Who's Who Of The Rajat Gupta Insider Trading Trial

Includes: GS, INTC, PG
by: Shock Exchange

The much awaited trial of Rajat Gupta, former head of McKinsey & Co. and board member of Goldman Sachs (Goldman (NYSE:GS)) and Procter & Gamble (P&G (NYSE:PG)), finally began in May 2012. Insider trading cases after the financial crisis had been relegated to hedge funds, consultants and small investors. However, when the SEC announced in April 2010 that it was investigating Gupta, the news drew the most powerful and respected Wall Street firm - Goldman Sachs - into the fray. The SEC claimed Gupta provided material nonpublic information concerning Goldman and P&G to Raj Rajaratnam, founder of the Galleon Group and known on the street as the "Tiger Woods of insider trading." At its height Galleon held approximately $7 billion in AUM. The original SEC complaint stated that Rajaratnam and Galleon generated illicit profits of over $23 million from information provided by Gupta.

The Gupta trial is expected to be nothing short of Shakespearean drama. First there are the taped conversations between Gupta and Rajaratnam that prosecutors claim are crucial to the case. Wiretaps, known to be used mostly for drug cases and organized crime, helped get Rajaratnam convicted of 14 counts of securities fraud in May 2011, resulting in a prison sentence of 11 years. Gupta's legal counsel asked the judge not to admit the three wiretaps in question, out of fear that they would unfairly prejudice the jury; nonetheless, its pleas fell on deaf ears. Secondly, there is the "Who's Who" of Wall Street and the American business elite expected to testify. The names include, but are not limited to, Lloyd Blankfein, CEO of Goldman, legendary investor Warren Buffett, Ken Chenault, CEO of American Express (NYSE:AXP), and Anil Kumar, former McKinsey & Co. executive.

However, the mainstream media has declined to report on the most compelling aspect of the Gupta / Rajaratnam saga. When the names involved in the Galleon insider trading ring began to surface in late 2009, one could only notice that most were of Indian or South Southeast Asian descent. As a securities analyst at Needham & Company in the late 1990s, Rajaratnam was predicting Intel's earnings with such precision that investors complained to Intel (NASDAQ:INTC) directly that the Company must have had a leak within its ranks. Yet Rajaratnam's insider trading activities went on unimpeded until December 2009. In his upcoming book, Shock Exchange … How Inner City Kids Predicted The Great Recession And the Pain Ahead, Ralph Baker, Executive Director of the New York Shock Exchange, explains why:

As an analyst, Rajaratnam had a penchant for accurately predicting revenue projections of some of the companies he covered. For instance, the revenue predictions in his research reports on Intel were so prescient that investors complained to Intel that its confidential information was somehow being leaked to Rajaratnam. Intel began investigating whether anyone was dialing Rajaratnam's number. They learned that Khan dialed it several times and sent faxes to Galleon as well. Afterwards Intel set up a hidden video camera that on March 6, 1998, recorded Ms. Khan faxing key financial documents to Mr. Rajaratnam. The documents contained pricing information for key Intel chips as well as the number of units sold in the first quarter of 1998.

Intel fired Ms. Khan and she later worked directly for Galleon. She subsequently entered a plea agreement with the FBI, describing an insider trading ring that included her, Rajaratnam and others. The FBI and SEC dropped the investigation because they could not demonstrate that Rajaratnam acted on the confidential Intel information from Ms. Khan. As Rajaratnam and Roomy Khan came to the U.S. and brazenly broke every securities law known to man, one out of every three black men was being profiled and arrested for decades. The FBI would lead one to believe that it could arrest D.C. mayor, Marion Barry, the most powerful African-American in the country, on trumped up drug charges but could not bring Rajaratnam to justice. Rajaratnam and Roomy Khan were not the priority. Black men were.

Below is the list of key players in the Galleon insider trading ring, which now includes Gupta, a native of Indian and graduate of the famed Indian Institute of Technology.

Rajiv Goel

Goel admitted that as an executive in Intel's treasury department, he provided material nonpublic information to Rajaratnam concerning Intel's financial results. The two were classmates at the Wharton School of Business where they became friends. Goel testified that he provided Rajaratnam the information based on the strength of their friendship.

Anil Kumar

A graduate of the Indian Institute of Technology and the Wharton School where he was a classmate of Rajaratnam, Kumar was an executive at McKinsey when he entered into a compensation scheme whereby he received a share of the profits from inside information he provided to Rajaratnam. Rajaratnam made $23 million from the merger of ATI Technologies and Advanced Micro Devices (NYSE:AMD) on information provided by Kumar. Facing the proverbial "prisoner's dilemma," Kumar later told the feds "what had happened" about their secret arrangement.

Roomy Khan

After being confronted by the FBI with evidence of additional insider trading in 2007, Mrs. Khan agreed to cooperate with the feds and record future phone conversations. Using her network of young professionals within the Indian community, Mrs. Khan ascertained information on the Blackstone Group's (Blackstone (NYSE:BX)) acquisition of Hilton Hotels (Hilton (NYSE:HLT)) in 2007, and that Google Inc. (Google (NASDAQ:GOOG)) would fall short of its second quarter 2007 earnings. She passed along the information to Rajaratnam who reportedly made about $13 million in illicit profits from trading on the two stocks. Taped phone conversations between the two eventually led to Rajaratnam's prosecution.

Deep Shah

Shah, a junior hotel analyst at Moody's Investors Service, allegedly tipped off Khan about Blackstone's takeover of Hilton. According to an SEC complaint, Khan agreed to pay Shah $10,000 for the tip. In November 2011, Judge Jed Rakoff ordered Shah to pay $34.5 million in fines after he fled the U.S. to avoid facing insider trader charges. He was believed to have left for his home country of India.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.