Gupta gets 2yrs in jail, $5-mn fine
REUTERS
New York, 24 October
Former Goldman Sachs director Rajat Gupta was today sentenced to two
years in prison and fined $5 million for insider trading by Manhattan
US District Judge Jed Rakoff.
The 63-year-old Gupta arrived at court for his sentencing, accompanied
by his lawyer. He allowed photographers to click pictures, telling his
lawyer, "They're just doing their job." The former Goldman Sachs Group
Inc board member was convicted in June of leaking boardroom secrets to
hedge fund manager Raj Rajaratnam, his friend and former business
associate, at the height of the financial crisis. The former Goldman
director, who also once ran the McKinsey & Co consulting firm and sat
on the boards of Procter & Gamble Co and American Airlines, is the
most influential corporate figure to be convicted in the recent
crackdown on insider trading.
Indian-born Gupta had moved in elite business and philanthropic
circles for decades until he became ensnared in the Rajaratnam case.
Gupta's lawyers requested that he be spared prison, citing his work
with charitable groups.
Rajat Gupta ( centre )arrives outside court in New York on Wednesday
with his attorney Gary Naftalis ( right )PHOTO: AP/PTI Appeal in
insidercase centres on wiretap WORLD, P6
>The FBI's 5-yearoperation to nab a newinsidertrading class
>Insiders everywhere, impossible to catch
>Rajaratnam: The fund manager with the rightfriends
>PreetBharara: The lawyerwho set the trap
HOW THEYGOT RAJAT GUPTA, P11
MP petitions against Bharti Infratel IPO
SOUNAKMITRA& N SUNDARESHASUBRAMANIAN
New Delhi, 24 October
The Securities and Exchange Board of India (Sebi) is examining
complaints seeking the rejection of the offer document filed by
telecom tower company Bharti Infratel for an Initial Public Offering
(IPO).
This is the first instance of such requests received by Sebi under the
new framework for 'Rejection of offer documents' it announced on
October 9. The regulator has sent a copy of these complaints to Bharti
Infratel. The latter has planned to raise up to ~5,500 crore through
the IPO. The company is 13.9 per cent owned by financial investors,
including Kohlberg Kravis Roberts & Co, Macquarie Group, Citigroup,
Investment Corporation of Dubai and AIF Capital.
In an email, the Bharti group spokesperson said, "Sebi has forwarded
to us certain complaints received by them in relation to the proposed
IPO of Bharti Infratel. We have already replied to Sebi, pointing out
that all necessary disclosures on the matter have already been made in
the detailed DRHP (preliminary prospectus) filed." Adding: "We have
given all relevant details and rationale to counter all these
complaints and allegations, and accordingly have requested Sebi to
reject these complaints, as these are incorrect and do not fall under
the purview of the said new Sebi regulations." Sebi's spokesperson did
not respond to an email seeking comments. The complainant, Maheshwar
Hazari, a Member of Parliament, said in a letter dated October 15,
addressed to Sebi chairman U K Sinha: "The company has virtually no
assets under its name, as most of the schemes of arrangement are
pending before courts and the company may not get approvals." Business
Standard has reviewed a copy of this letter.
Bharti Infratel is a provider of telecom towers and related
infrastructure and on a consolidated basis, is one of the largest in
India, "based on the number of towers that Bharti Infratel owns and
operates and the number of towers owned or operated by Indus, that are
represented by Bharti Infratel's 42 per cent equity interest in
Indus," according to the offer document. In 2007, Bharti Infratel
entered into a joint venture, called Indus Towers, with Vodafone India
and Aditya Birla Telecom. Infratel and Vodafone hold 42 per cent each
and Aditya Birla holds16 per cent.
Company says complaints incorrect, do not fall under Sebi regulations' purview
Sebi seeks law to curb public money collection
PRESS TRUST OF INDIA Mumbai, 24 October
The Securities and Exchange Board of India (Sebi) has asked the
government to frame a strong legislation to tackle the menace of
companies collecting large amounts of money from the public without
regulatory approvals and for dubious investments.
The legal provisions are weak and allow such companies to benefit from
certain loopholes in the regulatory framework, Sebi Chairman U KSinha
said. The market regulator takes action against such entities whenever
it suspects there is something wrong.
Giving an example, Sinha said he was recently in Assam where he was
told that all the mutual funds put together have a combined assets
under management of less than ~1,000 crore in the state. At the same
time, there is a company that launched one scheme and managed to
collect more than ~1,000 crore, he said, without naming the company.
