The US regulator has alleged that Rajat Gupta, a friend and business associate of Raj Rajaratnam, provided him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards
Washington: US Security and Exchange Commission (SEC) today charged Indian American Rajat K Gupta, a former board member of Goldman Sachs and Proctor & Gamble, with insider trading, accusing him of providing confidential information to the key figure in a major hedge fund probe, reports PTI.
The SEC has accused him of illegally tipping Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information about the quarterly earnings at both firms as well as an impending $5 billion investment by Berkshire Hathaway in Goldman.
SEC alleges that Mr Gupta, a friend and business associate of Mr Rajaratnam, provided him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards.
Mr Rajaratnam used the inside information to trade on behalf of some of Galleon's hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms, it said.
The insider trading by Mr Rajaratnam and others generated more than $18 million in illicit profits and loss avoidance.
Mr Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Mr Rajaratnam, SEC said.
"Gupta was honoured with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets," said Robert Khuzami, director of the SEC's Division of Enforcement.
"Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions," he said.
SEC alleges that while a member of Goldman's board of directors, Mr Gupta tipped Mr Rajaratnam about Berkshire Hathaway's $5 billion investment in Goldman and Goldman's upcoming public equity offering before that information was publicly announced on 23 September 2008.
Mr Gupta called MR 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.
Within a minute after the Gupta-Rajaratnam call and just minutes before the close of the markets, Mr Rajaratnam arranged for Galleon funds to purchase more than 175,000 Goldman shares.
Mr Rajaratnam later informed another participant in the scheme that he received the tip on which he traded only minutes before the market close.
Mr Rajaratnam caused the Galleon funds to liquidate their Goldman holdings the following day after the information became public, making illicit profits of more than $900,000, SEC said.
Mr Gupta also illegally disclosed to MR Rajaratnam inside information about Goldman Sachs' positive financial results for the second quarter of 2008.
Goldman Sachs CEO Lloyd Blankfein called Mr Gupta and various other Goldman outside directors on 10th June, when the company's financial performance was significantly better than analysts' consensus estimates, the SEC said.
Blankfein knew the earnings numbers and discussed them with Mr Gupta during the call.
"Between that night and the following morning, there was a flurry of calls between Mr Gupta and Mr Rajaratnam. Shortly after the last of these calls and within minutes after the markets opened on 11th June, Mr Rajaratnam caused certain Galleon funds to purchase more than 5,500 out-of-the-money Goldman call options and more than 350,000 Goldman shares," SEC said.
"Mr Rajaratnam liquidated these positions on or around 17th June, when Goldman made its quarterly earnings announcement. These transactions generated illicit profits of more than $13.6 million for the Galleon funds," it said.
SEC also alleges that Mr Gupta tipped Mr Rajaratnam with confidential information that he learned during a board posting call about Goldman's impending negative financial results for the fourth quarter of 2008.
The call ended after the close of the market on 23rd October, with senior executives informing the board of the company's financial situation.
"Mere seconds after the board call, Mr Gupta called Mr Rajaratnam, who then arranged for certain Galleon funds to begin selling their Goldman holdings shortly after the financial markets opened the following day until the funds finished selling off their holdings, which had consisted of more than 120,000 shares," SEC alleged.
"In discussing trading and market information that day with another participant in the insider trading scheme, Mr Rajaratnam explained that while Wall Street expected Goldman Sachs to earn $2.50 per share, he had heard the prior day from a Goldman Sachs board member that the company was actually going to lose $2 per share.
"As a result of Mr Rajaratnam's trades based on the inside information that Mr Gupta provided, the Galleon funds avoided losses of more than $3 million," SEC said.
Since leaving the world's richest school—in Cambridge, Massachusetts—former endowment managers at Harvard University now run Boston-based investment firms that altogether oversee more than $43 billion—exceeding Harvard's $27.60-billion fund.