With Gupta’s Arrest, Insider Inquiry Goes Beyond Wall St.

Rajat K. Gupta, a former director at Goldman Sachs and Procter & Gamble, pleaded not guilty Wednesday to insider trading charges, setting the stage for a courtroom battle that will extend the government’s broad crackdown on Wall Street to the corporate boardroom. On Wednesday, a federal grand jury in Manhattan charged Mr. Gupta, 62, with one count of conspiracy to commit securities fraud and five counts of securities fraud. He is accused of sharing corporate secrets about Goldman and Procter & Gamble with Raj Rajaratnam, the co-founder of the Galleon Group who was sentenced to 11 years in prison earlier this month for insider trading.

The details of the indictment, many of which came out during Mr. Rajaratnam’s trial and a previous action by the Securities and Exchange Commission, could prove explosive; he is the first executive from the upper echelons of corporate America to be implicated in the far-reaching scandal. “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 for the benefit of their shareholders,” Preet Bharara, the United States attorney in Manhattan, said in a statement. “As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr. Gupta’s breach of duty.” A stoic Mr. Gupta, wearing a navy blue suit and red tie, pleaded not guilty to all charges. He is set to be released on a $10 million bond, secured by his home in Westport, Conn., and will turn over his passport. “The facts in this case demonstrate that Mr. Gupta is innocent of any of these charges and that he has always acted with honesty and integrity,” Gary P. Naftalis, a lawyer for Mr. Gupta, said in a statement.

Judge Jed S. Rakoff, a federal judge in Manhattan, has been assigned to the case, set for trial on April 9, 2012. He ruled on a matter between Mr. Gupta and the S.E.C. this summer. The government has taken aggressive action against insider trading. In the last two years, the government has charged 56 people with swapping illegal tips, including Mr. Gupta; of those, 51 have pleaded guilty or have been convicted.
With Mr. Gupta, the campaign has moved beyond financial professionals. As the head of McKinsey & Company, the prominent consulting firm, Mr. Gupta advised some of the world’s most influential people, rubbing elbows with the chief executive of General Electric, Jeffrey R. Immelt, and the former President Bill Clinton. Mr. Gupta’s case has been tricky for the government. Although his name came up repeatedly at Mr. Rajaratnam’s trial, both in testimony and in secretly recorded phone conversations, the Justice Department never brought charges against him.

The S.E.C. filed an administrative action against Mr. Gupta. In response, he filed a separate lawsuit, asking to move the case to federal court, where it would be heard by a jury. Judge Rakoff allowed Mr. Gupta’s suit to move forward in July, saying the S.E.C. took a “cavalier approach” in approving the administrative proceeding. The agency later dropped the matter, but reserved the right to refile. On Wednesday, the S.E.C. filed a civil complaint against Mr. Gupta and Mr. Rajaratnam, claiming an “extensive insider trading scheme.” It mirrored the agency’s earlier action against Mr. Gupta. “Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets to the disadvantage of investors, shareholders, and fellow directors,” Robert S. Khuzami, director of the S.E.C.’s division of enforcement, said in a statement.

According to the indictment, Mr. Gupta gave Mr. Rajaratnam advance word of Warren E. Buffett’s $5 billion investment in Goldman during the financial crisis. After hanging up from a special board meeting in September 2008, Mr. Gupta called Mr. Rajaratnam within 16 seconds, prosecutors said. Moments later, Mr. Rajaratnam purchased shares in Goldman, ultimately netting about $840,000, according to the indictment. The next month, Mr. Gupta ostensibly informed Mr. Rajaratnam that Goldman would report an unexpected quarterly loss. Acting on the tip the next day, Mr. Rajaratnam, sold off shares in the company, saving millions of dollars, the indictment stated. Mr. Gupta is also accused of tipping Mr. Rajaratnam about Procter & Gamble’s quarterly sales projections, which were going to be weaker than predicted. Mr. Rajaratnam promptly bet against the company’s stock, the indictment says.

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