"So if you make the comparison, you will see the dimension is quite
big," he said.
Appeal in insidertrading case centres on wiretap
PETER LATTMAN
24 October
In March 2008, the Justice Department made an extraordinary request:
It asked a judge for permission to record secretly the phone
conversations of Raj Rajaratnam, a billionaire hedge fund manager.
The request, which was granted, was the first time the government had
asked for a wiretap to investigate insider trading. Federal agents
eavesdropped on Rajaratnam for nine months, leading to his indictment
— along with charges against 22 others — and the biggest insider
trading case in a generation.
On Thursday, lawyers for Rajaratnam, who is serving an 11year prison
term after being found guilty at trial, will ask a federal appeals
court to reverse his conviction. They contend that the government
improperly obtained a wiretap in violation of Rajaratnams
constitutional privacy rights and federal laws governing electronic
surveillance.
Such a ruling is considered a long shot, but a reversal would have
broad implications. Not only would it upend Rajaratnams conviction but
also affect the prosecution of Rajat K Gupta, the former Goldman Sachs
director who was convicted of leaking boardroom secrets to Rajaratnam.
Gupta is scheduled to be sentenced on Wednesday.
A decision curbing the use of wiretaps would also affect the
governments ability to police Wall Street trading floors, as insider
trading cases and other securities fraud crimes are notoriously
difficult to build without direct evidence like incriminating
telephone conversations.
"Wiretaps traditionally have been used in narcotics and organised
crime cases," said Harlan J Protass, acriminal defense lawyer in New
York who is not involved in the Rajaratnam case. "Their use today in
insider trading investigations indicates that the government thinks
there may be no bounds to the types of white-collar cases in which
they can be used." More broadly, Rajaratnams appeal is being closely
watched for its effect on the privacy protections of defendants
regarding wiretap use. Three parties have filed "friend-ofthe-court"
briefs siding with Rajaratnam. Eight former federal judges warned that
allowing the courts ruling to stand "would pose a grave threat to the
integrity of the warrant process." A group of defense lawyers said
that upholding the use of wiretaps in this case would "eviscerate the
integrity of the criminal justice system." To safeguard privacy
protections, federal law permits the governments use of wiretaps only
under narrowly prescribed conditions. Among the conditions are that a
judge, before authorising a wiretap, must find that conventional
investigative techniques have been tried and failed. Rajaratnams
lawyers said the government misled the judge who authorised the
wiretap, Gerard ELynch, in this regard.
They say that the government omitted that the Securities and Exchange
Commission had already been building its case against Rajaratnam for
more than a year using typical investigative means like interviewing
witnesses and reviewing trading records.
©2012 The New York Times News Service
Rajaratnam's lawyers seek reversal of conviction citing violation of
his constitutional privacy rights and laws governing electronic
surveillance
Raj Rajaratnam
NSE asks brokers to define orderlimits
PALAKSHAH
Mumbai, 24 October
Stock brokers can no more play the 'no limit game'. The National Stock
Exchange (NSE) has asked brokers to predefine order limits, based on
various criteria, of each terminal through which they operate in both
the cash and derivatives segments, across asset classes.
This is after the recent flash crash that saw the benchmark S&P CNX
Nifty index of the NSE crash 16 per cent in two minutes, due to a
freak trade in the cash segment. Earlier this month, a trader with
Mumbai-based Emkay Global Financial Services punched an erroneous
order, which got executed in 59 trades at lower prices pulling the
market down in the cash segment. The order got punched for more number
of shares than the trader intended, leading to chaos. The order was
worth nearly ~650 crore.
The NSE has 200,000 trading terminals across the country and around
1,500 members. Though NSE terminals require brokers to define their
orders, most trading houses had put their terminals on 'no limit'
mode, as a matter of convenience for quick execution of large
institutional orders.
Following the flash crash, the exchange had stressed that brokers
should have checks and balances at their level, too. But experts had
criticised NSE and expressed a view that exchanges should have checks
and balances to handle crises if brokers' risk management systems
fail.
NSE has said trading members will now have to pre-define the limit of
each order based on quantity, value, user, branch and spreads for
every terminal. Spread is the difference between two ticks. This will
allow the exchange to undertake better risk management in case of
punching or other erroneous trades.
The Bombay Stock Exchange (BSE) said their BOLT terminal already
requires brokers to specify limits. This apart, the exchange also
requires collateral of 10 times the order size if the trade value is
more than ~30 lakh. Even NSE follows strict collateral norms.
However, trading experts say there is further scope for tightening
risk management in the derivatives segment.
"Exchanges in India do not have a circuit breaker for stocks in the
derivative segment and order limits for futures and options are unduly
high. More, exchanges should have cumulative order limits per minute
or per second to contain risk. The is due to the fact that if
exchanges do not manage order limits per minute or per second, then
even small erroneous orders going through high frequency trading can
cause chaos," said the head of a trading technology company that
caters to members of both NSE and BSE.
However, NSE had recently tightened the criteria for choosing stocks
for the derivatives segment. The key idea was to allow only liquid
counters to be traded in the futures and options segment.
According to NSE, a broker can, at any time review his pre-defined
limits according to requirements but will have to submit a certificate
to the exchange on a quarterly basis. The certificate should include
details of limits after assessing the risks of the terminal user,
which should be done keeping the capital adequacy ratio of the member
in mind.
This is the second attempt so far this year at tightening risk
management systems by stock exchanges in India. In July, both BSE and
NSE had imposed a fee on algorithm trading to curb excessive
speculation. This trading fee on pre algo order discourages
arbitrageurs, who speculated in a huge way to take advantage of the
one to two paise price spreads. In June, the Infosys share had crashed
by 20 per cent, pulling down the benchmark index S&P CNX Nifty of NSE.
Algo trading was found to be the catalyst for this crash.
In the US and Europe, regulators are still discussing ways to curb
excessive speculation through algo trading. While exchanges in Europe
may soon be asked to impose trading fee on large algo orders, the US
exchanges recently implemented circuit breakers for their indices. For
many years now, exchanges in India have had circuit breakers for
indices. Only, US exchanges were more liquid and such a measure was
not required till now. But this belief was challenged by the flash
crash of May 2010.
Experts demand more steps in derivatives segment
The move follows the recent flash crash on NSE that sawthe Nifty
indexcrash 16% in two minutes due to freaktrade
ILLUSTRATION: BINAY SINHA
Institutional participation must for IPOs, says Sebi
SAMIE MODAK
Mumbai, 24 October
Capital markets regulator Securities and Exchange Board of India
(Sebi) has said spillover from the retail category to the qualified
institutional buyers (QIBs) category in initial public offerings
(IPOs) will not be permitted.
In other words, any public offering will need compulsory participation
from QIBs, which, among others, includes foreign institutional
investors (FIIs), mutual funds and insurance companies.
The move was prompted after a number of IPOs last year saw zero
participation from institutional investors and were filled only due to
retail subscription. Incidentally, some of these IPOs were later
banned by the market regulator for irregularities and violation of
norms.
According to legal experts tracking the capital markets, Sebi has now
clubbed the QIB and non-institutional investor categories, commonly
known as the high net worth individual (HNI) category, into one bucket
and has said that spillover from the retail sector will not be allowed
into this bucket. In other words, if an IPO fails to generate a
minimum 65 per cent demand for QIBs and HNIs, either the issue will
have to be withdrawn or will have to be underwritten by merchant
bankers.
This new norm comes into effect after Sebi amended the Issue of
Capital and Disclosure Requirements (ICDR) on October 12.
According to the earlier rules, spillover from one category to another
was permitted to the extent of undersubscription in that category.
Last year, at least four IPOs had seen no bids from QIBs and the
issues managed to sail through just on the back of oversubscription by
the retail segment ( see table).
Market experts say the decision to not allow spillover from retail to
QIB, will help reduce manipulation. The retail category, they say, can
be easily manipulated with fake applications; however, QIB
applications are mostly genuine.
"QIBs are considered to be more sophisticated investors and are known
to have the wherewithal. If they abstain completely from an IPO,
something may not be right with the issue," said a senior official in
charge of IPO distribution with adomestic merchant bank, who did not
want to be named.
For IPOs done through the book building process, 35 per cent of the
net offer is reserved for QIBs. Up to 15 per cent is meant for HNIs or
corporates who bid for more than ~2 lakh. The remaining 50 per cent is
reserved for retail investors, which are individual investors who
invest up to ~2 lakh.
As reported earlier, Sebi has also redesigned the profitability
criteria for companies wanting to tap the capital markets. Corporates
will need to have a minimum average pretax operating profit of ~15
crore in three of the preceding five years. If companies fail to meet
this criterion they will need an increased QIB participation of 75 per
cent as against the existing 50 per cent in IPOs or will have to list
on the SME platform.
Disallows spillover from retail to QIB category
IPO QIB HNI Retail Total
Brooks Laboratories 0.0 2.8 3.4 1.6 RDB Rasayans 0.0 0.8 4.0 1.5
Tijaria Polypipes 0.0 0.7 1.7 1.2 Bharatiya Global Infomedia 0.0 1.9
5.1 2.1
Source: BS Research Bureau RETAILDEPENDENT
AlotofIPOs lastyear managed to sail through onlyon retail participation
The FBI's 5-yearoperation to nab anewinsidertrading class
BLOOMBERG
Almost six years ago, Federal Bureau of Investigation (FBI) agents
David Chaves and Patrick Carroll surveyed the midtown New York skyline
to the north, home to much of the world's financial industry. They had
received some disturbing intelligence: A surge in profits at hedge
funds might be the result of an epidemic of insider trading.
The two men, head of securities and commodities fraud units at the New
York office, faced a dilemma. Informants had told them the hedge fund
industry was similar to organised crime: Insular and distrusting of
outsiders. Without people on the inside, the government would have a
tough time gathering enough evidence to prosecute. They needed more
tools to gather more information on traders who moved faster, and more
secretly, than your typical Mafia soldier.
"It was reminiscent of that scene in
Jaws where they got their first look at the shark," Chaves said. He
told Carroll, "We're going to need a bigger boat." That bigger boat
came in the form of alandmark change in the way whitecollar crime was
investigated in the US, agents said. The only way to uncover insider
trading was to apply the same techniques agents used to dismantle the
Mafia: Court- authorised wiretaps of phones, informants and
cooperating witnesses.
'Perfect Hedge'
At that moment, "Perfect Hedge" was born.
Over the next five years, the operation by the New York offices of FBI
and Manhattan US Attorney led to prosecutions that disrupted multiple
rings of illegal trading by portfolio managers, bankers and
consultants. It is the biggest insider trading investigation since the
days of Ivan Boesky and Michael Milken, and the largest ever in the
world of hedge funds.
Agents in New York spent years monitoring clandestine wiretaps as
traders received and passed illicit tips. FBI learnt everything it
could about fund managers suspected of being criminals, conducting
surveillance as targets passed secrets on street corners, in gyms, or
handed out bags of money for information.
Illicit profit
And it all began with the realisation that hedge fund managers who
illicitly profited on knowledge the public didn't have access to could
be pursued as vigorously as those who commited more traditional
crimes.
"We coined this investigation 'Perfect Hedge' because if you're armed
with that insider's information, you can initiate the perfect hedge,"
Chaves said in an interview. "You're always protected — the upside and
the downside." The results can be seen in the scores of
insider-trading prosecutions made in New York — from the conviction of
Galleon Group LLC Co-founder Raj Rajaratnam to those involving
expertnetworking consultants and employees at technology and
pharmaceutical companies.
Wiretaps played a role in many of these cases.
'Identified the problem'
"We identified the problem, we created the solution to infiltrate the
industry and we put people in well-placed hedge funds who reported to
us on a daily basis," said Chaves, 48, a lawyer as well as supervisory
special agent. He worked on the prosecutions of WorldCom Chairman
Bernard Ebbers, who was imprisoned for accounting fraud, and Martha
Stewart, convicted of obstruction of justice in an insider trading
case.
In some circumstances, Chaves said, agents would send in people
wearing wires to record incriminating statements by targets. Such
evidence, he said, "could then be used to provide us enough probable
cause to obtain a wiretap".
Ironically, the wiretaps that were so crucial to bringing down
defendants in Perfect Hedge would be the basis of an appeal in its
biggest case so far, that of Rajaratnam.
The hedge fund manager was found guilty on all 14 counts of securities
fraud and conspiracy he faced. The trial showcased 45 recordings by
agents working for Chaves and Carroll of the more than 2,400 taped
conversations between Rajaratnam and friends, business associates and
alleged accomplices.
Goldman Sachs
Prosecutors said he made more than $72 million by using illegal tips
to trade in stocks of companies including Goldman Sachs Group, Intel,
Google, ATI Technologies and Clearwire Corp. The investigation also
led to charges against former Goldman Sachs board member Rajat Gupta.
Electronic surveillance
Under the leadership of now-retired FBI Special Agent In Charge Peter
Grupe, who supervised Chaves and Carroll, FBI's New York office began
to use cooperating witnesses to build insider trading cases. In some
instances, Chaves said, agents sent in cooperators wearing wires to
record incriminating statements by targets.
