Venture, and Friendship, Sour After Insider Conviction

Rajat Gupta, the former managing director of the consulting giant McKinsey & Company, and Parag Saxena were not just business partners in a South Asian private equity fund, New Silk Route.

For 25 years, the men had been friends. Their families vacationed together at the Palm Island Resort in Cape Haze in southwest Florida. And the two men shared a common passion for bridge.

But simmering tensions between them have erupted. Mr. Gupta has now sued his business partner in Federal District Court in Manhattan, essentially accusing Mr. Saxena of trying to stop him from having a say over the fund. A year after being convicted on charges of tipping the hedge fund billionaire Raj Rajaratnam on secrets gleaned while a director at Goldman Sachs, Mr. Gupta is now embroiled in a dispute over his biggest business venture.

The dispute stems from an arrangement the two men put in place in early 2012 when Mr. Gupta was facing criminal charges. Since then, however, Mr. Saxena has been maneuvering behind the scenes for months to get his friend to sever all his ties with New Silk Route, according to people briefed on the situation.

Both men declined to comment for this article, but close friends of the two corroborated the account of their dispute.

Mr. Saxena, a, longtime player in private equity and venture capital, started New Silk Route with Mr. Gupta in 2006 after stepping down from the helm of Invesco Private Capital, where he led a team that invested in a glittering array of start-ups and early-stage companies including Amgen, Metro PCS, Staples, Costco and Starbucks.

Soon after Mr. Gupta’s conviction, Mr. Saxena visited his onetime friend at his Westport, Conn., estate, once the home of the retailing magnate James Cash Penney. Mr. Saxena had come on a mission: he wanted to find a way for Mr. Gupta to exit New Silk elegantly.

Some of New Silk Route’s limited partners were unhappy with Mr. Gupta’s continuing role in the fund. In India, where the fund invests heavily, Mr. Gupta’s involvement in the purchase of a big stake in a South Indian bank years earlier had raised the hackles of the Reserve Bank of India, making it difficult at times for New Silk Route to do business.

In March 2011, shortly after he was accused of insider trading by the Securities and Exchange Commission, Mr. Gupta, who was chairman of the fund, took a leave of absence. In February 2012, he agreed to step down from New Silk’s two-person board after Mr. Saxena requested that he distance himself from the company while securities charges were pending.

To protect his interests in the company, Mr. Gupta was allowed to designate one member of the company’s board. His suit against Mr. Saxena claims that his former business partner is trying to remove his board designee and thwart his effort to name a director.

Mr. Gupta has a 43.5 percent stake in the private equity firm; he is invested in its funds and is also entitled to residual management fees and carried interest income, or the profits that fund managers are paid as part of their compensation.

During a meeting in the study overlooking the pool on the Gupta estate, Mr. Saxena made an offer: he was willing to pay Mr. Gupta about $9 million for his stake and related investments in New Silk. Mr. Gupta indicated that he felt the sum did not reflect his contribution to the fund. He believed that New Silk — which he, Mr. Saxena, Mr. Rajaratnam and Mark Schwartz, a Goldman Sachs executive — had teamed up to start in happier times, had gotten off the ground in large part because of him. He felt he had played a pivotal role in helping the fund raise $1.4 billion in 2007 and in securing marquee investors like Swiss Re and Credit Suisse, according to people briefed on the situation.

For months afterward, talks between the two men went nowhere. Mr. Gupta was preoccupied with something far more important: he was busy collecting letters on his behalf from his important friends and former colleagues ahead of his sentencing before Judge Jed S. Rakoff in late October, and afterward with preparing for his appeal.

But last spring, shortly after Mr. Gupta sued Mr. Saxena, the two men met again after months of not speaking to each other. They met in the offices of a law firm unaffiliated with either man, a neutral site, in Midtown Manhattan.

Mr. Saxena was eager to find a way for Mr. Gupta to exit New Silk, and Mr. Gupta, after talking to friends familiar with the fund, had come to the view that it was in his best interest to cut ties with the fund. Though he hadn’t indicated exactly what price he was seeking for his stake and related investments, it was far higher — on the order of $35 million — than the $9 million Mr. Saxena was proposing.

The sum that Mr. Gupta can obtain for his stake in New Silk Route could prove critical for him. In 2008, he had a net worth of $100 million. Mr. Gupta’s defense has cost $40 million, but so far he hasn’t had to pay a cent. That’s because under Goldman’s bylaws, the bank is required to pay the legal fees of its top officers and directors.

But as part of an agreement reached with Goldman before his trial last summer, Mr. Gupta agreed that if he were found guilty of insider trading, he would reimburse the bank for the legal fees that were paid on his behalf. That payment would be made only after his appeal was resolved.

“For N.S.R. to have a future, it is very important you not be a part of it,” Mr. Saxena told Gupta, according to people with knowledge of the conversation.

The former McKinsey chief countered by placing the blame squarely on Mr. Saxena.

“You say N.S.R.’s future is not bright because of my involvement,” Mr. Gupta said. “It is not me, it is the management of the investments.”

New Silk, like many funds invested heavily in India, has been a poor performer in large part because of the devaluation of the rupee.

At the meeting, which at times got emotional, Mr. Saxena suggested that Mr. Gupta provide him with an idea of the percentage of the value in New Silk Route that he should receive, rather than an absolute dollar figure. That way, Mr. Gupta would have the opportunity to participate in any upside at the firm.

Last week, Mr. Gupta came back to Mr. Saxena with a percentage, which was undisclosed, that leaves the two men as far apart as when they started.