Former Goldman Sachs Board Member Rajat Gupta Charged By SEC With Insider Trading

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Just what Goldman did not need: a former board member of Goldman Sachs, Rajat Gupta has been charged by the SEC with insider trading, related to the Galleon insider trading scheme. It seems, Gupta was also tipped off about Berkshire's $5 billion investment in Goldman.

From the release:

Washington, D.C., March 1, 2011 – The Securities and Exchange
Commission today announced insider trading charges against a Westport,
Conn.-based business consultant who has served on the boards of
directors at Goldman Sachs and Procter & Gamble for 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

The SEC’s Division of Enforcement alleges that Rajat K. Gupta, a
friend and business associate of Rajaratnam, provided him with
confidential information learned during board calls and in other aspects
of his duties on the Goldman and P&G boards. 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. The insider trading by
Rajaratnam and others generated more than $18 million in illicit profits
and loss avoidance. 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 Rajaratnam.

The SEC has previously charged Rajaratnam and others in the widespread insider trading scheme involving the Galleon hedge funds.

“Gupta was honored 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.”

In the order that institutes administrative and cease-and-desist
proceedings against Gupta, the SEC’s Division of Enforcement alleges
that, while a member of Goldman’s Board of Directors, Gupta tipped
Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman
and Goldman’s upcoming public equity offering before that information
was publicly announced on Sept. 23, 2008. 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. 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.
Rajaratnam later informed another participant in the scheme that he
received the tip on which he traded only minutes before the market
close. 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.

The SEC’s Division of Enforcement alleges that Gupta also illegally
disclosed to Rajaratnam inside information about Goldman Sachs’s
positive financial results for the second quarter of 2008. Goldman Sachs
CEO Lloyd Blankfein called Gupta and various other Goldman outside
directors on June 10, when the company’s financial performance was
significantly better than analysts’ consensus estimates. Blankfein knew
the earnings numbers and discussed them with Gupta during the call.
Between that night and the following morning, there was a flurry of
calls between Gupta and Rajaratnam. Shortly after the last of these
calls and within minutes after the markets opened on June 11, 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. Rajaratnam liquidated these positions on or around June 17, when
Goldman made its quarterly earnings announcement. These transactions
generated illicit profits of more than $13.6 million for the Galleon

The Division of Enforcement further alleges that Gupta tipped
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 October 23, with senior executives informing the board of the
company’s financial situation. Mere seconds after the board call, Gupta
called 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. In discussing
trading and market information that day with another participant in the
insider trading scheme, 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 Rajaratnam’s trades based on
the inside information that Gupta provided, the Galleon funds avoided
losses of more than $3 million.

As it pertains to insider trades by the Galleon funds in the
securities of Procter & Gamble, the Division of Enforcement alleges
that Gupta illegally disclosed to Rajaratnam inside information about
the company financial results for the quarter ending December 2008.
Gupta participated in a telephonic meeting of P&G’s Audit Committee
at 9 a.m. on Jan. 29, 2009, to discuss the planned release of P&G’s
quarterly earnings the next day. A draft of the earnings release, which
had been mailed to Gupta and the other committee members two days before
the meeting, indicated that P&G’s expected organic sales would be
less than previously publicly predicted. Gupta called Rajaratnam in the
early afternoon on January 29, and Rajaratnam shortly afterward advised
another participant in the insider trading conspiracy that he had
learned from a contact on P&G’s board that the company’s organic
sales growth would be lower than expected. Galleon funds then sold short
approximately 180,000 P&G shares, making illicit profits of more
than $570,000.

The Division of Enforcement alleges that by engaging in the
misconduct described in the SEC’s order, Gupta willfully violated
Section 17(a) of the Securities Act and Section 10(b) of the Exchange
Act and Rule 10b-5 thereunder. The administrative proceedings will
determine what relief, if any, is in the public interest against Gupta,
including disgorgement of ill-gotten gains, prejudgment interest,
financial penalties, an officer or director bar, and other remedial

Sanjay Wadhwa, Jason Friedman and John Henderson – members of the
SEC’s Market Abuse Unit in New York – together with Diego Brucculeri and
James D’Avino of the New York Regional Office conducted the agency’s
investigation, which is continuing. The SEC’s litigation effort will be
led by Kevin McGrath and Valerie Szczepanik of the New York Regional

Full filing: