Authors: Anita Raghavan
Tags: #Finance, #Business & Economics
The next day Gupta was the keynote speaker at an Investing in India event at Harvard Business School. Alok “Rodinhood” Kejriwal, a Mumbai-based digital entrepreneur, had high expectations for Gupta’s HBS speech. But the only thing that impressed Kejriwal was Gupta’s “killer” haircut. “In 2010 March, I saw a broken man on that dais,” said Kejriwal. “He sounded defeated, he sounded tired…There was no strength, no authority in his voice.”
Like most of the roughly two hundred attendees in the audience, Kejriwal had no way of knowing what was going on in Gupta’s life at the time. The revelations that regulators were investigating him in connection with the Galleon hedge fund case had not yet surfaced publicly. All Kejriwal remembers thinking as he sat in the audience was,
What the hell is wrong with Rajat Gupta?
“It seemed like he was a mannequin from Madame Tussauds.”
In mid-April, as Gupta was preparing for the Procter & Gamble board meeting, the
Wall Street Journal
reported that prosecutors were examining whether he had shared confidential information about Goldman with Rajaratnam. The story left Gupta feeling helpless and frustrated. The only misstep he had made was to place an ill-timed phone call to Rajaratnam to inquire about his missing $10 million—and not to fill Rajaratnam in on confidential information from a Goldman board meeting. But that call now threatened to destroy him.
When his business partners pressed him about the accusation that had surfaced in the
Journal
, he brushed it off, saying, “It’s nothing. It’s nothing.” Old friends from his days in India, his time in Europe, and his years in Chicago stuck by him, but Gupta noticed that his newer friends, the ones he had made since he moved to New York, were distancing themselves from him. One day, soon after the
Journal
story, a shopper at a Costco near Westport noticed a visibly agitated Gupta speaking somewhat loudly into his cell phone.
“No one is even taking my calls anymore,” he declared to the person on the other end. “At least you are taking my calls.”
In early June 2010, Steve Peikin arrived at the New York offices of the SEC, armed with a thick binder, to make a presentation to Sanjay Wadhwa and two lieutenants. After leaving the US attorney’s office, Peikin became Goldman’s outside lawyer at Sullivan & Cromwell. He occupied an interesting position in the information flow in the case. Besides Goldman, he had another important client at the time: Hector Ruiz, the AMD chief executive, who was captured on wiretap recordings giving nonpublic information to Danielle Chiesi. She promised to keep the information confidential.
As part of an informal joint defense agreement, which provides for disclosure of information among lawyers in the pact, Peikin had learned through his representation of Ruiz that Gupta had been caught on a wiretap intercept. Each time the US attorney’s office sought to “re-up” its wiretap—legal slang for getting a judge to allow the FBI to wiretap a defendant’s phone for another month—the attorneys submitted a wiretap application that included the highlights from calls they had recorded. By December, these applications were in the hands of defense lawyers. Peikin called Palm after getting permission from his client Ruiz, among others, to share the materials with Goldman Sachs.
At the meeting with the SEC attorneys who were trying to piece together Rajat Gupta’s role in the Galleon insider trader ring, Peikin laid out the facts about Gupta as Goldman knew them. He walked the SEC through Goldman’s board meetings, and who was privy to what information and when. Most important, he enlightened the SEC lawyers on the wiretap intercepts. It was excerpts of these recordings that originally raised his antennae and triggered his call to Goldman’s general counsel, Greg Palm. In one, Rajaratnam was boasting of hearing about Buffett’s $5 billion investment from a Goldman director. In another Gupta was captured transmitting nonpublic information about discussions at a Goldman board meeting in St. Petersburg, Russia, to Rajaratnam.
The conversation between Gupta and Rajaratnam didn’t rise to criminal behavior; however, it pointed to the free and easy flow of information between the two. Peikin’s revelations were news to the SEC and confirmed Wadhwa’s gut feeling that it was worth pouring resources into building a circumstantial insider trading case against Gupta. At the time, the agency was still struggling to get its hands on the fourteen thousand hours of recorded conversations in the Galleon case. Under the law, a civil body like the SEC is typically not allowed access to the wiretaps.
After Peikin left the SEC, Jason Friedman requested Gupta’s phone records from McKinsey and subpoenaed phone companies. Trolling through Gupta’s phone records reminded Friedman of his deep dive into Roomy Khan’s call logs. Gupta had several phones—at least thirteen—and he used them all. As Friedman lined up the timeline of board meetings and the calls from Gupta to Rajaratnam, he was struck by a remarkable pattern. Time and time again, after the Goldman board met, there were calls from Gupta to Rajaratnam. The most obvious synchronicity was the call Gupta placed after the Buffett investment.
On August 2, 2010, the SEC sent a subpoena for documents to Gupta seeking information about his investments, any communication with Rajaratnam at certain relevant times, any transfers of money, and his Rolodex. Getting the Rolodex ultimately turned out to be far more complicated than the SEC lawyers had imagined. Before Gupta would relinquish his Rolodex, which included the numbers of famous figures including Bill Gates and Bill Clinton, his lawyers entered into a protracted back-and-forth over which numbers among his hundreds and hundreds of contacts would be protected.
