Rajat Gupta was just criminally charged with 5 counts of securities fraud and one count of conspiracy to commit securities fraud.
At the heart of these charges are the allegations that Gupta learned material, nonpublic information through his Goldman Sachs boardmanship.
Gupta is also charged with passing Raj tips he was privileged to learn as a member of the P&G board. So one focus of Rajat Gupta’s insider trading case might be whether or not, as a member of one board, it was legal for Gupta to share information that he learned with the head of a company on another board. Robert Khuzami said in a press release, “Directors who exploit board room confidences for private gain can be certain they will ultimately be held responsible for their illegal actions.”
On the matter of the Goldman tips, the CEO of Goldman Sachs Lloyd Blankfein took the witness stand in March 2011 and testified on what might be a critical argument in the upcoming trial of Rajat Gupta.
The Feds allege that Gupta passed tips on material, inside information that he learned in Goldman Sachs’ boardroom.
(The other charges against Gupta are related to Proctor and Gamble. The charges relate to the same five details that the SEC alleged that Gupta divulged to Raj when the regulatory body accused him of insider trading (they later dropped the charges) in March. We have not yet read the indictment in its entirety, but more specific details on each of the charges are forthcoming.)
The SEC alleged that Rajat Gupta passed material, nonpublic (aka inside information) to Raj Rajaratnam, who was later found guilty on all 14 counts of insider trading.
In the federal trial against him, Rajaratnam’s lawyer, John Dowd, gave a hint about one possible line of defence that Gupta’s lawyer might take against the Feds allegation that Gupta divulged material, nonpublic information to Rajaratnam that he learned in Goldman’s board room.
When Raj’s lawyer John Dowd argued that the information Gupta told Raj was not material, but instead confidential, he drew a clear line distinguishing between the two.
The Feds allege that Gupta gave Raj Goldman’s 4th quarter earnings in 2008 — specifically, that he told Raj that Goldman would earn less than analyst-expected $2.50 per share. And that he allegedly told Raj that Goldman would actually lose $2 per share — just 23 seconds after hanging up with the Board.
The court ruled in May 2011 that Raj avoided losses of $3 million because he learned this significant detail via insider trading.
We hope not, for Gupta’s sake, as Lloyd Blankfein drew a clear line during his testimony between keeping clients abreast of matters that affect the firm and its important clients, and what Gupta did.
However the matter of whether information discussed in the boardroom is material and nonpublic, or simply “confidential,” as Raj’s lawyers argued, is still up for debate. Blankfein did not testify on what is or is not material nonpublic information. (That is normal.)
So if that same defence is the route taken by Gupta’s lawyers, to form a judgment, the jury will consider what happened.
The government has a recording of a call that took place between Raj and then-Goldman board member Rajat Gupta. Raj tells Gupta he heard that Goldman might acquire AIG and Gupta tells Raj what the Goldman board said in its meeting about the deal: both Wachovia and AIG were on the table, but a deal is unlikely.
Gupta was just doing his job, helping one of Goldman’s tier one clients, a tier one client who owned Goldman stock and was concerned about the future of the business, argued John Dowd.
The prosecution called Lloyd Blankfein to the witness stand and he explained that what board members discuss during the meeting is confidential. He expressly said that Gupta violated company policy by telling Raj about the Goldman-AIG-Wachovia deal in preparation for his upcoming meeting with Cohn.
The prosecution played the wiretap of the conversation and asked Blankfein, did Gupta violate company policy?
Blankfein said, “Um, yes.”
The government does not have a wiretap of the call that Gupta made to Raj 23 seconds after the board meeting in which executives discussed Goldman’s disastrous 2nd quarter earnings. However it does have Raj on tape learning information from someone, allegedly Gupta, on another note. The indictment of Gupta says, “Rajaratnam told a portfolio manager at Galleon that he had heard from someone on the P&G board certain information concerning P&G’s organic sales growth.” The Feds will likely imply that because Gupta might have been the board member who told Raj about what was said during one board meeting, he might have told Raj what happened on another.
On this matter, the Feds will have the burden to prove that material, nonpublic information was divulged in the board meeting and passed to Raj. Lloyd Blankfein testified that divulging information discussed during the board meeting is not speculation. “Speculation is people trying to guess,” Lloyd Blankfein testified. In a board meeting, however, those board members “know what the company is going to do.” He did not testify on whether that information is material and nonpublic.
Raj’s defence lawyer John Dowd argued that material, nonpublic, inside information was not revealed on this call. Rather, the call was about Raj getting ready for a meeting with a top executive at Goldman, Gary Cohn. (Raj had a meeting scheduled with Cohn for later that week.)
Gupta was just doing his job, helping one of Goldman’s tier one clients, a tier one client who owned Goldman stock and was concerned about the future of the business. Raj was just doing his job preparing for his meeting so that he could ask Cohn smart questions. “The government gets all excited about this call,” says the defence, but they misunderstood it. Raj and Gupta just did their jobs.
Blankfein’s testimony, that what is discussed in board meetings is not speculation because those board members know what the company is going to do, debunks that argument entirely. Blankfein also explained that what board members discuss during the meeting is confidential. And he also expressly said that Gupta violated company policy by telling Raj about the Goldman-AIG-Wachovia deal in preparation for his upcoming meeting with Cohn.
The prosecution played the wiretap of the conversation and asked Blankfein, “did Gupta violate company policy?”
Blankfein said, “Um, yes.”
Blankfein’s testimony leaves a lot of questions about Gupta’s likely defence. Do the rules that boardmembers follow make it clear that passing material nonpublic info is illegal? Likely very much so.
So Gupta might aim for the same “confidential but not material,” argument that Raj did. Or he take another route that includes focusing on the fact that he did not stand to profit from telling Raj these details. The government will have to prove that Gupta benefitted from the relationship in some way in order to prove the substantive claims against him.
Gupta is expected to appear in court later today.
According to the WSJ, Gary Naftalis, Mr. Gupta’s lawyer, said in a statement that Mr. Gupta is innocent and “has always acted with honesty and integrity.” Mr. Gupta “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.”