The former Goldman Sachs director Rajat Gupta was ordered to pay USD 6.2 million for legal expenses incurred by his former employer during his trial in the insider trading case on Feb 26. Goldman had sought USD 6.9 as reimbursement from Gupta, which he did not contest in the court. After reviewing the firm's 542 pages of billing records related to the case, Judge Rakoff however cut the bill by 10 per cent noting that there were some extraneous entries in the 542 pages of billing records submitted by Goldman Sachs.
This extract from former Outlook managing editor Sandipan Deb's best-selling book covers the defence adopted by his legal team during the trial.
In the one day of the trial between Blankfein’s first and second appearance in the court (when he was having lunch in Yonkers), the prosecution had focused on Gupta’s involvement in Voyager Capital Partners. He had invested $5 million when Voyager was set up in 2005 and later exercised an option he had had and put in another $5 million. But the 2008 market collapse wiped out his investment. The prosecution called several witnesses, including former Galleon employees, to testify and piece together what happened at Voyager.
Voyager was a so-called fund-of-funds that invested in several Galleon funds. Some of these funds had investments in Goldman Sachs. Therefore, the prosecution was implying, Gupta stood to gain financially by passing on secret Goldman information to Rajaratnam.
Voyager performed brilliantly at first, returning about 41 per cent annually in its first couple of years. But the $400 million fund, which was highly leveraged, blew up during the financial crisis.
At the end of 2007, Gupta and Rajaratnam got into a dispute over the value of Gupta’s stake in Voyager. Rajaratnam felt that the profits on Gupta’s second $5 million investment should be calculated from the day he had exercised his option to up his stake and put in the money. Gupta, however, insisted that his share should be computed from the date of the inception of the fund. If one used Rajaratnam’s methodology, Gupta’s stake worked out to about $12.5 million, while by Gupta’s logic it was $16.4 million. In the end, Rajaratnam gave in and agreed to the higher figure.
The prosecution was determined to cover every detail in the dispute, including the complex calculations. Many documents were produced, witnesses were asked to validate them and explain their arcane nuances to the jury. This took up the entire day. By the time court adjourned, the jury’s eyes had glazed over, and Judge Rakoff had described the proceedings as “excruciating”.
The next day, before Blankfein was called to the stand, government witness James Barnacle Jr, an FBI agent, took the jury through a long series of charts that summarised all the evidence that the prosecution had presented—the timelines, the phone call records, the trades made by Galleon and the supposed illegal profits that it had made on these trades, the dates when the information Galleon was alleged to have traded on the basis of became public, and so on.
During cross-examination, defence lawyer David Frankel produced the details of two money-losing Goldman and Procter & Gamble trades that Galleon had made after Gupta had allegedly tipped off Rajaratnam. Frankel pointed out that the FBI’s charts were misleading, since they did not document any loss-making trades that Galleon had made. “So you made charts for trading profits but not for losses, correct?” Frankel asked Barnacle. “No, I did not,” the FBI agent said.
Once Blankfein’s testimony was over, the government had no more witnesses to call. But as a final set of evidence, the prosecution played several secretly recorded voice mail messages left by Gupta on Rajaratnam’s cellphone. In one of these messages, on October 10, 2008, Gupta says: “Hey Raj, Rajat here. Just calling to catch up. I know it must be an awful and busy week. I hope you are holding up well. Uh, and I’ll try to give you a call over the weekend just to catch up. All the best to you, talk to you soon. Bye bye.”
Gupta’s lawyers had been arguing from the outset that by October 2008, his relations with Rajaratnam were extremely strained, following the Voyager fiasco. Why then was Gupta sounding so friendly on the voice mail?
Lead prosecutor Reed Brodsky now rested the government’s case.
There was still about an hour of court time left. Rajat Gupta’s defence utilised that to show the jury the videotaped deposition of Ajit Jain, a top Berkshire Hathaway executive. There were several similarities between the stories of Guota and Jain. Both were India-born, had studied engineering at IIT and then done an MBA from Harvard Business School. Like Gupta, Jain had also joined McKinsey from Harvard. Today, he runs Berkshire’s massive reinsurance operations, and is widely tipped to succeed Warren Buffett at the helm when the Sage of Omaha, who is now in his 80s, decides to retire.
Jain, who described his relationship with Gupta as “completely social”, spoke about a lunch they had at Stamford, Connecticut, where Jain is based, in January 2009, in the course of which Gupta told him about his falling out with Rajaratnam. “He told me that he had $10 million invested and he had been gypped, swindled and cheated by Raj and had lost his $10 million,” said Jain. He said he “shocked” to hear of this, and the conversation “left (him) with the impression” that it was not just a bad investment or loss of money but “a deliberate hanky panky on the part of Rajaratnam”. He also acknowledged, in response to a query by Gary Naftalis, that it was “unusual” for Gupta to tell him about his lost investment.
