Even if McKinsey & Co’s former long-serving managing director Rajat Kumar Gupta wins this week’s battle, he has already lost the war.
On Tuesday, May 21, exactly a year after he walked into a courthouse in New York City to defend himself for the first time against insider trading charges, Gupta was back in court again, this time to hear his celebrated appellate lawyer Seth P. Waxman, present arguments on why his conviction on insider trading charges should be reversed.
His wife Anita and four daughters accompanied him as they had during much of the month-long trial a year earlier.
Instead of a jury of twelve ordinary New Yorkers deciding his future, his fate now rests in the hands of three of America’s sharpest legal minds.
Among the panel of three US Court of Appeals judges for the Second Circuit opining on his case was one who is viewed as favouring defendants, another who is seen as siding with the government and a third judge who is something of a wild card but is respected by defence lawyers and prosecutors alike for his intellectual rigour.
No longer welcome
Whatever they decide, though, it probably won’t matter for Gupta’s public persona.
Ever since March 2011, Gupta has not been welcome in the corporate boardrooms of America or even the charitable panels on which he once sat.
It was more than two years ago, just weeks after the Securities and Exchange Commission brought a civil case of insider trading against Gupta, that prosecutors played in open court a recording of a conversation between Galleon hedge fund chief Raj Rajaratnam and Gupta where the three-time-elected McKinsey chief is heard talking freely of discussions at a recent Goldman Sachs board meeting and is acquiescing in Rajaratnam telling him that another McKinsey partner is moonlighting for him – Anil Kumar is receiving “a million dollars a year for literally doing nothing” Rajaratnam tells Gupta and Gupta responds “He should sometimes say ‘thank you’ for that”.
Overnight, Gupta, once the darling of corporate America, turned into an outcast. The information he was heard discussing with Rajaratnam did not rise to the level of material non-public information but his exchange with Rajaratnam about his former McKinsey colleague and protégé Kumar was damning.
Gupta, after all, had built a career and reputation on advising corporations, presumably on best practices. What he displayed in that July 2008 call was worst practices.
In a standing room-only courtroom on Tuesday which was so packed that many observers had to watch the proceedings on video in an anteroom, the panel heard Waxman, who served as US Solicitor General under President Bill Clinton, argue that Gupta’s conviction of securities fraud charges in mid-June 2012 was prejudiced by the inclusion of wiretapped conversations between Rajaratnam and his lieutenants.
In one conversation, Rajaratnam said he got a call before the close of the market on September 23, 2008 that “something good might happen to Goldman”.
After trading ended that day, Goldman announced that Warren Buffett was investing $5 billion in it, a strong vote of confidence at the peak of the financial crisis. In another wiretapped conversation a month later, Rajaratnam told an associate that he heard “from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share”.
In both instances, the “hearsay” wiretaps were supported by circumstantial evidence of calls between Gupta and Rajaratnam that were followed by profitable trades in Goldman shares at Galleon.
Backed up charges
Gupta was only convicted on the charges that were backed by these “hearsay’’ wiretap recordings. He was acquitted on the other counts on which he was indicted which explains Gupta’s appeal strategy.
Gupta’s lawyers in their appeal are not arguing that there was insufficient evidence to convict their client.
The thrust of their brief is that wiretapped conversations between Rajaratnam and his lieutenants and one between Rajaratnam and Gupta should have been excluded and that testimony by his eldest daughter Geetanjali was improperly curtailed.
She was prepared to testify that at the time of Gupta’s curiously timed calls to Rajaratnam her father believed the Galleon hedge fund chief had yanked money out of a joint investment vehicle they were partners on, making it unlikely that he would have helped Rajaratnam with insider tips.
Even before the arguments on the appeal started on Tuesday morning, lawyers were handicapping which way it would go. US Appeals Court Judge Amalya L. Kearse is a favourite of government lawyers because she is known for upholding convictions; during Tuesday’s hearing, she did not say a word.
Meanwhile Judge Rosemary S. Pooler was a welcome draw for the defence; she has a reputation of reversing judgments. But the judge that all eyes were focused on during the hearing was Judge Jon O. Newman who spurred some of the most spirited questioning – and appeared to be most sceptical of the arguments Gupta’s lawyers sought to advance.
At one point, Judge Newman, after detailing powerful evidence showing Gupta coming out of a Goldman board meeting on September 23, 2008 and, less than a minute later, calling Rajaratnam who bought $33 million of Goldman stock, asked Waxman if he was claiming that the calls by Gupta to Rajaratnam and the trades that followed were a coincidence.
Waxman sidestepped the question, saying there was an innocent explanation for the calls. Gupta’s lawyers argued at his trial last year that their client was telephoning Rajaratnam during the fall of 2008 because he was trying to get to the bottom of a $10 million investment with Rajaratnam that had gone to zero.
But Judge Newman persisted in his questioning until Waxman was forced to concede: “Ok, I embrace it. It was a coincidence.”
Judge Newman also appeared not to be buying Waxman’s argument that Geetanjali’s testimony would have changed the outcome of the trial last year.
“You’re telling me that if the jury had heard that statement, it would have disregarded all the other evidence in the case?” Judge Newman asked. “How realistic is that?”
Slow decision
A decision on Gupta’s appeal isn’t likely for months, or at least until a different panel of judges for the US Court of Appeals for the Second Circuit hands down its decision on Rajaratnam’s bid to reverse his May 2011 conviction on insider trading.
The arguments on Rajaratnam’s appeal which centre on whether hundreds of hours of wiretap recordings were appropriately obtained were heard in October 2012, a day after Gupta was sentenced to two years in prison.
If the separate panel of appeals court judges argues that the wiretaps were improperly obtained, it would throw the Gupta conviction into question too.
Unlike Gupta, whose lawyers succeeded in getting him bail as his appeal is pending, Rajaratnam is now sitting in jail in Ayer, Massachusetts, starting to serve out his eleven-year sentence. So far, he is only one-and-a-half years into it.
(Anita Raghavan who was with The Wall Street Journal for 18 years, is the author of the upcoming book The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund).