Financial Integrity

Prosecutors Seek to Prove Incentive in Gupta Insider Trading Trial

Rajat Gupta’s attorneys have argued throughout his trial that he and Raj Rajaratnam were at odds over Rupta’s investment in Rajartnam’s fund, the Galleon Group, which collapsed during the financial crisis, resulting in Gupta’s $16.4 million investment in the fund being completely wiped out. According to his attorneys, as a result of this falling out, Gupta had no motivation to provide Rajaratnam with corporate secrets. However, this week prosecutors offered testimony and evidence attempting to prove Gupta’s investment in the Voyager Capital Partners fund did indeed provide Gupta with the financial incentive to leak inside information to Rajaratnam. The Voyager fund was a “fund of funds” that invested in multiple Galleon funds. The government presented evidence indicating that several of those funds were invested in Goldman Sachs. Gupta invested $5 million when the fund was founded in 2005 and then increased his investment to $10 million according to testimony from Isvari Mahadeva, a former Galleon employee. Gupta is charged with providing Rajaratnam with inside information from Goldman and Proctor & Gamble. Before it collapsed during the financial crisis, the Voyager fund performed extremely well, returning approximately 41% during its first few years. A good portion of the testimony was related to a dispute between Gupta and Rajaratnam over the value of Gupta’s investment in the fund. Testimony indicated Rajaratnam eventually relented and Gupta ended up with a higher stake in the fund. The government is expected to wrap up its case this week.

New York Times: Prosecutors Try to Prove Incentive for Insider Tips (6 June 2012)
(Source: New York Times)

False Claims Allegations Settled

The United States (US) Department of Justice (DoJ) has announced the reaching of a settlement with Calnet Inc. (Calnet) to “resolve allegations that the company submitted false claims to the Department of Defense”, under which Calnet will pay the US $18.1 million. Calnet was alleged to have “overstated its provisional indirect or overhead rates” on its translation and linguist services contracts at Guantanamo Bay and other facilities, resulting in the submission of “inflated claims for payment”. The settlement resolves a lawsuit filed by former Calnet employee Kimthy Chao on behalf of the US under the False Claims Act.

DoJ’s media release (1 June 2012)
(Source: DoJ)

Securities Company Fined and Barred for Fraud

The Financial Industry Regulatory Authority (FINRA) has announced that Brookstone Securities, its owner/chief executive officer Antony Turbeville and one of its brokers, Christopher Kline, have been found guilty by the FINRA hearing panel of “intentionally [making] fraudulent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks associated with investing in [collateralized mortgage obligations (CMOs)]” in order to induce them to purchase unsuitable CMOs. The panel also found that despite being aware of the negative effect on CMOs caused by increasing interest rates, Mr Turbeville and Mr Kline “led customers to believe that the CMOs were ‘government-guaranteed bonds’ that preserved capital and generated 10% to 15% returns”, leading to customer losses of US$1,620,100. Furthermore, the firm failed to acknowledge or accept responsibility for the misconduct, and instead blamed the customers for their own losses. Brookstone Securities has been fined US$1 million and ordered to pay restitution of more than $1.6 million to customers. Additionally, Mr Turbeville and Mr Kline have been barred from the securities industry, while the firm’s former chief compliance officer David Locy has been barred from “acting in any supervisory or principal capacity” for two years and fined US$25,000.

FINRA’s media release (4 June 2012)
(Source: FINRA)

US Investment Management Company Fined US$35 Million for Misleading Statements

The United States (US) Securities and Exchange Commission (SEC) has announced that investment management company OppenheimerFunds Inc (Oppenheimer) has agreed to pay over US$35 million to settle SEC charges that it made “misleading statements about two of its mutual funds struggling in the midst of the credit crisis in late 2008″. The charges (6 June 2012) allege that although declines in the commercial mortgage-backed securities (CMBS) market caused large cash liabilities on its funds and forced it to reduce its CMBS exposure, Oppenheimer “disseminated misleading statements about the funds’ losses and their recovery prospects”. According to SEC Denver regional office associate director Julie Lutz, “[t]hese Oppenheimer funds had to sell bonds at the worst possible time … Yet, the message that Oppenheimer conveyed to investors was that the funds were maintaining their positions and the losses were recoverable”. SEC enforcement division director Robert Khuzami reiterated that mutual fund providers must “clearly and accurately convey the strategies and risks of the products they sell”, and that “[c]andor, not wishful thinking, should drive communications with investors, particularly during times of market stress”.

SEC’s media release (6 June 2012)
(Source: SEC)

Witness: Gupta Helped Promote Rajaratnam Funds

A pair of government witnesses testified last Friday at the ongoing insider trading trial of Rajat Gupta. The first witness was Bill George, the former chief executive at Medtronic, and director at both Goldman Sachs and Exxon Mobil. George’s testimony mostly consisted of walking through the minutes from Goldman board meetings and other presentations made to the board in 2008. According to prosecutors, after these meetings Gupta, who was also a member of Goldman’s board, would call Raj Rajaratnam and illegal tip him off to information about Goldman before it went public. Prosecutors also introduced an email and power point presentation sent to George from Gupta regarding the private equity fund Gupta and Rajaratnam created. By introducing this evidence prosecutors were trying to demonstrate the close business ties that existed between Gupta and Rajaratnam. The second piece of testimony came from Michael Cardillo, a former employee of Rajaratnam’s hedge fund the Galleon Group. Cardillo testified that Rajaratnam’s brother, also an employee at Galleon, told him in 2008 that Proctor & Gamble was going to announce a drop in organic sales growth. He also indicated to Cardillo that the information came from his brother. They all shorted the Proctor & Gamble stock and when the company announced the decline the next day, they all made a significant amount of money. Gupta was also a board member at Proctor & Gamble.

New York Times: Prosecutors Present E-Mail Evidence in Insider Trading Case (25 May 2012)
(Source: New York Times)