NEW YORK – A federal prosecutor accused former Goldman Sachs board member Rajat Gupta on Monday of feeding inside investment tips to a corrupt hedge fund manager, while Gupta's lawyer told a jury the relationship between the Wall Street heavyweights was above board.
By sharing confidential information with his close friend, Rajat Gupta "threw away his duties, threw away his responsibilities and broke the law," Assistant U.S. Attorney Reed Brodsky told jurors in opening statements at Gupta's highly anticipated insider trading trial in federal court in Manhattan.
Brodsky recounted how former billionaire Raj Rajaratnam earned close to $1 million after Gupta told him in a phone call that Goldman had received an offer from Warren Buffett's Berkshire Hathaway to invest $5 billion in the banking giant in 2008.
"That was trading on secrets coming from someone who actually knew what was happening in the confines of the board room," Brodsky said. "That's called insider trading and that's a serious crime."
The 63-year-old Gupta is also a former board member at Procter & Gamble Co., one of the 30 companies that make up the Dow Jones industrial average and the owner of many well-known brands, including Bounty, Tide and Pringles.
A not-guilty plea by Gupta "tells you these charges are false," defense attorney Gary P. Naftalis told jurors. "He never defrauded anybody. He never cheated anybody."
The Westport, Conn., resident is charged with one count of conspiracy to commit securities fraud and five counts of securities fraud stemming from his communications with Rajaratnam.
A key to the case could be a July 29, 2008, phone call between Gupta and Rajaratnam that began with the old friends exchanging mild pleasantries, but then quickly turned serious and — by the government's account — criminal. Rajaratnam asked about a rumor that Goldman Sachs "might look to buy a commercial bank." On the other end of the phone, Gupta told him there was a "big discussion" on the subject at a recent meeting.
Brodsky said the call provided "a clear window into how these two men spoke to each other and helped each other out."
Naftalis countered that the call harms rather than helps the government's case because no unusual trading occurred around that time, and the men were discussing information already reported by analysts and journalists.
Prosecutors will try to convince the jury that the intercepted call and other evidence show that Gupta was providing inside tips that gave Rajaratnam an illegal edge in massive stock maneuvers. The tips from Gupta were like "getting tomorrow's business news today," Brodsky said Monday.
As a Goldman board member, Gupta had intimate knowledge of the confidentiality standards, the prosecutor added.
"He broke the very same rules he put in place," he said.
Naftalis said prosecutors had taken "a series of innocent, unconnected acts and put them together and put a bad spin on otherwise innocent facts."
He noted that Gupta was not accused of making any trades or receiving any secret payoffs or payments in what was "a very, strange insider trading case."
The government alleges Gupta benefited because he made investments with Rajaratnam that grew at least temporarily while the Galleon Group hedge fund founder presided over $7 billion in funds. But the defense claims Gupta lost $10 million on those investments, and that there's no evidence of kickbacks or any other quid quo pro.
Gupta "did no insider trading," his lawyer said. The case, he added, "is based on guesswork. It's based on suspicion. ... He spoke to someone on the phone and it turned out that person did something wrong."
Rajaratnam, who was born in Sri Lanka, has been the biggest catch so far in a wide-ranging insider-trading investigation by U.S. Attorney Preet Bharara that's resulted in more than two dozen prosecutions of white-collar defendants. But based on Gupta's standing in the world of finance, his trial could draw more attention, and a potential conviction could resonate farther.
Aside from his role at Goldman Sachs, the Indian-born Gupta is the former chief of McKinsey & Co., a highly regarded global consulting firm that zealously guards its reputation for discretion and integrity.
Prosecutors in effect previewed their case against Gupta at the Rajaratnam trial. Rajaratnam was convicted last year and is serving an 11-year prison sentence, the longest insider trading sentence in history.
Jurors in that case heard testimony that at an Oct. 23, 2008, Goldman board meeting, members were told that the investment bank was facing a quarterly loss for the first time since it had gone public in 1999.
Prosecutors produced phone records that they said show Gupta called Rajaratnam 23 seconds after the meeting ended, causing Rajaratnam to sell his entire position in Goldman the next morning, saving millions of dollars. Also played at trial was the tape of the hedge fund manager grilling Gupta about whether the Goldman Sachs board had discussed acquiring Wachovia or an insurance company.
Prosecutors sought to maximize the impact of the Gupta tape by calling Goldman Sachs chairman Lloyd Blankfein to testify that the phone call violated the investment bank's confidentiality policies. Prosecutors say Blankfein will return to the stand at Gupta's trial.
Prosecutors also said Monday that they planned to call Bill George, a Harvard Business School professor who serves on Goldman's board, as a witness.