Naftalis had now established for the jury the acrimony between Gupta and Rajaratnam, and from an unimpeachable source. But the conversation Jain had reported had taken place in January 2009, several months after the last time Gupta had allegedly tipped off Rajaratman. Anil Kumar had testified that Rajaratnam had given him the impression that the falling out occurred sometime in February or March 2009. Clearly, it had taken place earlier. But the defence had not yet been able to present any evidence that it had happened early enough to exonerate Gupta.
Late in the evening, after court had adjourned, Gary Naftalis told the media that it was “highly likely” that Gupta would testify in his own defence in the coming week.
On the next day of hearings, Gupta’s defence team produced several witnesses to testify about his character. Ashok Alexander, a former McKinsey colleague who now headed the Bill & Melinda Gates Foundation in India, had flown in from Delhi. Another witness was Anil Sood, a former senior World Bank executive, who had known Gupta for more than half a century, having been his classmate in school since fifth grade, and then at IIT Delhi. Soon after Gupta was indicted, Sood had written a long piece on friendsofrajat.com, expressing his confidence that “Rajat will emerge successfully from this totally uncalled-for ordeal and go on to do what he has done all his life—being a good human being, helping others, and contributing to make the world a better place.”
“I have admired Rajat—always—and my admiration for him has grown over the years,” he wrote. “His respect for all human beings comes through in every aspect of his personal and professional life…He has always been a person of the highest integrity and stood up for what is right…What Anita, Rajat and the family have endured in recent months is grossly unfair and unjust—a lifetime of achievement maligned by unproven hearsay. The picture of him that has been painted by some is simply NOT of the Rajat I have known well for half a century. The situation has been very difficult for his family and also for all of us friends who care for him deeply. Rajat, supported by his family, has shown tremendous grace and dignity in the face of this most difficult challenge of his life.” In his testimony in Judge Rakoff’s court, he said that Gupta “inspires trust and confidence”.
During cross-examination, prosecutor Reed Brodsky asked both Alexander and Sood if they had known about any investments or business dealings that Gupta had had with Rajaratnam. They said they had not.
More important, in terms of pure information, was the testimony of Suprotik Basu, a public health specialist who is a UN envoy on matters related to malaria, and who had been with Gupta on September 23 2008, the day he allegedly called Rajaratnam and told him about Warren Buffett’s investment in Goldman Sachs.
How did he first meet Gupta, asked Naftalis.
“(In January 2008) I got an urgent call that a businessman wanted to end all childhood deaths from malaria by 2025,” said Basu.
A prosecutor jumped to his feet and objected. The objection was sustained.
Naftalis used Basu to walk the jury through Gupta’s busy calendar on that fateful day. Gupta and Basu had met at five in the evening, an hour and few minutes after the Goldman Sachs board meeting wound up. They had a conference with Julian Schweitzer, the World Bank’s head of health nutrition, and Raymond G. Chambers, the United Nations special envoy for malaria. Basu then accompanied Mr. Gupta to a dinner honouring the health minister of Ethiopia at a Midtown Manhattan restaurant.
Basu told the jury that he had seen Gupta many times with “earpiece in his ear constantly returning phone calls between meetings”. This fitted in with Gupta’s lawyers’ argument that given the packed schedule that characterised a typical day for Gupta, it was his normal practice to use breaks between meetings to make and return phone calls. So there was nothing unusual or suspicious about him calling Rajaratnam right after the Goldman meeting ended.
Naftalis asked Basu whether he had heard Gupta referring to Goldman Sachs or Warren Buffett that day. He had not.
The prosecution now went over the phone records again for the jury—the records showed that Gupta and Rajaratnam had spoken to each other at least six times on that day, including the fiftysix-second conversation right after the Goldman board meeting.
Brodsky asked Basu if he was present for that call. Basu said he wasn’t.
Late in the day, Gupta’s eldest daughter Geetanjali took the stand.
The thirtythree-year-old Geetanjali told the jury that she was an alumnus of Harvard College, Harvard Business School and Harvard Law School, and worked for the Harvard Management Company, which oversees the investment of the university’s endowment.
But that was about all that she could tell the jury that day. Naftalis began asking her about a conversation she had had with her father in 2008 about his troubles with Rajaratnam, and the prosecution objected to the line of questioning. After some bickering, Judge Rakoff decided to hear out the defence and prosecution in a private conference. Geetanjali would have to continue her testimony the next day.
