On Wednesday, October 26, 2011, both the SEC and the U.S. Attorney’s Office for the Southern District of New York filed charges against Rajat Gupta, the former Managing Director of McKinsey & Company and board member at Goldman Sachs and Procter & Gamble. Mr. Gupta, who previously argued that an Administrative Proceeding brought by the SEC against him was unfair because he denied a trial before a jury will now have two opportunities to challenge the charges against him in Court.
Both the federal prosecutors and the SEC allege that Mr. Gupta engaged in an insider trading scheme by providing nonpublic material information to Raj Rajaratnam in 2008 and 2009. Specifically, Mr. Gupta provided information which he learned during board calls and in other communications and meetings relating to his official duties as a director of Goldman Sachs and Procter & Gamble. For example, the SEC’s Press Release describes how Mr. Gupta learned certain information regarding Goldman Sachs’ impending negative financial results during an October 23, 2008 telephone call with Board members and that "[m]ere seconds after the board call ended," Mr. Gupta telephoned Mr. Rajaratnam, who arranged for certain Galleon funds to begin selling their Goldman Sachs holdings when the markets opened the following morning.
In the criminal case, Mr. Gupta was charged with one count of conspiracy to commit securities fraud and five counts of securities fraud. He faces up to five years in prison for the conspiracy count and up to 20 years for each securities fraud count.
The SEC’s Complaint against Mr. Gupta charges him with violations of Section 10(b) of the Exchange Act and Rule 10b-5, as well as Section 17(a) of the Securities Act. The complaint seeks a final judgment permanently enjoining him from future violations, ordering him to disgorge ill-gotten gains, plus prejudgment interest, and ordering him to pay financial penalties. The complaint also seeks to permanently prohibit Mr. Gupta from acting as an officer or director of any registered public company, and to permanently enjoin him from associating with any broker, dealer or investment adviser.
The SEC’s complaint against Mr. Gupta also names Mr. Rajaratnam as a defendant, bringing new insider trading charges against him (adding to those charges originally brought against him in October 2009). Mr. Rajaratnam has been convicted on insider trading and sentenced to eleven years in prison, as discussed here. The evidence in the eight-week trial against him included numerous recordings of wiretapped phone calls between Mr. Rajaratnam and co-conspirators (many of whom pled guilty) (discussed here).
The SEC and Mr. Gupta have already faced each other in two different proceedings this year on these issues. On March 1, 2011, the SEC commenced an Administrative Proceeding against him. In the Matter of Gupta, Administrative Proceeding File No. 3-14279. In that case, the SEC also alleged that Mr. Gupta engaged in an insider trading scheme by providing nonpublic material information to Mr. Rajaratnam between June 2008 and January 2009. In the Administrative Proceeding, the SEC sought relief which included civil penalties from Mr. Gupta under Section 929P of the Dodd-Frank Act, which was not passed until 18 months after the conduct in question.
On March 18, 2011, Mr. Gupta filed a complaint in federal court against the Commission seeking a declaratory judgment and injunctive relief. Gupta v. SEC, 11-cv-1900 (S.D.N.Y.). Mr. Gupta alleged that, by seeking civil penalties through the retroactive application of the Dodd-Frank Act in the Administrative Proceeding (as opposed to in a federal court), the SEC unconstitutionally deprived him to a jury trial in federal court (pointing out that the SEC has filed all of its cases related to Mr. Rajaratnam and Galleon in federal court).
On April 1, 2011, the SEC moved to dismiss Mr. Gupta’s lawsuit on the grounds it was not ripe (as discussed here). On July 11, 2011, Judge Rakoff denied that motion, but ruled that "the theory of the Complaint [was] narrowed to one of equal protection" (see here).
In August 2011, the parties agreed to settle their dispute regarding the forum in which they should litigate the SEC’s allegations (as described here). Specifically, the SEC dismissed its Administrative Proceeding against Mr. Gupta and the parties filed a Joint Stipulation of Dismissal in the case before Judge Rakoff, stating that if the SEC elected to bring action against Mr. Gupta, it would do so in federal court in New York and designate it as related to the other Galleon cases pending before Judge Rakoff.
One of the issues raised by Mr. Gupta in the earlier Administrative Proceeding and related litigation was that the SEC was seeking to use the enhanced enforcement provisions of Section 929P of the Dodd-Frank Act to recover civil penalties, even though the Dodd-Frank Act was not passed until the following year. In today’s action against Mr. Gupta, the SEC does not seek those same penalties.