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SEC: Insider Trading Ring Reached Into Goldman's Boardroom

Mar 1, 2011 – 2:53 PM
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Joseph Schuman

Joseph Schuman Senior Correspondent

The Securities and Exchange Commission today accused a former board member of Goldman Sachs and Procter & Gamble of illegally providing tips to his friend and partner, hedge fund manager Raj Rajaratnam, as part of a skein of insider trading schemes that generated more than $18 million in illicit profits.

Rajat K. Gupta, as a member of both boards, helped Rajaratnam's Galleon Management trade ahead of market-moving public announcements by Goldman and Procter, including the 2008 news that Warren Buffett's Berkshire Hathaway was investing $5 billion in Goldman, the SEC said.

SEC says Insider Trading Ring Reached Into Goldman's Boardroom
Getty Images / AP
The Securities and Exchange Commission announced insider trading civil charges against Rajat Gupta, left, on Tuesday. The agency said Gupta gave confidential information to Raj Rajaratnam, right, the founder of Galleon Management.
"Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets," SEC Enforcement Director Robert Khuzami said. "Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions."

Rajaratnam, a former billionaire hedge fund star, is scheduled to go on trial next week on charges of leading a massive insider-trading plot. The SEC said he used Gupta's information to trade for Galleon's funds or shared the information with his associates who did the trading.

At the time, Gupta was either a direct or indirect investor in some of those Galleon hedge funds and was a partner with Rajaratnam in other deals, the agency said. Gupta, the former head of consulting giant McKinsey & Co., is now a Connecticut-based business consultant.

Gupta's attorney, Gary Naftalis, issued a statement calling the SEC civil charges against his client "totally baseless."

"Mr. Gupta has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder," Naftalis said in the statement.

Of the 25 people criminally charged in the Galleon case, 19 have already pleaded guilty, and most are cooperating with authorities.

The government has accused Rajaratnam of netting more than $50 million in profits by trading on inside information related to companies' financial results or deals that were in the works.

In one of the most sensational charges yet in the case, the SEC today said that while serving on Goldman's board of directors, Gupta learned of Goldman's September 2008 deal with Berkshire Hathaway. Gupta served as a Goldman board member from November 2006 to May 2010, and has been on Procter & Gamble's board since 2007.

"Gupta called Rajaratnam immediately after a special telephonic meeting at which Goldman's board considered and approved Berkshire's investment in Goldman Sachs and the public equity offering," the agency said. "Within a minute after the Gupta-Rajaratnam call and just minutes before the close of the markets, Rajaratnam arranged for Galleon funds to purchase more than 175,000 Goldman shares."

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The day after the Goldman deal became public, Rajaratnam had Galleon liquidate the new Goldman holdings, generating an illicit profit of more than $900,000, the SEC said.

He also gave Rajaratnam inside information about Goldman's financial results, including in June 2008, when he learned during a private phone call with Goldman CEO Lloyd Blankfein that Goldman did better than analysts expected.

"Between that night and the following morning, there was a flurry of calls between Gupta and Rajaratnam," according to the government.

Galleon then bought more than 5,500 options to buy Goldman shares and more than 350,000 Goldman shares, which Rajaratnam later sold after the results were announced, making a profit of more than $13.6 million, the SEC said.
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