New Silk Route’s Gupta faces FBI charges

New Silk Route has been in a battle to convince its limited partners that the insider trading scandal involving its co-founder Rajat Gupta has nothing to do with the firm and its ability to generate solid returns.

That battle may have just gotten more intense. Earlier this week, the US Federal Bureau of Investigation arrested and charged Gupta with insider trading for allegedly sharing confidential information with disgraced hedge fund manager Raj Rajaratnam, founder of Galleon Group. The US Securities and Exchange Commission also filed charges against Gupta for alleged insider trading activities.

The charges stem from Gupta's alleged insider leaks to Rajaratnam from 2008 to 2009 while Gupta was on the boards

Rajat Gupta

of directors of Goldman Sachs and Procter & Gamble. Gupta allegedly knew the information would be used to make trades, according to the FBI complaint.

“Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders,” the FBI said.

As alleged, [Gupta] broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate [Rajaratnam], who reaped enormous profits from Gupta's breach of duty. FBI

“As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate [Rajaratnam], who reaped enormous profits from Gupta’s breach of duty.”

One of the specific deals related to the charges involved Gupta allegedly disclosing material non-public information concerning Berkshire Hathaway’s $5 billion investment in Goldman Sachs before it was publicly announced on 23 September 2008. Rajaratnam was found guilty of conspiracy and securities fraud in May related to numerous allegations of insider trading and earlier this month was sentenced to 11 years in prison.

In March, Gupta took a “leave of absence” from New Silk Route after he was initially charged by the SEC with insider trading. The SEC later dropped those charges, but reserved the right to bring new charges, which it did this week.

“Rajat Gupta has been on leave of absence since March 2011. Since that time, [he] has not been involved in the day-to-day running of the firm, nor has he ever served on the boards of any of its investments,” the firm said in a statement Thursday. “The large and talented team at New Silk Route remains focused on delivering value to its investors across the globe and making investments in Asia, and particularly in India, one of the world’s fastest growing economies.”

New Silk Route, which was founded in 2006, has been dealing with the fallout of scandal for most of this year. The firm has had to communicate consistently with its LPs to keep them apprised of the Gupta situation, and keep them confident that the fund itself and its performance have not been impacted, Parag Saxena, co-founder of New Silk Route, told Private Equity International in an exclusive interview earlier this year.

“We reminded LPs that this had nothing to do with New Silk Route … it had to do with Rajat’s board memberships with Goldman Sach,” Saxena said. LPs want to know, ‘what does this mean for me?’ On that front, ‘in terms of your investment’, we told them, ‘there is absolutely not change’. Our deal flow is as strong; our team, with more than 25 people and 10 partners, is a deep one.”

At the time, Saxena said Gupta was not on the investment committee anymore and was not in daily contact with other

Rajat [Gupta] is sui generis, there's no one else quite like him on the planet. Parag Saxena

partners. He also did not serve on any portfolio company boards and was not the originator of any of the firm’s 14 portfolio company investments, Saxena said.

Even in Gupta’s absence, the firm still had a strong foundation of talented investment managers, each focusing on different aspects of the market, he said.

“Rajat [Gupta] is sui generis, there’s no one else quite like him on the planet. He’s extremely smart, he has an unbelievable Rolodex. If I went to the South Pole, I could call Rajat, and if he didn’t know someone directly he’d call someone who did,” Saxena said. “It’s very unfortunate the situation he’s in. At the same time, we have 25 people who do different things, 10 other partners who bring deals to the table.”