NEW YORK - A former board member of Goldman Sachs and Procter & Gamble pleaded not guilty Wednesday to federal charges accusing him of acting as "the illegal eyes and ears in the boardroom" for a friend, a billionaire hedge fund founder sentenced this month to 11 years in prison in the biggest insider trading case in history.
The case, built partially on wiretaps used for the first time in insider trading, has offered unprecedented insight into greed at the highest levels of Wall Street. The arrest of Rajat Gupta took it one step higher.
The indictment unsealed Wednesday accuses Gupta of cheating the markets with Raj Rajaratnam, the 54-year-old convicted hedge fund founder who was the probe's prime target.
CBS News correspondent Bob Orr reports that, as a board member for both Procter & Gamble and Goldman Sachs, Rajat Gupta regularly heard sensitive corporate secrets, capable of moving stocks up or down. Gupta was allegedly able of passing on the important information with stunning speed.
For example, prosecutors say on September 28, 2008, Gupta called Rajaratnam just 16 seconds after completing a Goldman Sachs conference call. Gupta allegedly told Rajaratnam that Warren Buffet's Berkshire Hathaway was about to make a $5 billion investment in Goldman. Minutes later, before the markets closed and before the Buffet news was public, Rajaratnam bought $27 million in Goldman stock.
The next morning, Goldman's price jumped $3 per share. Rajaratnam cashed out with an $840,000 dollar profit.
Gupta, 62, quietly surrendered early in the day at the FBI's New York City office, a few blocks north of the ongoing Occupy Wall Street demonstration against what protesters call a culture of corporate greed. His lawyer called the allegations "totally baseless."
Swarmed by photographers, Gupta left the courthouse shortly before 4 p.m.
Gupta, of Westport, Conn., pleaded not guilty to one count of conspiracy to commit securities fraud and five counts of securities fraud, charges that carry a potential penalty of 105 years in prison. He was freed on $10 million bail, and conditions require him to remain in the continental United States. An April 9 trial date was set.
The indictment in U.S. District Court in Manhattan alleges Gupta shared confidential information about both Goldman Sachs and Procter & Gamble at the height of the financial crisis from 2008 through January 2009, knowing that Rajaratnam would use the secrets to buy and sell stock ahead of public announcements.
In a release, U.S. Attorney Preet Bharara said Gupta broke the trust of some of the nation's top public companies and "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."
Alluding to the wide scope of the prosecution, he added: "Today we allege that the corruption we have seen in the trading cubicles, investment firms, law firms, expert consulting firms, medical labs, and corporate suites also insinuated itself into the boardrooms of elite companies."
In all, 56 people have been charged in insider trading cases since Bharara took over shortly before Rajaratanam's October 2009 arrest. Of those, 51 have been convicted and 21 sentenced to prison terms ranging from no prison time to 11 years, the longest prison term ever given in an insider trading case.
FBI Assistant Director-in-Charge Janice Fedarcyk said Gupta's arrest was the latest to occur in an initiative launched by the FBI in 2007 against hedge fund cheats.
"The conduct alleged is not an inadvertent slip of the tongue by Mr. Gupta," she said. "His eagerness to pass along inside information to Rajaratnam is nowhere more starkly evident than in the two instances where a total of 39 seconds elapsed between his learning of crucial Goldman Sachs information and lavishing it on his good friend."
Authorities said they relied on wiretaps for the first time because it became apparent inside traders were employing the tactics of common criminals to evade detection. If the Gupta case goes to trial, taped conversations would be key evidence, as it was in the Rajaratnam trial.
The Rajaratnam probe led to a major spinoff investigation of expert networking firms, with investigators targeting those who enabled corrupt employees at public companies to divulge secrets to hedge fund managers as if their conversations were legitimate research.
Gupta's lawyer, Gary P. Naftalis, said in a statement Wednesday that his client had only legitimate communications with Rajaratnam.
"The government's allegations are totally baseless," he said. "The facts in this case demonstrate that Mr. Gupta is innocent of any of these charges and that he has always acted with honesty and integrity. ... We are confident that these accusations which are based entirely on circumstantial evidence cannot withstand scrutiny and that Mr. Gupta will be completely exonerated of any wrongdoing."
Aside from being a former director of the Wall Street powerhouse Goldman Sachs, Gupta is the former chief of McKinsey & Co., a highly regarded global consulting firm that zealously guards its reputation for discretion and integrity.
Gupta was also a former director of the huge consumer products company Procter & Gamble Co., a pillar of American industry and one of the 30 companies that make up the Dow Jones industrial average. P&G owns many well-known brands including Bounty, Tide and Pringles.
The Indian-born defendant's name played prominently at the criminal trial this year of Rajaratnam, who was convicted after prosecutors used a trove of wiretaps on which he could be heard coaxing a crew of corporate tipsters into giving him an illegal edge on blockbuster trades.
Jurors heard testimony that at an Oct. 23, 2008, Goldman board meeting, members were told that the investment bank was facing a quarterly loss for the first time since it had gone public in 1999.
Prosecutors produced phone records showing Gupta called Rajaratnam 23 seconds after the meeting ended, causing Rajaratnam to sell his entire position in Goldman the next morning and save millions of dollars.
In one tape played at trial, Rajaratnam could be heard grilling Gupta about whether the Goldman Sachs board had discussed acquiring a commercial bank or an insurance company.
"Have you heard anything along that line?" Rajaratnam asked Gupta.
"Yeah," Gupta responded. "This was a big discussion at the board meeting."
Prosecutors sought to maximize the impact of the Gupta tape by calling Goldman Sachs chairman Lloyd Blankfein to testify that the phone call violated the investment bank's confidentiality policies.
The Securities and Exchange Commission also brought civil insider trading charges against Gupta on Wednesday.
Besides highlighting the Goldman allegations that came out during the Rajaratnam trial, the indictment also accused Gupta of providing Rajaratnam in January 2009 with a tip that P&G was not going to meet sales growth expectations for the fiscal year. As a result, prosecutors said, Rajaratnam told a portfolio manager about the tip and certain funds sold short about 180,000 shares of P&G stock.
Daniel Alpert, managing partner at the investment bank Westwood Capital LLC, said Gupta, who did not benefit financially, demonstrates that passing information to friends is just as dangerous as trading on secrets.
"There is not a single person out there who doesn't know he is playing at the edges of propriety when he is doing it, and few who don't feel a pang of guilt after having done so," Alpert said.
"This has many of the same attributes as organized crime prosecutions," he said. "Until you throw the kingfishes in jail, there is unlikely to be any deterrent effect."