SEC Brawls With US Attorneys Over Insider Trading Case

Rajat Gupta
Umesh Goswami | The India Today Group | Getty Images
Rajat Gupta

The insider trading allegations against former McKinsey & Co. chief Rajat Gupta led to a bitter dispute between federal prosecutors and securities regulators, according to people familiar with the matter.

Gupta has been accused by the Securities and Exchange Commission of leaking confidential information about Goldman Sachs and Procter and Gamble , two companies on whose boards he sat as a director. He has denied any wrongdoing.

The Securities and Exchange Commission and the U.S. attorney's office in New York found themselves at odds over the timing of the allegations, according to people familiar with the matter. The SEC wanted to file a civil complaint against Gupta using its newly acquired authority under the Dodd-Frank financial reforms. Federal prosecutors worried that filing charges so close to the start of the trial of Raj Rajaratnam, the founder of the Galleon hedge fund group who is facing criminal charges of insider trading, might be viewed as prejudicial to the criminal case against Rajaratnam, the sources said.

Prosecutors attempted to pressure the SEC to hold off on filing a complaint against Gupta until after a jury had been selected in the Rajaratnam trial. They were concerned that the Rajaratnam defense team would claim that the pre-trial publicity surrounding the filing of insider trading violations against a person as prominent as Gupta had tainted the jury pool. They feared that this would give Rajaratnam's lawyers an excuse to try to have the case moved from federal courts in New York to another location—or perhaps have the case thrown out altogether, a person familiar with the matter said.

The SEC wanted to press forward with the case against Gupta.The enforcement division of the SEC has felt "somewhat overshadowed" by the insider trading probe lead out of the office of Preet Bharara, the U.S. attorney based in Manhattan, according to one of the people familiar with the matter. The SEC looked at the charges against Gupta as a chance to show that it was taking a pro-active stance against insider trading, the person said.

The dispute between federal prosecutors and securities regulators grew more acrimonious as time passed. Some at the SEC began to see the attempt by the prosecutors to delay their case as an encroachment on their independence and authority, according to a source.

"There was shouting over the phones," the person said.

The dispute about whether or not to file a claim against Gupta prior to the Rajaratnam trial reached the highest levels at both the Justice Department and the SEC. At one point, SEC chief Mary Shapiro became personally involved in the dispute, the person said.

Two weeks before the trial of Rajaratnam was to begin, Gupta made a submission of evidence to the SEC, a person familiar with the situation said. The nature of that evidence is not clear, although people familiar with the matter say Rajaratnam's defense attorneys viewed it as exculpatory. Rajaratnam's defense attorneys requested that the SEC hold off on charges against Gupta until after the trial, one person said. They mentioned that they might call Gupta as a witness in the trial.

The SEC filed its complaint against Gupta on March 1, a week before jury selection for Rajaratnam's trial was set to begin. Lawyers for Raj Rajaratnam almost immediately accused the government of a deliberate effort to taint the jury pool.

Rajaratnam defense attorney Attorney John Dowd said that the SEC's claims against Gupta had generated “overwhelming publicity” that jeopardized Rajaratnam's right to an unbiased jury and a fair trial.

A jury for the Rajaratnam trial was selected on March 8 after attorneys questioned potential jurors about their familiarity with the case.

The Securities and Exchange Commission and the U.S. Attorneys General office declined to comment.


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