Rajat Gupta, one of the Harvard Business School’s most prominent alums, apparently left his Westport, Ct., home at 6:15 a.m. today (Oct. 26) to drive into Manhattan and surrender to federal authorities to face insider trading charges.
The former managing director of McKinsey & Co. is accused of feeding tips to Galleon Group LLC hedge fund manager Raj Rajaratnam, a Wharton MBA. The arrest of Gupta makes him the highest-ranking executive to be arrested in a massive insider trading probe on Wall Street.
Gupta has long been a highly involved player in graduate business school circles. He has been on advisory boards at Northwestern University’s Kellogg School of Management, University of Pennsylvania’s Wharton School, Massachusetts Institute of Technology’s Sloan School of Management and Harvard Business School, where he picked up his MBA in 1973. In 2001, Gupta founded the Indian School of Business in Hyderabad.
A reporter for Rediff Business, who went to ISB in search of comment, found few people willing to talk about the news publicly. “It is a sad development. We are shocked. We hope that he will prove his innocence and come out clean,” said one of the faculty members at the ISB on condition of anonymity.
But after a four-year investigation by the FBI of insider trading at hedge funds, Gupta will be prosecuted by the office of Manhattan U.S. Attorney Preet Bharara, who with the FBI has directed a nationwide investigation of illegal trading at hedge funds, technology firms, banks and consulting firms. A federal grand jury in Manhattan charged Gupta with one count of conspiracy to commit securities fraud and five counts of securities fraud, all related to tips on Goldman Sachs in 2008.
“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,” Bharara 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.”
Gupta’s lawyer, meantime, denied the allegations, and Gupta pleaded not guilty to the charges. “Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless,” his lawyer, Gary Naftalis, told Bloomberg News in an e-mailed statement yesterday. “He 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.”
The Securities and Exchange Commission in March filed an administrative action contending Gupta passed inside information to Rajaratnam about Goldman Sachs and Procter & Gamble Co. At the time, Gupta became the second Harvard MBA in less than a month to have been charged with insider trading. On Feb. 8th, Samir Barai, who graduated from Harvard in 1999, also was accused of insider trading by the government. But the action against Gupta was dropped in August after Gupta, who denied the allegations, sued the SEC for violating his rights by not bringing its case in federal district court.
In the administrative proceeding, the SEC had claimed Gupta tipped Rajaratnam, 54, about Berkshire Hathaway Inc.’s $5 billion investment in New York-based Goldman Sachs. The agency also said Gupta told Rajaratnam about quarterly earnings of Goldman Sachs and Cincinnati-based P&G, the world’s largest consumer products company.
Gupta left the Goldman Sachs board in 2010 and stepped down from P&G’s board in March.
Aside from serving on those two boards, Gupta from 1994 to 2003 ran McKinsey & Co., the global consulting firm. He remained a senior partner there until 2007.