Goldman Sachs ex-board member Rajat Gupta hopes to win insider trading case on the offensive

NEW YORK: As a business executive, being proactive has been second nature to Rajat Gupta. He did not become the head of McKinsey—the leader of 8,000 cream-of-the-crop consultants—expanding its presence to 20-odd countries and raking in $4 billion a year for the company by being conservative.

When the 62-year-old former member of the Goldman Sachs board countersued the US Securities and Exchange Commission ( SEC) last Friday, he appears to be calculating that going right for the jugular will once again work for him, as it consistently has in his nearly fourdecade-long career in business. On Wall Street and within the legal community, the initial reaction to the suit, which came less than three weeks after the agency initiated civil administrative action against the Kolkata-born Gupta for insider trading, has been one of surprise.

Robert Heim, a partner with the New York law firm Meyers & Heim LLP, pointed out such lawsuits against SEC are not typical in insider trading litigations. “Mr Gupta’s lawsuit is highly unusual ,” he said. “It is very rare.” Heim, who has worked in a number of insider trading cases during his tenure as an SEC assistant regional director from 1993 to 1999, said, “This is a very aggressive defence strategy,” adding, “It is definitely going to make the SEC sit up and take notice.” Gupta’s suit, filed at the federal District Court in Manhattan, claimed the SEC—the agency that regulates America’s securities industry and markets—was wrong to deny him a jury trial.
Getting Ready For a Long Battle

On Monday, the SEC declined comment. Calls to the New York office of Gupta's lawyer, Gary Naftalis, were also not returned . For now, both sides seem to be getting ready for an expensive and protracted legal battle. There the latest developments have not been favourable to Gupta.

On Wednesday , Lloyd Blankfein, chief executive of Goldman Sachs, made a much-anticipated appearance as a prosecution witness at the trail of Raj Rajaratnam, founder and hedge fund manager of Galleon Management. Blankfein told the jury that Gupta had violated Goldman's confidentiality policies by revealing to Rajaratnam that in a June 2008 meeting, the board had discussed the possibility of acquiring Wachovia Corp, a bank or an insurance company, possibly AIG. Gupta told Rajaratnam the board was "divided".

The lawsuit was indeed an unexpected twist to the Gupta insider trading saga that began on March 1, when the SEC filed charges against the Indian American businessman saying he illegally tipped Rajaratnam with non-public information about Goldman Sachs and Procter & Gamble, while serving on the boards of the two companies. According to the agency, the tips Gupta gave Rajaratnam resulted in "illicit profits and loss avoidance" to the tune of $18 million.

Under the US securities law trading of a corporation's stock and securities by its directors, officers or key employees on the basis of what is termed as "material non-public information" is considered insider trading. The SEC cited examples of Gupta's alleged egregiousness. In one instance, barely four minutes after he took part in a special meeting of the Goldman board in 2008 that eventually won a $5-billion investment by Warren Buffett's Berkshire Hathaway, Gupta placed a call to Rajaratnam and, within minutes, Galleon purchased 175,000 Goldman shares.

The profit the next day: close to a million dollars. A more profitable instance, according to the SEC, was when Gupta tipped off Galleon that Goldman Sachs would have a better-than-expected quarter. Rajaratnam then snapped up 5,500 Goldman options and more than 350,000 Goldman shares. When Galleon dumped the options in June after the Goldman earnings announcement, the profit was a hefty $13.6 million. Rajaratnam, a Sri Lankan American, was arrested in 2009 for insider trading, and his trial is under way in New York.

If convicted, he could get up to 20 years in prison. Curiously, the SEC initiated an administrative proceeding against Gupta, not a federal jury trial. The agency did that using the power vested in it by a recent legislation—the Dodd-Frank law—that gave it authority to pursue individuals through such administrative action, where the threshold is much less than a jury trial.

Now Gupta's lawsuit questions the SEC's attempt to use the law retroactively. It pointed out all the incidents that led to the SEC action against him took place before the Dodd-Frank legislation was enacted . Gupta was the only accused in the Rajaratnam case, who was charged in a civil lawsuit, leading many to believe that evidence against him might be thin. So far an audio tape involving Gupta, which was presented in the Rajaratnam trial, has been the main documentary evidence against the former McKinsey head.