A day after the SEC sent the document subpoena, Jason Friedman telephoned Gupta’s defense attorney Gary Naftalis and told him that once the SEC lawyers reviewed the documents, he planned to seek testimony from Gupta. “Can you get us some dates that he is available?” Friedman asked. Not long after, he and John Henderson raised the issue with Naftalis’s associate Robin Wilcox, the Kramer Levin lawyer charged with meeting the SEC’s document request. They asked her if she knew Gupta’s travel schedule. She said she didn’t but told them she would check to see if anyone did.
In early November, after not receiving information on Gupta’s availability, Friedman issued a subpoena for Gupta’s testimony. It got the attention the SEC lawyers suspected it would. Wilcox immediately telephoned Henderson and asked, “Why did you issue a subpoena?”
Gupta, she asserted, wanted to testify. It was simply a matter of scheduling. The date that the SEC lawyers proposed, November 30, didn’t work; Naftalis was tied up with an appearance for another case involving another big-name client, Muriel Siebert.
Then the SEC lawyers heard from Naftalis.
On Tuesday, November 16, the Kramer Levin lawyer traipsed to the SEC to meet with Friedman and Henderson. Naftalis said Gupta was willing to provide testimony to the SEC but “we don’t want to be dragged into the Rajaratnam trial.” Naftalis told the lawyers his chief concern was that if Gupta gave testimony to the SEC, it would be given to the US attorney’s office, which would be required to share it with Rajaratnam’s lawyers, who might seek to call Gupta as a defense witness in the upcoming trial. Why would anyone representing Rajat Gupta want that?
There was another issue too. With the testimony passing through so many hands, the risk of a leak was high. The first leak—the April 2010 story in the
Journal
—had dented Gupta’s reputation, but he had survived it. After doing their due diligence, Procter & Gamble and AMR, the parent of American Airlines, ultimately decided to keep Gupta on their boards. They weren’t likely to look so kindly on his presence there if there was a second leak—a newspaper reporting that Gupta was giving testimony at the SEC in connection with the Galleon case. Just a month before,
Fortune
magazine had run a devastating piece entitled “Rajat Gupta: Touched by Scandal,” which had shone a harsh light on Gupta’s board seats. Naftalis knew that the last thing corporate boards want is controversy over their directors.
Naftalis told the SEC lawyers that his client Gupta was “an honorable, good guy. He is not going anywhere. There are no offshore funds. There is no statute of limitations. You want to hear his story. We want you to hear his story. What is the harm in waiting?”
“Our investigation is ripe,” countered Friedman. He said the SEC was happy to consider another day but it was not prepared to postpone Gupta’s testimony indefinitely. The SEC lawyers’ concern was that Gupta was still sitting on a number of boards. In its role as corporate watchdog, the SEC could not stand by if it had reason to believe that Gupta was breaching his duties as a director.
Naftalis asked the two lawyers if there was an “access order,” meaning that if Gupta testified, his testimony would be shared with the Manhattan US attorney’s office. The lawyers didn’t answer. Then Naftalis said that if the SEC was not willing to hold off until after the Rajaratnam trial, he wanted assurances such as a protective order ensuring that Gupta’s testimony did not go to anyone else—at least until after the Rajaratnam trial. The SEC lawyers were not amenable. Before leaving, Naftalis told them that if he hadn’t been persuasive enough, then he wanted to speak to their superiors.
“Fine,” said Friedman. Naftalis should know, though, that he and his colleague were acting with the backing of their bosses, Wadhwa and George Canellos, who had joined the SEC the summer before from the New York law firm Milbank, Tweed, Hadley & McCloy. Naftalis ultimately did not appeal to Canellos—he decided to reserve that option for later—and a date for testimony was set for December 22.
Three days before Christmas 2010, and nearly five months after Friedman first made the request, Gupta and his lawyers went to the SEC to give testimony. Predictably, Gupta invoked his Fifth Amendment privilege against self-incrimination and the deposition ended in forty-two minutes.
Wadhwa knew that if the SEC were to build its case against Gupta, it required witnesses who could testify to the fact that Gupta was in possession of nonpublic information such as the news of Goldman’s fourth-quarter 2008 earnings and the Buffett investment in Goldman. One day late in the fall of 2010, George Canellos, director of the SEC’s New York Regional Office; Wadhwa; and the staff attorneys on the Gupta case called Peikin with their Goldman wish list. Among the executives they wanted to interview were Byron Trott, the banker who crafted the Buffett investment; John F. W. Rogers, the secretary of the board, who could speak to the duties of board members; and most important, Lloyd Blankfein, Goldman’s chief executive. Blankfein was key because he could tell them what had been communicated to Gupta before Buffett’s investment of September 2008 and then a month later, during a Goldman board posting call, in which directors were updated on Goldman’s financial results.
“The reason I am calling is that sooner would be better than later,” said Canellos.
