Prosecutor says Rajat Gupta cheated, abandoned duties

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A former Goldman Sachs Group Inc board member ‘threw away his duties’ in divulging secrets about the investment bank to now-imprisoned hedge fund manager Raj Rajaratnam, a U.S. prosecutor said at the start of a major insider-trading trial on Monday.

Rajat Gupta, once a boldface name in business and charity circles, is the most prominent corporate executive charged in the U.S. government's crackdown on insider trading. He has denied the charges, and his lawyer says that prosecutors have no direct evidence to win a conviction.

Gupta, 63, is accused of leaking stock secrets to Rajaratnam, his erstwhile friend and business associate. Rajaratnam, founder of the Galleon Group, was convicted of insider trading last year.

The case ‘is about this man’, Assistant U.S. Attorney Reed Brodsky said in his opening statement in Manhattan federal court, gesturing toward Gupta with his left arm, ‘and how he violated his duties and abused his position as a corporate insider’.

As the prosecutor spoke, Gupta stared straight at him and barely moved in his seat. His wife, Anita, and their four adult daughters sat in the front row, also absorbed in the proceedings.

Gupta, who also once led management consultant McKinsey & Co, has pleaded not guilty to five counts of securities fraud and one count of conspiracy.

His lawyer, Gary Naftalis, told the jury in his opening statement that the prosecution had ‘no real, hard, direct evidence’ against his client.

"This is a case based on speculation, guesswork and suspicion of what might have happened," Naftalis said. He reminded the jury that the burden of proof was high in a criminal case and that the government had to prove each charge beyond a reasonable doubt.

Naftalis has argued in pre-trial hearings that others may have leaked information about Goldman to Galleon and that Gupta had no reason to illegally spill corporate secrets.

Goldman will play a key role at the trial. One of the government's core allegations is that Gupta tipped Rajaratnam to a $5 billion investment by Warren Buffett's Berkshire Hathaway Inc in Goldman during the 2008 financial crisis and Goldman's surprise fourth-quarter loss that year.

Brodsky told the jury it would hear evidence that on September 23, 2008, Gupta called Rajaratnam 16 seconds after a special Goldman board meeting approved the $5 billion investment. Rajaratnam then ordered his traders to buy Goldman stock, prosecutors contend. The investment boost to Goldman was not made public or known to ordinary investors until after the market closed that day, Brodsky said.

"It was against the rules for Gupta or anyone else who knew to tell anyone else about it," Brodsky said in his 45-minute opening statement.

Goldman has not been charged with any wrongdoing in connection with the case. Gupta is also charged with leaking inside information to Rajaratnam while a board member at Procter & Gamble Co.

The case is being heard by a jury of 12 people, including a nurse, an executive of a non-profit organization, an elementary school teacher and a physician's assistant.

Before the jury was seated, Brodsky told Judge Jed Rakoff that the government plans to call former Goldman banker Byron Trott, a long-time Buffett confidant, and William George, a director at the investment bank since 2002, as witnesses this week.

Other witnesses who could take the stand during the trial include Goldman Chief Executive Lloyd Blankfein, who testified for the government at the Rajaratnam trial and said Gupta breached his fiduciary duty to the investment bank.

Ties to Rajaratnam

If convicted, Gupta faces up to 25 years in prison, though such a long sentence would be unlikely. Rajaratnam was handed an 11-year term in October, the longest for insider trading in the United States, after being convicted on 14 criminal counts.

Barely a day went by at Rajaratnam's trial a year ago without the mention of Gupta. But this is a very different case.

At Rajaratnam's trial, jurors spent weeks listening to the Galleon founder discussing stock trades on calls secretly recorded by the FBI. With Gupta, prosecutors have no direct conversations on tape related to the trades central to their case.

Naftalis fought unsuccessfully to exclude three wiretaps between Rajaratnam and two traders that could implicate Gupta. But the judge said his ruling was not final.

Gupta, who was arrested last October, has had a remarkable fall from grace.

Born in India, he earned an MBA from Harvard Business School and spent 34 years at McKinsey, serving as its global head for nine years. He retired in 2007. In addition to his corporate work, he became well known for his charity, including his work to combat AIDS, malaria and tuberculosis.

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