At the trial of a one-time billionaire hedge fund founder next week, the government plans to show that a former Goldman Sachs board member conspired with him, feeding him inside tips within minutes of learning about them during the 2008 economic crisis, including word that Goldman would lose money for the first time, a prosecutor said Friday.
Assistant U.S. Attorney Jonathan Streeter told a federal judge in Manhattan that then-Goldman board member Rajat Gupta called Galleon fund founder Raj Rajaratnam twice to give him tips. Rajaratnam then traded hundreds of thousands of shares of Goldman Sachs stock.
Gupta has not been charged criminally in what prosecutors have called the largest hedge fund insider trading case in history. The Securities and Exchange Commission filed civil charges against him this week, accusing him of tipping Rajaratnam seven minutes before the stock markets closed on Sept. 23, 2008, that the Goldman Sachs board had approved an offer from Warren Buffett's Berkshire Hathaway to invest $5 billion in the banking giant.
The SEC said Rajaratnam directed his hedge fund, the Galleon Group, to buy 175,000 shares of Goldman stock within a minute of receiving the tip, enabling him to earn nearly $1 million in profit. It said the second occurrence came Oct. 23, 2008, when Gupta called Rajaratnam 23 seconds after the end of a conference call by the Goldman board in which it was revealed that Goldman was expected to report its first quarterly loss since going public in 1999. Streeter said Rajaratnam sold his entire position in Goldman the next morning.
Gary Naftalis, Gupta's lawyer, said in a statement Friday that the allegations were "totally baseless" and unfairly attack Gupta's 40-year record of ethical conduct, integrity and commitment to guarding his clients' secrets.
"Mr. Gupta has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder," he said.
He added that Gupta lost his entire $10 million investment in a fund managed by Rajaratnam, "negating any motive to deviate from a lifetime of honesty and integrity."
Jury selection is scheduled to start Tuesday in the securities fraud trial of Rajaratnam, 53, of Manhattan, who has pleaded not guilty to charges that carry a potential penalty of up to 185 years in prison. Prosecutors say he earned more than $50 million in profits from illegal trades. He has said through his lawyers that he traded only on public information.
Streeter mentioned Gupta, 62, of Westport, Conn., as lawyers discussed taped conversations that were planned for the trial and sought the judge's help in determining which ones could be played for the jury.
The prosecutor said he planned to play a tape of a July 29, 2008, conversation between Gupta and Rajaratnam, though the subject of the conversation was not described. Lawyers for Rajaratnam objected to use of the tape, prompting U.S. District Judge Richard J. Holwell to ask if the government considered Gupta a coconspirator.
"We do. We do your honor," Streeter answered. Later, the judge said he would allow the tape to be played.
Streeter said the government also plans to show at trial that Rajaratnam told his employees after receiving the Goldman tips that he had received information that was not yet public.
In a court filing Thursday, Rajaratnam lawyer John Dowd complained about the publicity surrounding the SEC announcement of civil charges against Gupta, saying heavy publicity "has seriously jeopardized Rajaratnam's ability to seat an impartial and unbiased jury and has negatively impacted his Sixth Amendment rights."
The SEC in its enforcement action said Gupta was an investor in some of the Galleon hedge funds and also had other business interests with Rajaratnam.
Dowd in a statement described them as "old friends" and called Gupta "a distinguished human being."
Rajaratnam, who has both U.S. and Sri Lankan citizenship, was arrested in October 2009. More than 25 people have been charged so far in the Galleon probe, with 19 of them pleading guilty to charges.
U.S. Attorney Preet Bharara said when he announced Rajaratnam's arrest that the case represented the first time prosecutors had made extensive use of wiretaps in an insider trading case. Two judges have upheld the constitutionality of using the investigative tactic in a white collar case.