“Sure,” replied Peikin.
The Goldman lawyer’s biggest concern about any interview of Blankfein was rooted in optics. “If anybody gets a load of Lloyd Blankfein in the lobby of the SEC, Goldman is going to lose 10 percent of its market cap in an afternoon,” Peikin told the SEC lawyers. He floated a number of proposals. Perhaps the SEC could come to Goldman to interview Blankfein? No way, said Wadhwa. He didn’t spell it out, but the message was clear. The government does not travel to interview anybody. Then Peikin suggested that Blankfein could be whisked through security or, even better, avoid it altogether. Again, Wadhwa was adamant that there be no special privileges for Blankfein. He would be subject to the same security checks as any other visitor to the SEC. After toying with interviewing Blankfein late one evening, the SEC and Goldman ultimately agreed that he would answer questions on Friday, January 7, 2011, at 10:30 a.m.
* * *
Before the US attorney’s case against Raj Rajaratnam could begin, Jon Streeter, the lead prosecutor, needed one major pretrial victory: he needed the wiretaps to be admissible in court. Soon after Rajaratnam’s arrest, his lawyers gave prosecutors a hint of his battle plan. “The government’s unprecedented use of electronic surveillance in this case” violated Rajaratnam’s constitutional rights, wrote John Dowd, his new lawyer.
After Rajaratnam was rebuffed by Martha Stewart’s former lawyer, the late Robert Morvillo, he spoke to Dowd, a feisty attorney at Akin Gump Strauss Hauer & Feld in Washington, DC. Dowd told Rajaratnam exactly what he wanted to hear: losing was not an option. He was hired quickly and went to work trying to neuter the government’s case.
On May 7, 2010, Rajaratnam’s lawyers filed a motion to suppress the recordings, arguing among other things that the statute does not authorize the use of wiretaps to investigate insider trading and that in seeking to establish probable cause the wiretap application made false statements and contained important omissions. The most notable: Roomy Khan’s prior felony conviction. In addition, Rajaratnam’s lawyers said the affidavit misstated or omitted material facts regarding “necessity,” which requires prosecutors to show, before seeking a wiretap, that other investigative techniques had been tried and failed or were unlikely to work. Here Rajaratnam’s lawyers pointed to the SEC inquiry for which Galleon had produced millions of pages of documents.
Most seasoned trial lawyers handicapping the fight between the United States of America and Raj Rajaratnam believed the case would be won or lost on the wiretaps. If the wiretaps were allowed in, the betting was the government would win. If they weren’t, the defense had a shot.
On August 12, 2010, after listening to arguments from both sides, the judge presiding over the Rajaratnam case, Judge Richard J. Holwell, decided that he would accede to the defense’s request and hold a hearing to help him rule on the matter. The proceeding, known as a Franks hearing—its name is derived from the case
Franks v. Delaware
—is held to determine if an affidavit to obtain a search warrant, or in this case a wiretap, relied on false statements.
For prosecutors like Streeter who were accustomed to putting on a case and having the burden of proof rest on their shoulders, the Franks hearing turned the tables. Unlike at trial, in a Franks hearing, the onus lay on the defense to prove that investigators did not pursue other techniques before filing for the wiretaps. One of the witnesses the defense planned to call was none other than Andrew Michaelson, the SEC lawyer who was lent to the US attorney’s office to help build the case against Rajaratnam. It was unusual to have someone on a government trial team testify in a hearing before the trial. It put Michaelson in the awkward seat of a witness and Streeter in the even more uncomfortable position of preparing him. In the weeks before the hearing, the nervous Michaelson would needle Streeter, “When is my prep session?”
On October 4, federal judge Holwell began hearing testimony from four witnesses called by Rajaratnam’s lawyers. Before President George W. Bush appointed Holwell to the bench, he was a litigation partner at the New York law firm White & Case and was known for defending securities fraud cases much like the one playing out in his courtroom. With his lean frame and tidy mustache, Judge Holwell looks like a colonial-era British military officer. He has an army-like efficiency about him; he listens intently to opposing lawyers’ arguments but is careful to keep them brief and to the point.
The first witness was Lindi Beaudreault, the lawyer who represented Sedna and later Galleon in the proceedings before the SEC. Beaudreault told the court that Galleon and Rajaratnam complied with all the document requests and subpoenas the SEC served it between November 2003 and July 2007. In response to two subpoenas alone, on May 14 and June 8, 2007, Galleon and Rajaratnam produced 4.1 million documents that included among other items emails and instant messages. By putting Beaudreault on the stand, Dowd was trying to show the court that Galleon and Rajaratnam met the SEC’s exhaustive investigative requests and in doing so, they obviated the need for wiretaps.
But Michaelson painted a different picture, showing that even though the SEC’s efforts generated countless leads, they were not enough to crack the case. “We kept pushing trying to get these boulders to the top of the hill,” he said. “We kept at it.” Before the wiretaps went up in March 2008, Michaelson said that he had not even identified McKinsey’s Anil Kumar as a source of inside information.