A New York City jury found Rajat Gupta guilty Friday of conspiracy and three insider trading counts in a devastating blow for the one-time corporate titan. Late Thursday, the jurors asked U.S. district judge Jed Rakoff for clarification on the definition of “conspiracy,” which Gupta had been charged with, along with five counts of securities fraud. As the jurors deliberated, the key question became whether the evidence — described by the defense and some observers as circumstantial — would be enough to convict the 63-year-old former chief of consulting titan McKinsey & Co. It was. The prosecution surmounted its lack of a smoking-gun phone-recording of Gupta delivering inside information for his own benefit to billionaire friend Raj Rajaratnan, the disgraced former Galleon hedge fund manager now serving an 11-year prison sentence.
Anything short of a guilty verdict would have been a big blow for Manhattan US Attorney Preet Bharara, who has built a reputation as a crusading force against white-collar corruption. The Gupta prosecution has been one of the most high-profile cases involving alleged financial malfeasance since the financial crisis. As well as running McKinsey, Gupta was on the board of directors at blue-chip corporate behemoths like Proctor and Gamble, American Airlines and Goldman Sachs. It was in that last role that Gupta made the fateful phone call to Rajaratnan at the center of the insider trading case. Gupta was accused of tipping Rajaratnan off about Warren Buffett’s plan to invest $5 billion in Goldman Sachs at the height of the financial crisis — a huge cash injection from the “Oracle of Omaha” that was viewed as a critical lifeline.
Although the federal government has moved aggressively to charge big insider-trading targets, it has faced criticism about the lack of prosecutions directed at Wall Street executives over the origins of the sub-prime meltdown. Gupta, who joined Goldman’s board in 2006 and left in May 2010 — pushed out after the Rajaratnan story broke — is among the biggest of the big fish in the financial world to face trial. He was born in India, attended Harvard, and rose to lead McKinsey for a decade, developing a sterling reputation over his career in corporate America. The trial was a particular blow for McKinsey, which for many decades was the gold-standard in management consulting, with an unparallelled reputation for integrity toward clients, as taught by its revered leader Marvin Bower.
After learning — as a member of Goldman’s board — about the soon-to-be announced Buffett investment, “Gupta violated his duty to keep that information confidential by giving that information to Raj Rajaratnam,” Assistant U.S. Attorney Richard Tarlowe charged in federal court in Manhattan, according to the Associated Press. Gupta “abused his position as a corporate insider.” In building its case, the government painted a picture of Gupta and Rajaratnam as part of a rarefied, cozy world of financial big-shots who routinely shared investment tips.
Gupta’s defense, led by prominent attorney Gary P. Naftalis, maintained the prosecution’s case was circumstantial, insisting there was “zero” evidence that Gupta profited from insider trading. On this score, the defense had a point. Although the government presented evidence that Gupta called Rajaratnam just moments after learning about the Buffett investment, it lacked a bonafide smoking gun — in the form of a recorded conversation — that would have made the case a slam-dunk. “You’ll find there were no such conversations, because they didn’t happen,” Naftalis declared in comments cited by the AP. “A phone record is not hard, real evidence about what was said,” he said at another point. This despite the fact that the government had built a treasure-trove of wire-taps from the 2011 Rajaratnam trial and other related insider trading cases. But it was enough for the jury.
What the government did present, to damning effect, it turns out, was a record — if not a recording — of a Sept. 23, 2008 phone call that Gupta allegedly made to Rajaratnam only minutes after a confidential conference call during which Gupta learned about Buffet’s $5 billion investment. The prosecution alleged that shortly after that phone call ended at 3:55 p.m., Rajaratnam bought $40 million worth of Goldman Sachs stock, netting a profit of almost $1 million. News of the Buffett investment would not be announced until after the stock market closed at 4 p.m. At the trial, Rajaratnam’s assistant, Caryn Eisenberg, testified it was the only call her boss received on his private line that day between 3 p.m. and 4 p.m., according to the AP. “That evidence is devastating for the defendant. … If you believe Ms. Eisenberg, it’s over — the defendant is guilty,” Tarlowe asserted.
The prosecution presented other circumstantial evidence as well: A wiretap of a July 2008 phone call during which Rajaratnam asked Gupta whether the Goldman board was considering buying a struggling bank — a move that could have had a huge impact of the bank’s stock price. “Have you heard anything along that line?” Rajaratnam asked Gupta. “Yeah,” Gupta responded. “This was a big discussion at the board meeting.” Then there was a 2008 call during which Rajaratnam told one of his traders that he had received a tip “from someone who’s on the board of Goldman Sachs” that Goldman was facing an unexpected quarterly loss.
What the prosecution didn’t seem to show is that Gupta actually benefited materially from this insider chatter. If anything, it was the other way around — and Rajaratnam is already in jail. Did Gupta participate in a conspiracy with another person? The jury said yes. Perhaps that’s why they asked for more information on Thursday. At that time, it was at least conceivable that Gupta could have been convicted on the conspiracy charge and acquitted on the five insider trading charges. Instead, the jury convicted Gupta on three of the five insider trading counts as well as the conspiracy charge. Gupta faces 20 years in prison.