Rajat Gupta - Insider Trading Conviction

Insider Trading Conviction

On March 1, 2011, the SEC filed an administrative civil complaint against Gupta for insider trading with billionaire and Galleon Group hedge fund founder Raj Rajaratnam. Coverage of the event noted that Anil Kumar — who, like Gupta, had graduated from IIT, was a highly regarded senior partner at McKinsey, and had also co-founded the Indian School of Business — had already pleaded guilty to charges in the same case. Gupta, Kumar, and Rajaratnam were all close friends and business partners. Gupta countersued and both sides eventually dropped charges.

On October 26, 2011 the United States Attorney's Office filed criminal charges against Gupta. He was arrested in New York City by the FBI and pleaded not guilty. He was released on $10 million bail on the same day. Gupta's lawyer wrote, “Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless .... He did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo.” The SEC alleged, "The tips generated 'illicit profits and loss avoidance' of more than $23 million." Manhattan U.S. Attorney Preet Bharara said, "Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel."

Details of wiretap recordings and trading activity related to the charges were analyzed at length in the media, assessing the strengths and weaknesses of the prosecution's and defense's cases.

The current case is focusing on the relationship between Raj Rajaratnam, Anil Kumar and Gupta. Gupta, Rajaratnam, and Kumar were all involved to varying degrees as founding partners of private-equity firms Taj Capital and New Silk Route, though Rajaratnam and Kumar left before they began operation. Gupta remained as chairman of New Silk Route, and Rajaratnam eventually invested $50 million in the fund.

Rajat Gupta's trial began on May 22, 2012. On June 15, 2012, Gupta was found guilty on three counts of securities fraud and one count of conspiracy. He was found not guilty on two other securities fraud charges. At the time, his lawyer told reporters, "We will be moving to set aside the verdict and will, if necessary, appeal the conviction." Sentencing is scheduled for October 2012. The maximum sentence for securities fraud is 20 years and the maximum sentence for conspiracy is five years. In arguments in mid-October, prosecutors favored prison time of up to 10 years while defense attorneys favored probation and community service. As one service option, the latter suggested Gupta "work on health care and agriculture in rural Rwanda". Prosecutors based their recommendation in part on $11.2 million profits, or losses avoided, by Rajaratnam based on the tips. The defense argued Gupta "never profited on the alleged trading" per one news account.

On October 24, 2012, Gupta was sentenced to two years in prison by Judge Rakoff of the United States District Court in Manhattan for leaking boardroom secrets to former hedge fund manager Raj Rajaratnam.