After listening to the arguments from both sides about what she could say, Judge Rakoff ruled that Geetanjali could testify about her observations of her father’s reaction to his Galleon involvement, but she was not permitted to recount statements Gupta had made to her.
The defence had by now clarified that Rajat Gupta would not testify. Financial Times quoted Judge Rakoff as saying, of the defence’s decision to call Geetanjali instead: “It’s a bit of a gimmick.” However, he then added that “it’s within their tactical right”.
Of Geetanjali’s testimony, a New York Times (12 June, 2012) journalist noted admiringly: “Geetanjali Gupta’s education at Harvard Law School may not have included a class on how to testify, but she was poised and articulate in answering questions on the witness stand on Tuesday at her father’s criminal trial.”
Geetanjali told the jury that she was at her parents’ house at Westport, Connecticut, on September 20, 2008, three days before the Goldman Sachs board meeting on the Berkshire investment. She was sitting in the library with her father when he spoke to her about his problematic $10-million investment in Voyager. “'He was upset,” said Geetanjali. “He was running his hand through his hair, as he often does when he is stressed…He is usually a very calm and collected person.”
The defence showed the jury an email from October 2008 that she had sent her father asking for his help in landing her friend a job at the Dell family foundation. In the mail, which began “Hi Baba,” the Bengali word for “father”, she asked: “How bad are things with the Raj fund?”'
By Thanksgiving—or late November that year, Geetanjali said, the whole family was discussing the investment. She said that her father was “depressed, withdrawn and not himself”.
This is how The New York Times described her cross-examination:
“On cross-examination, Reed Brodsky, a prosecutor known for histrionics in the courtroom, reduced his voice to almost a whisper. He asked her two questions.
“‘Do you love your father?’
“‘Yes,’ she replied.
“‘Would you do anything for your father?’
“‘I would do anything for my father, but I would not lie, though, on the stand,’ she said.”
Brodsky retreated. Geetanjali returned to her seat in the first row of the visitors’ gallery. When the jury left the courtroom, she went up to her father. For nearly three weeks, Rajat Gupta had sat with his lawyers, his ruggedly handsome face never betraying any emotions. But as he stood up to gather his daughter in his arms in a loving embrace, his eyes welled up with tears.
Over three days, the defence had summoned a dozen witnesses, but most of them had been called to tell the jury that they believed Gupta to be a person of unshakeable integrity, and to mention his tireless commitment to a dizzying number of philanthropic causes. In the final analysis, other than Geetanjali’s testimony, the principal thrust of the defence’s case had been that a jury could not convict a man of such impeccable credentials in personal, professional and public life on the basis of evidence that was, whichever you looked at it, circumstantial.
For the prosecution, Assistant US Attorney Richard Tarlowe did the summation of arguments. He told the jury the government’s story all over again, distilled from phone records, minutes of board meetings, trading records and masses of email. He displayed charts that showed the sequence of events—Gupta participating in board meetings of Goldman Sachs and Procter & Gamble, Gupta calling Rajaratnam, Galleon buying or shorting shares to make quick profits. These were not coincidences, he told the jurors.
On September 23, 2008, there was only one call made to Rajaratnam’s work phone in the final ten minutes of trading, “and that call was from Gupta,” said Tarlowe. “That evidence is devastating.”
He replayed the September 24 wiretapped conversation in which Rajaratnam gloats to a colleague that he was told at 3:58 p.m. that “something good might happen to Goldman.”
Gupta was going to be chairman of Galleon International, Tarlowe said. In fact, he had started telling potential investors that he was chairman, even before the appointment had been officially made. He was going to start a new fund with Rajaratnam, where he would have a stake and a share of the “extraordinary profits” that the fund would make, based on insider trading. “Rajaratnam offered Gupta many benefits,” Tarlowe said. “What was good for Rajaratnam and Galleon was good for Gupta.” Indeed, when they had a dispute about Gupta’s stake in Voyager, the fund they had already set up together, Rajaratnam acceded to his demand, and “bumped up” his stake by $4 million. This was actually Gupta’s reward for informing Rajaratnam about what went on in the board meetings he attended.
The witnesses the defence had called had known nothing about Gupta’s relationship with Rajaratnam. “Those witnesses shed absolutely no light,” said Tarlowe.
The defence would argue, Tarlowe told the jury, that this was all circumstantial evidence, but in this case, circumstantial evidence was as strong as eyewitness testimony. The defence had been claiming that Gupta would never pass on tips to Rajaratnam after he had lost his $10 million investment in Voyager. The defence was wrong. There was even more incentive for Gupta to engage in an illicit relationship with the Galleon boss, said the prosecutor. It was simple. Gupta would want to recoup his losses, make his money back.
