One of the most influential and best-known corporate figures in the world may be joining a small club of fallen financiers when he is sentenced later this week on insider-trading charges.
Former Goldman Sachs (NYSE:GS) director Rajat Gupta, 63, is the highest-profile executive caught, tried and convicted in the government’s campaign to crack down on corporate abuse. He joins a growing group of money-hungry white-collar criminals brought up on securities fraud and conspiracy charges. The one-time managing partner of McKinsey & Co. is scheduled to appear before U.S. District Judge Jed Rakoff on Oct. 24 for sentencing.
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In June, a 12-member New York jury deliberated less than 10 hours before returning with a guilty verdict on three counts of securities fraud and one count of conspiracy for passing along company secrets about Goldman Sachs. Gupta was acquitted on two other counts of securities fraud, including one related to Procter & Gamble Co. (NYSE:PG) where he had also been a director. He pleaded not guilty on all charges.
Last week, federal prosecutors asked the court to send Gupta to prison for 10 years saying it was “necessary to reflect the seriousness of Gupta’s crimes and to deter other corporate insiders in similar positions of trust from stealing corporate secrets and engaging in a crime that has been far too common.”
Separately, Goldman Sachs wants Gupta to pay it $6.78 million, which includes the costs the bank incurred in legal fees and 25% of the compensation Goldman paid him as a director.
Gupta’s lawyer, Gary Naftalis, is pushing for probation and asked the court to consider his client’s fall from grace as punishment enough.
A long line of prominent businessmen and humanitarians including Microsoft Corp. (NASDAQ:MSFT) co-founder Bill Gates and former United Nations Secretary-General Kofi Annan have come to Gupta’s defense. Their letters for leniency were among 200 sent to the court.
Not everybody is on Team Gupta, however.
In an email sent to the court, Brian Walker, the founder of an executive search firm, said he read a Wall Street Journal article on the letters of support “with disgust.” Walker said there had been too much leniency in insider trading sentences and that “people now think – and rightfully so based on news headlines – that all they will need to do is pay a fine and the charge goes away.”
So just how harsh will Gupta’s punishment be? According to court watchers, it is unlikely the judge will send him to prison for 10 years.
In the past, Rakoff has been very vocal in his criticism of the government’s sentencing guidelines, once calling them “the mirage of something that can be obtained with arithmetic certainty.”
Last year, Rakoff sentenced Winifred Jiau, who was convicted of selling confidential company information, to four years in prison – less than half of what federal prosecutors had sought. And in 2006, he called the request for an 85-year sentencing in an accounting fraud case “patently unreasonable” and “absurd.”
For the government, getting the strongest possible punishment in the Gupta case is crucial. Federal prosecutors have used Gupta’s once-stellar standing in the international business community as an example of how high they are willing to go to prosecute insider trading cases.
One day after Gupta learns his fate, a federal appeals court is set to hear oral arguments in billionaire Raj Rajaratnam’s bid to overturn his insider-trading conviction. He was found guilty in 2011 on 14 counts related to insider trading - nine on securities fraud and five for conspiracy – and is serving an 11-year prison sentence at the Federal Medical Center Devens in north central Massachusetts.
The former Galleon fund manager was the central figure in the government’s multiyear investigation into abuses on Wall Street. It was his high-stakes relationship with Gupta as well as other business insiders that helped federal authorities bring down one of the biggest insider-trading rings in U.S. history. And there are no signs the government is slowing down anytime soon.
According to James Barnacle, a supervisor of the Federal Bureau of Investigation’s economic crimes unit in Washington, D.C., the number of new FBI investigations into insider trading increased 43% nationally for the fiscal year that ended Sept. 30.
Since 2009, criminal charges have been filed against 72 hedge fund traders, consultants and company insiders by the U.S. Attorney’s Office in Manhattan alone. The four-year crackdown has been the largest since the 1980s, when the government convicted a slew of criminals with ties to the illegal practice.
Among the most notable was Ivan Boesky – the rumored inspiration for the fictional Gordon Gekko character in Oliver Stone’s film “Wall Street.” In 1986, Boesky was sentenced to 3 ½ years in prison and fined $100 million after pleading guilty to a criminal charge related to insider trading. Boesky cooperated with prosecutors and the information he provided eventually led to charges against more than a dozen people.