New York, Jun 18: Rajat Gupta, former Goldman Sachs Director and a one-time poster boy of Indians in the US, has begun his two-year jail term for insider trading while losing his appeal against paying nearly USD 14 million in civil penalties and ban on serving as a public company officer.
India-born Gupta, 65, will now have to pay USD 13.9 million as penalty in the US Securities and Exchange Commission’s parallel insider trading case against him, in addition to the USD five million fine in the criminal case and USD 6.2 million restitution to Goldman Sachs.
A three-judge bench of the US Court of Appeals for the 2nd Circuit yesterday denied Gupta’s plea to overturn the decision of the district court that had imposed a permanent injunction prohibiting the former McKinsey head from serving as an officer or director of a public company, associating with brokers, dealers or investment advisors, and further violating securities law.
The district court had also ordered Gupta to pay the USD 13.9 million civil penalty, equal to three times the profits gained and losses avoided by one-time billionaire hedge fund founder Raj Rajaratnam. The setback for Gupta came the same day he reported to the Federal Medical Center-Devens in Ayer, Massachusetts, to begin his two-year prison sentence on insider trading charges.
A spokesperson for the centre told PTI that Gupta had “surrendered” to the prison yesterday. Gupta was undergoing routine medical tests, which could take a day to be completed. Following the tests, Gupta will be lodged in the satellite camp near the centre.
According to initial information available on the facility’s website, Gupta has been described as a 65-year old “Asian male”. Gupta’s appeal was denied by the appeals court, a day after hearing arguments from his lawyer Seth Waxman and the SEC.
The judges Barrington Parker, Denny Chin and William Sessions said in their order that “we find no abuse of discretion in the imposition of injunctive relief and civil penalties on Gupta by the district court. We have considered Gupta’s remaining arguments and find them to be without merit.”
“Accordingly, we affirm the judgement of the district court,” the judges said in their six-page order. Gupta began his prison sentence after fighting a protracted legal battle to clear his name in one of the biggest insider trading schemes in US history. Normally, only five visitors, including children, are allowed to visit an inmate at any given time.
A report last week in the New York Times had quoted retired Bureau of Prison’s Correctional Treatment Specialist Jack Donson as saying that Gupta could serve approximately 85 per cent of his two-year sentence before becoming eligible for transfer to a halfway house prior to his release date.
Although the statutory maximum halfway house is 12 months, white collar offenders with family and financial resources can expect a minimal amount of halfway house placement or direct home detention. ”Based on that, Gupta could be back home by the end of 2015. When Gupta reports to Devens, he will have fought his conviction and efforts to stay out of prison for a longer period of time than he will even be in prison,” Donson said.
The two-year prison term is the final nail in the coffin for Gupta, who rose to stellar heights in corporate America and became the poster boy of the Indian-American success story. At age 45, he became the first Indian CEO of the consulting giant McKinsey.
He co-founded the prestigious Indian School of Business with fellow McKinsey executive Anil Kumar, who had pleaded guilty to insider trading and testified as a government witness against Gupta in his trial. Gupta was also involved with various philanthropic causes, a side that the defence tried to portray at the trial using character witnesses.
Nearly 200 supporters, including influential names like Reliance Industries Chairman Mukesh Ambani, Microsoft co-founder Bill Gates and former United Nations Secretary-General Kofi Annan, wrote letters to the trial judge asking him to show leniency when he sentenced Gupta for insider trading.
The SEC contended that a treble civil penalty is warranted because Gupta’s tips to Rajaratnam “resulted, in effect, in millions of dollars of losses to those who traded their stock without the benefit of Gupta’s inside information.” ”This is the insider trading case of our century so far,” SEC’s lawyer David Lisitza had argued in court describing it “unprecedented”.
Waxman argued that the district court’s sole justification for the penalty was that Congress had intended to make insider trading a “moneylosing proposition”, which his lawyers said is an “insufficient rationale” given the severe financial consequences already imposed on Gupta and his complete lack of concrete personal benefit from the crime.
Waxman also argued that US District Judge Jed Rakoff, who oversaw Gupta’s criminal trial, was wrong in imposing the civil penalty and ban on Gupta even though he had said that Gupta was unlikely to commit similar crimes in the future.
Gupta’s lawyers have said he did not accrue any “direct financial benefit” from the insider trading offenses and yet he has been ordered to pay a “heavy price”. Since his trial and sentencing, Gupta spends most of his time up in his Westport, Connecticut home at his library.
The lengthy legal battle has cost millions of dollars to Gupta, who once had a networth of USD 130 million. His trial lawyer was renowned defense attorney Gary Naftalis and his appeal was fought by Waxman, a former United States solicitor general. A New York Times report had said that his total legal costs, including fees paid to his trial lawyers, consultants and experts, stands at roughly USD 40 million dollars.
He would also be required to reimburse to Goldman Sachs, which has been footing his legal bills so far due to bank’s bylaws that require it to pay the legal fees of its top officers and directors. Goldman is required to pay until Gupta has exhausted all avenues of appeal. Once all his appeals are exhausted, Gupta is likely to owe Goldman about USD 50 million.
Gupta was initially required to report to prison in January 2013, a few months after his conviction. He has been free on bail pending appeal since then but the Second Circuit Court of Appeals affirmed Gupta’s convictions in March. In May, Gupta filed a motion in the court of appeals to stay his surrender date and for bail pending the disposition of his rehearing petition but the motion was denied.
Gupta has apparently told his friends that once he is released from prison, the first place he wants to visit is native country.