SEC charges ex-Goldman director in insider case4 min read . Updated: 02 Mar 2011, 12:40 PM IST
SEC charges ex-Goldman director in insider case
SEC charges ex-Goldman director in insider case
New York: A former Goldman Sachs Group Inc director leaked secret details to Galleon Group hedge fund manager Raj Rajaratnam about Warren Buffett’s plan to invest $5 billion in the Wall Street bank at the height of the financial crisis, a US securities regulator charged.
The US Securities and Exchange Commission said the director, Rajat Gupta, tipped Rajaratnam by phone just minutes before the public learned of the investment by Buffett’s Berkshire Hathaway Inc, which helped ensure Goldman’s stability.
Gupta, a former worldwide managing director at consulting firm McKinsey & Co, was also accused of tipping Rajaratnam about quarterly earnings at Goldman and Procter & Gamble Co, where he was a director before resigning on Tuesday.
The 62-year-old Gupta is one of the highest-ranking corporate executives implicated in the government’s wide-ranging insider trading probe, which has resulted in criminal or civil charges against dozens of individuals.
Tuesday’s charges mark the first time that activity said to have occurred at Goldman was directly implicated in the probe.
The SEC said Rajaratnam, who faces a 8 March criminal insider trading trial, used the tips to trade at his firm, Galleon Group, reaping more than $18 million of illegal gains. It said Gupta invested in at least some Galleon hedge funds.
“Gupta was honoured with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets," SEC enforcement chief Robert Khuzami said in a statement. “Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions."
The SEC began administrative and cease-and-desist proceedings against Gupta. It described Gupta as a “friend and business associate" of Rajaratnam.
“Based on the allegations in the order instituting the administrative proceedings, it appears the SEC has a powerful, circumstantial case against Gupta," said Kathleen Hamm, managing director at Promontory Financial Group in Washington and a former SEC enforcement official.
“Totally Baseless" Charges, Lawyer Says
Gary Naftalis, a lawyer for Gupta, called the SEC allegations “totally baseless," and said his client had lost his entire $10 million investment in a Galleon fund that Rajaratnam managed, known as GB Voyager.
“Mr. Gupta has done nothing wrong," Naftalis said in a statement. “There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo."
Gupta sat on Goldman’s board from November 2006 until last May and served on its corporate governance committee.
The Westport, Connecticut, resident had served on Procter & Gamble’s board since 2007 before resigning on Tuesday.
“He’s stepping down in the interest of the company, to prevent any distraction to the P&G board or our business," company spokesman Paul Fox said.
Rajaratnam also faces SEC civil charges. He has denied wrongdoing.
“This is simply an effort to destroy a favourable witness," John Dowd, a lawyer for Rajaratnam, said in a statement about the Gupta charges. “There is no case, absolutely none. No conversations, no benefit, no nothing. These are old friends and Mr. Gupta is a distinguished human being."
Goldman spokesman Ed Canaday declined to comment. Berkshire did not return a request for comment.
“It is striking the SEC refers to phone calls immediately before the trades," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick PC in Washington and a former SEC enforcement lawyer. “This suggests there was a witness, or that the SEC has more circumstantial evidence."
Gupta is one of a web of associates in Corporate America that investigators have said Rajaratnam used to learn advance tips about potentially market-moving news.
A Harvard Business School graduate, Gupta was previously worldwide managing director at McKinsey, where he worked for more than three decades.
The Gupta case “does not help in instilling confidence in Main Street investors that they’re getting a fair shake at these multinational companies," said Michael Nix, co-chief investment officer at Greenwood Capital Associates LLC.
In trading on the New York Stock Exchange on Tuesday, Goldman fell $2.47, or 1.5%, to close at $161.31, while Procter & Gamble fell 31 cents, or 0.5%, to $62.74.
Multiple Tips Alleged
Prosecutors have said a Morgan Stanley banker also leaked inside information that found its way to Rajaratnam.
Former McKinsey consultant Anil Kumar pleaded guilty in January 2010 to leaking inside information about a possible merger to Rajaratnam, in return for $1.75 million.
White-collar defense lawyers said civil administrative proceedings may afford the SEC a more friendly forum in which to pursue its case. They also allow the regulator to avoid having to amend its own lawsuit against Rajaratnam.
“It’s faster, the evidence rules are more liberal, and the SEC can wield a bigger hammer in penalties, which can include barring someone from the securities industry." Weissman said.
The SEC alleged Gupta tipped Rajaratnam about Goldman’s results for the second and fourth quarters of 2008, resulting in more than $16.6 million of illicit gains.
It said he also tipped Rajaratnam about Procter & Gamble’s results for the final quarter of 2008, resulting in more than $570,000 of profit.
The SEC said Gupta had at least two phone calls with Rajaratnam shortly before Goldman announced Berkshire’s investment on 23 September 2008.
It said one call came just before the market closed that day, immediately after Gupta had disconnected from a phone link to the board meeting where Goldman approved the investment. Goldman announced the Berkshire stake after markets closed.
Rajaratnam’s trades in Goldman based on these tips resulted in more than $900,000 of profit, the SEC said.