Rajat Gupta’s Best Option: No Defense, Settle With SEC Paying A Fine

By Asif Ismail

  • 16 May 2011

An unequivocal guilty verdict against a hedge fund titan last week in a landmark insider trading trial does not bode well for former McKinsey chief Rajat Gupta, who is facing civil charges in a related case.

The conviction of Galleon Group founder Raj Rajaratnam by a New York jury may have dashed any hope Gupta had of coming out of his own trial relatively unscathed. And, according to one analyst, the prosecution’s resounding victory in the Galleon case might force Gupta’s defence team to reach a settlement with the US Securities and Exchange Commission.

The Sri Lanka-born Rajaratnam, aged 53, was found guilty of conspiracy and securities fraud on all 14 counts, and now awaits sentencing in mid-July. He may have to spend as much as two decades behind the bars.Gupta, a former McKinsey managing director and partner, was one of the several corporate insiders who provided tips to Rajaratnam about the companies they served, according to the prosecution. Rajaratnam made nearly $64 million by illegally trading on these tips, it said.


According to Aaron Elstein, a senior reporter for Crain’s New York Business, the best option for Gupta, at this point, is settling the case with the with the SEC. “I would think that he would have settled the case,” he said.In the wake of the Rajaratnam verdict, Elstein said, he couldn’t imagine the defence not going for a settlement.

It is not uncommon for the SEC to obtain settlement in insider trading investigations. In such instances, executives often pay fines.

Asked what impact the verdict would have on the Gupta trial, an SEC spokeswoman in Washington D.C. declined to comment.


The SEC, the agency responsible for regulating and enforcing stock market, pressed civil charges against Gupta for insider trading on March 1. Among other things, it charged that Gupta illegally tipped Rajaratnam “with inside information about the quarterly earnings” at Goldman Sachs and Procter & Gamble, and also gave his friend and business associate information about “an impending $5 billion investment by Berkshire Hathaway in Goldman.”

Robert Khuzami, director of the SEC’s Division of Enforcement, said at the time that Gupta, who “was honored with the highest trust of leading public companies,” had “betrayed that trust by disclosing their most sensitive and valuable secrets.”

Gupta was not charged criminally. His civil trial before an administrative judge is scheduled to start on August 22.


Gupta has denied charges and countersued the SEC for denying him a jury trial. At the time of its filing, the suit was seen as a bold move in the legal circles.

But that was before the prosecution introduced a wiretapped phone call between the two friends at the Rajaratnam trial. Jurors heard Gupta sharing confidential information about a possible takeover of Wachovia by Goldman Sachs after a board meeting.

Testifying about the confidential and non-public nature of that conversation was none other than Lloyd Blankfein, chief executive officer and chairman of Goldman Sachs. Asked whether Gupta violated Goldman’s confidentiality policy in the phone conversation with Rajaratnam, Blankfein replied in the affirmative.


There is little doubt that the manner in which the prosecution secured the conviction of Rajaratnam would make the job of Gupta’s Gary Naftalis-led defence team a lot tougher. Instantly, it appears to have strengthened the SEC’s case against Gupta.

“I think (the SEC has) a strong case that he did something that he shouldn’t have done,” Crain’s New York Business’ Elstein said. “We know what exactly Gupta told Rajaratnam,” he said, pointing to the telephone conversation that was introduced at the trial. “No arguments can be made that those calls were not made.”

In a way, the 12 New York jurors agreed with the prosecution that what Rajaratnam gathered from his network of friends, including Gupta, was insider information that was not available to the general public.


Even though Gupta is not being tried by a jury, the decision of those jurors is likely to weigh in heavily in whatever strategy he and legal team adopt.

If he settles the case, the Indian American may end up paying a hefty fine, which can even be an eight-figure sum. If not, he will be mounting a vigorous defence. In Rajaratnam’s case, the second option hasn’t proved to be successful, at least during the jury trial. (Rajaratnam’s lawyer has said he will appeal the conviction.)

Rather than going for a protracted legal fight with the SEC, as he seemed to have suggested by filing a countersuit against the SEC in March, it is more likely that Gupta may choose the first option.

(Asif Ismail is Editor in Chief of Global India Newswire).

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