“Gupta abused his position as a corporate insider by providing secret company information to his longtime business partner and friend, Raj Rajaratnam,” said Tarlowe, his voice rising towards the end of his speech, as he tried to impress upon the jury the seriousness of Gupta’s crimes. These leaks allowed “Rajaratnam and his criminal associates at Galleon” to make millions of dollars through illicit trades, he said, and there was “overwhelming evidence” to support this.
In the defence summation, Naftalis repeatedly pointed out to the jury, as he and his team had throughout the trial, that the government had not been able to present any direct evidence. “With all the power and majesty of the United States government, they found no real, hard, direct evidence,” he said. “They didn’t find any because it didn’t happen.”
“The prosecution failed here to prove that Mr. Gupta acted knowingly and wilfully and with any specific intent to defraud,” he said, going back to the essence of what Gupta had been charged with. No one had accused Gupta of trading illegally, there was no evidence that Rajaratnam was paying anything secretly, there was no witness at all to any of the tips the prosecution was claiming Gupta had given the hedge fund manager. “No cash changing hands here,” Naftalis said. “No dishonest dimes ending up in Mr Gupta’s jacket.”
“As they say in that old commercial, where’s the beef in this case?” the lawyer asked. “If you put in a lot of paper, you give the illusion that you might have something more than you actually have—an illusion of making something out of nothing. That is a gambit that can bamboozle people into thinking something was proven when it wasn’t. Heaps of pointless paper and “a parade of meaningless witnesses” was how Naftalis described the prosecution’s case.
“We don’t punish people for making mistakes, for being negligent, for trusting people, for not being smart enough to see through somebody that it took eight months of wiretaps for the government to find,” he said. Till his arrest, Rajaratnam was a star, a man admired by the business community for his success. No one knew that he was using dishonest means. Gupta had been deceived too, just as the rest of the world was. “There was a secret world of Raj Rajaratnam that was unknown to Rajat Gupta,” said Naftalis. “Our law does not make people criminals based on guilt by association.”
In the eight months that the FBI had tapped Rajaratnam’s phones, the agency had not been able to catch a single conversation that in any way indicated that Gupta was involved in Rajaratnam’s illegal activities. All the government had was some phone records, and “there was no evidence of what was said in any conversation. There is not a single wiretap recording out of those thousands of wiretapped calls where Rajat Gupta gave any inside information. None, zero.” The most that the government had was some unreliable “boasting” by Rajaratnam and “second- or third-hand hearsay”.
What were the facts? One, that Rajaratnam had cheated Gupta on the Voyager deal; Galleon records showed that Rajaratnam had withdrawn large sum of money from the fund without telling Gupta. Two, Gupta had wanted to step down from the Goldman Sachs board on September 12, 2008. This was before the phone calls Gupta made to Rajaratnam to supposedly give him insider tips. In fact, it was Goldman Sachs chief executive officer Lloyd Blankfein who had convinced Gupta to stay back.
“This resignation drives a stake through the heart of the government’s case,” Naftalis said. “He resigned. They begged him to come back. The only reason that he stayed is Goldman Sachs panicked, because Rajat Gupta is a prominent and respectable business leader. His resignation might cause panic in investors in a volatile market.”
And what about Blankfein? He was “a man with no memory of anything” and had been “less than candid.” “I suggest to you that no one could be that cold and callous and not remember that he fired three thousand people, as if it happens every day,” Naftalis said. “If you can’t remember firing three thousand people without any kind of notice, how can you pretend to remember anything about some posting call?”
Throughout his closing, Naftalis stressed that the government had the burden of proving its case beyond a reasonable doubt. If the government did not meet that high burden, he told the jury, “It’s your duty to say not guilty, or, as they say in Scotland, not proven.”
He ended his summation by talking about his visit to one of the oldest courthouses in England. Written on the walls of the basement, he recalled, were the words: “In this hallowed place of justice, the Crown never loses because when the liberty of an Englishman is preserved against false witness, the Crown wins.”
“The United States,” Naftalis said, “always wins when justice is done.”
The prosecution’s rebuttal of the defence’s closing arguments was done by Reed Brodsky. “No one is above the law, neither his positions, power, money or good deeds give him the right to violate the law or give him a free pass for having violated it,” he said, describing Gupta and Rajaratnam as “two men with public sides of success, but hidden, concealed from the public, was a different side, a side that committed crimes.”
If the jury had to believe what the defence had been saying, Brodsky contended, “you’d have to believe that Gupta was the unluckiest man in the whole world”.
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