From a legal standpoint, the 18-minute tape is not seen as incriminating in itself. This is because the conversation took place in July 2008 while the board meeting was in June that year. By that time, some say, the fact that Goldman was thinking about buying a bank or an insurance company was well known. However, it is embarrassing for Gupta at many levels. For starters, in it, he is clearly heard sharing confidential information discussed at Goldman's board meeting with Rajaratnam, an action that earned him Blankfein's rebuke.

Then there is also the disturbing, quiet acknowledgement by Gupta of the fact that Anil Kumar—a star government witness—was giving insider information to Rajaratnam, which is as sacrilegious a crime as there can be in the hallowed world of McKinsey's .

Meanwhile, in the tri-state area and other parts of the US, Gupta's friends and acquaintances , and those Indian Americans who have followed the IITian's stellar career over the past few decades are still trying to make sense of his swift fall from grace. Many of his friends would not comment for this story. Those from his home state Connecticut, who commented , did so on the condition of anonymity.

The question that is in the mind of nearly everyone is how could someone of Gupta's stature and record be in the position that he is in today. Gupta is estimated to be worth more than $100 million-with multiple million-dollar homes, including a $12.- million residence in Westport, Connecticut, and a $4-million plus mansion on Palm Island, off the Florida coast.

Even after he retired from McKinsey in 2007, Gupta stayed in the limelight and earned a decent salary: he made more than $3.2 million in 2009 for his work on several high profile boards, including five public companies, including Goldman and Procter & Gamble.

"We never expected something like this to happen to him," Dr Thomas Abraham, the founder of Global Organisation of People of Indian Origin, said. Abraham, who lives in Stamford, Connecticut, a few miles from Westport, where Gupta lives, and a businessman himself, has met Gupta several times. Among Connecticut's Indian Americans , a small, close-knit community, with many making a living off Wall Street, there still a deep well of sympathy for Gupta, who has been involved in a number of philanthropicprojects.

In 2001, he helped raise $1 billion in relief funds for the victims of the Gujarat earthquake, and later that year founded America India Foundation, the bestknown Indian American charity in the US, along with his friend Victor Menezes , a senior advisor with New Silk Route Partners. The charity raised more than a million dollars last year for causes in India.

"Sincere , sensitive and compassionate" was how Paul Ahuja, a businessconsultant described Gupta, whom he has met a few times at social gatherings in Connecticut . "From what I know of him, he does not have an extravagant lifestyle, does not drive a fancy car, is not at all ostentatious , does not throw his money around to impress people," said Viresh Sharma, a retired businessman who lives in New Canaan, Connecticut.

"My daughter knows one of his daughters and when she goes to their house his (Gupta's ) wife is the type who asks 'what do you want to eat?' and then cooks that." Gupta is married to Anita Mattoo, an electrical engineer whom he met at IITDelhi . They have four daughters—Geetanjali , Megha, Aditi and Deepali. Within the Indian American community , there is a nervous debate on whether the Gupta case could dent its hitherto impeccable reputation.

Many think the trial of Gupta, one of the first from the community to get a seat at corporate America's high table, has the potential to tarnish its image. Vivek Wadhwa, a director of research at the Pratt School of Engineering at Duke University and a senior research associate at Harvard Law School, in an interview to the Link newspaper, termed Gupta as an "icon ," but then added: "Every community has its bad apples, but when someone as respected is implicated, it makes the entire barrel look bad."

Not everyone agreed. Sanjay Puri, founder and CEO of Optimos Incorporated, an information technology company based in Reston, Virginia , and the chairman of the US-India Political Action Committee, said the Indian American community was too deeply entrenched in corporate America to suffer any significant fallout from the Rajat Gupta case, even if he was provenguilty . "Times have changed in this country; the stereotyping of past cannot be applied anymore. There's been an evolution," said Puri.

"This perception of Gupta's role having anything to do with the entire community is not going to linger. There are too many qualified, successful Indian Americans working and leading Fortune 500 companies, recognised for their abilities in corporate America."

Global India Newswire