Use of wiretaps allowed the targets of an investigation to unwittingly
explain complex, multi-million-dollar transactions, making schemes
easier for jurors to understand.
Soon after starting Perfect Hedge, FBI determined insider trading was
a business model at some hedge funds, Chaves said. The industry
manages $1.97 trillion in assets, according to Hedge Fund Research in
Chicago.
THE INVESTIGATION
1948 Born in Calcutta (now Kolkata) to a journalist, and a teacher
mother. Enrolls at Modern School, Delhi. Orphaned at 18.
1966 Among top-20 at the IIT-JEE
1971 Graduates in mechanical engineering from IIT-Delhi. Turns down
ITC job offer. Joins Harvard Business School on scholarship
1973 Becomes a Baker Scholar in his graduating class, a distinction of
top 5% students. Hired by McKinsey in New York
1980 Becomes partner in the consulting firm
1994 Becomes head of McKinsey. During his three terms at the helm, the
firms revenue increases to $3.4 billion from $1.2 billion
2007 Retires. Travels to India to seek investments for New Silk Route
Partners, a PE firm he starts with Rajaratnam, and others
2008
April: His net worth is $84.1 million
July: FBI agents listen in on a GuptaRajaratnam call where Gupta
discusses Goldman Sachs business
2012
June 16: Found guilty on insider trading charges, including leaking
tips such as aBuffet investment in Goldman The board member with the
tips
RAJAT GUPTA
In 'Perfect Hedge', the investigators wire-tapped low-level associates
to get at the big fish
BLOOMBERG
IN INDIA, SEBI SEEKS POWERS TO TAP PHONES
Insiders everywhere, impossible to catch
NSUNDARESHASUBRAMANIAN
New Delhi, 24 October
Insider trading investigations are the most difficult to crack of all
securities market offences. These are even more difficult to defend in
the courts of law.
These investigations have to establish three basic elements. First of
all, one has to have evidence of action in the market, whether a buy
or sell. This is the easier part. Then, one has to prove that the
insider had a particular information that others did not have. And
then the investigator has to establish one caused the other. The key
frustration for investigators often comes in establishing the cause
and the effect.
Even in the high-profile Raj Rajaratnam-Rajat Gupta case in the US, it
is not clear if the authorities would have been as successful if they
did not have the conversations, taping of which incidentally was
permitted to crack the insider trading.
Indian authorities, too, face the same frustrations and handicaps. To
overcome these, Sebi Chairman U K Sinha has been demanding tools such
as access to phone records from the government. We are not sure if its
on the way anytime soon.
Even without these props, Sebi has taken efforts to bring to book some
offenders. According to the Sebi annual report, it took up
investigations of 24 insider trading cases and completed
investigations in 21 in the year 2011-12. Insider trading cases
accounted for 15 per cent of the total number of cases.
Sebi has stepped up its efforts in enforcement. Reliance
Infrastructure and Reliance Natural Resources settled charges of
breaching securities laws by paying ~25 crore each in 2011.
Sebi also fined a former independent director of Ranbaxy Laboratories,
V K Kaul, and his wife ~60 lakh in early 2012 for insider trading of
shares in Orchid Chemicals and Pharmaceuticals based on unpublished
price-sensitive information.
Manoj Gaur, chairman of Jaiprakash Associates (JAL), Jaypee Group's
engineering and construction arm, and his relatives and three senior
executives were charged ~70 lakh for insider trading in the company's
stock in 2008. However, typically, Sebi orders are challenged in the
tribunal or courts where they either drag for years or end up against
Sebi. Recently, the order against Gaur was set aside by the Securities
Appellate tribunal (SAT) for want of evidence.
CGwatch 2012, a report on corporate governance by French Securities
firm CLSA and Asian Corporate Governance Association, puts forth a
tough task ahead for the regulator. "Sebi admits that it does not have
a good track record in insider-trading cases. The fact that it went
after, and succeeded in fining, two fairly high-profile people has
made the market take note." CLSA also referred to the regulator's
efforts in the insider trading case against Reliance Industries,
alleging the company had engaged in this when reducing its stake in
Reliance Petroleum in 2007. Reliance Industries has tried
unsuccessfully to settle the case through a consent order, an
out-of-court settlement where the defendant does not admit guilt, but
the regulator has refused the amounts offered by the company. "Market
observers believe when Sebi eventually settles the case, it could be
the largest settlement it has received to date," the report said.
Sebi Chairman UKSinha has been demanding tools such as access to phone
records from the government
--
.
-
CS A RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai
email csarengarajan@gmail.com
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