpublic information relating to Goldman Sachs and P&G…and/or executing securities transactions on the basis of the [i]nside [i]nformation.”
The first count was conspiracy to commit securities fraud. The indictment states that Gupta, Rajaratnam, and others “willfully and knowingly did combine, conspire, confederate and agree together and with each other to commit offenses against the United States…” The alleged conspiracy was carried out by Gupta disclosing Goldman Sachs and P&G inside information to Rajaratnam, “with the understanding that Rajaratnam would use the [i]nside [i]nformation to purchase and sell securities, and thereby receive illegal profits and/or illegally avoid losses.” Rajaratnam would then allegedly buy or sell securities based on the information or cause others to do so.
The indictment lists twenty-six overt acts to corroborate the conspiracy. These acts include the following:
- Rajaratnam told a Galleon portfolio manager “he had learned from someone on the P&G Board that P&G was selling its Folgers business…”;
- On June 10, 2008, Gupta and Rajaratnam traded telephone calls after Gupta spoke with a Goldman Sachs senior executive;
- On June 11, 2008, Rajaratnam caused Galleon to purchase 5,500 Goldman Sachs shares;
- On June 12, 2008, Rajaratnam caused Galleon to purchase an approximate total of 125,000 Goldman Sachs shares;
- On September 23, 2008, Gupta telephoned Rajaratnam after meeting with Goldman Sachs’ Board regarding a Berkshire Hathaway investment;
- After speaking with Gupta, Rajaratnam caused Galleon to purchase 217,2000 Goldman Sachs shares;
- On October 23, 2008, after participating in a Goldman Sachs Board meeting, Gupta telephoned Rajaratnam;
- On October 24, 2008, Rajaratnam caused Galleon to sell 150,000 Goldman Sachs shares;
- On January 29, 2009, after a telephone call from Gupta, Rajaratnam told a Galleon portfolio manager “he had received certain information concerning P&G’s organic sales growth from a contact on the P&G Board”; and
- On January 29, 2009, Galleon sold short 180,000 P&G shares.
A full list of the overt acts and the indictment can be found here.
The following five counts alleged securities fraud in violation of Rule 10b-5 by:
(a) employing devices, schemes, and artifices to defraud; (b) making untrue statements of material facts and omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and (c) engaging in acts, practices, and courses of business which operated and would operate as a fraud and deceit upon any person, to wit, on the basis of [i]nside [i]nformation that [Gupta] disclosed...
Counts 2 through 6 concern the following trades, respectively: September 23, 2008 at 3:58 p.m., purchase of approximately 150,000 Goldman Sachs shares; September 23, 2008 at 3:58 p.m., purchase of 67,200 Goldman Sachs shares; October 24, 2008 at 9:31 a.m., sale of 50,000 Goldman Sachs shares; October 24, 2008 at 10:09 a.m., sale of 50,000 Goldman Sachs shares; and October 24, 2008 at 10:37 a.m., sale of 50,000 Goldman Sachs shares.
The United States seeks forfeiture of all money, or property acquired with money, that is traceable to the profits made from the alleged insider trading.
The primary materials for this case may be found on the DU Corporate Governance website.