NEW YORK (Reuters) - Rajat Gupta, who sat on the boards of some of America's most prestigious companies, was arrested and charged on Wednesday with being the "illegal eyes and ears" for his friend Raj Rajaratnam, the central figure in a broad U.S. crackdown on insider trading at hedge funds.
Gupta, 62, a former director of Goldman Sachs Group Inc, Procter & Gamble and former global head of McKinsey & Co consultancy, is the most prominent executive to face charges since Rajaratnam was arrested in October 2009. He faces five counts of securities fraud and one count of conspiracy tied to what prosecutors say were his leaks of Goldman and P&G secrets to Rajaratnam in 2008 and 2009.
Galleon Group hedge fund founder Rajaratnam, 54, was sentenced to 11 years in prison this month after an overwhelming insider-trading conviction. The sweeping Galleon case caught many of his associates on secretly recorded phone calls, and many of them have also been prosecuted in the case.
Gupta's lawyer, Gary Naftalis, said in a statement that there were legitimate reasons for communications between his client and Rajaratnam, including a $10 million investment that Gupta had in a fund managed by the Galleon founder. Gupta lost the entire amount, Naftalis said.
"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," Naftalis said.
He said Gupta did not trade in any stocks and did not tip Rajaratnam so he could trade.
For Galleon Group case graphic: click r.reuters.com/jyk48r
Manhattan U.S Attorney Preet Bharara said in a statement on Wednesday that Gupta had been entrusted by top companies.
"As alleged, he broke that trust and instead 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," Bharara said.
Gupta surrendered to FBI agents and will appear in federal court in New York later on Wednesday. He also faces civil charges brought by the U.S. Securities and Exchange Commission. The SEC said Rajaratnam's funds made more than $23 million on Gupta's information.
The criminal charges carry a maximum prison sentence of 25 years.
Gupta was global head of McKinsey for nine years until he retired in 2007. He won a seat on the board of directors of powerful Wall Street bank Goldman in 2006 and left in May 2010, seven months after Rajaratnam's arrest. He was also a director at P&G and American Airlines Corp.
Stephen Cohen, a spokesman for Goldman Sachs, declined to comment on Wednesday. Representatives from Procter & Gamble, American Airlines and McKinsey also declined comment.
Gupta was born in India but made his name in the U.S. corporate world after graduating with an MBA from Harvard Business School.
The SEC said Gupta had business dealings with Rajaratnam and "stood to benefit from his relations" with him; Gupta was an investor in Galleon entities that "traded -- and handsomely profited -- based on Gupta's illegal tips."
The government contends that Gupta provided Rajaratnam with advance knowledge of Warren Buffett's $5 billion investment in Goldman at the height of the 2008 financial crisis, as well as information about Goldman's surprise fourth-quarter loss in 2008 and its first as a public company, and P&G quarterly earnings in late January 2009.
The accusations had already been revealed ahead of Rajaratnam's trial or during the two month-long trial. Prosecutors had previously described Gupta as an unindicted co-conspirator but had not lodged formal charges.
Rajaratnam, who was born in Sri Lanka and became a billionaire through his hedge fund business, was convicted in May of 14 insider-trading related charges. His 11-year sentence is the longest recorded for insider trading.
Goldman Chief Executive Officer Lloyd Blankfein testified at the trial for the prosecution about Gupta's conduct on the bank's board. Prosecutors also played secretly recorded telephone conversations to the jury in which Rajaratnam told Galleon employees about information he had received from Gupta about Goldman Sachs.
Wednesday's indictment said that on Oct. 23, 2008 Gupta called Rajaratnam 23 seconds after disconnecting from a Goldman board call and spoke to Rajaratnam for 13 minutes, disclosing negative interim earnings results.
In one recording played at the trial, Rajaratnam was on a call with David Lau, chief of Galleon's Singapore branch, on Oct. 24, 2008. They discussed a tip he got from a board member that Goldman was on its way to a surprise fourth-quarter loss, its first as a public company.
"I just heard from somebody who's on the board of Goldman Sachs, they are gonna lose $2 per share," Rajaratnam was heard saying. "So what he (the board member) was telling me was that, uh, Goldman, the quarter's pretty bad."
The Rajaratnam trial punctured McKinsey's reputation for closely guarding client confidentiality. Former McKinsey executive Anil Kumar, also a one-time friend of the hedge fund manager, pleaded guilty and testified against Rajaratnam.
Reporting by Grant McCool, Basil Katz and Jonathan Stempel, editing by Gerald E. McCormick, Lisa Von Ahn, Dave Zimmerman and Robert MacMillan