U.S. federal regulators have charged a former board member of investment bank Goldman Sachs with insider trading, saying he gave confidential information to the key figure in what prosecutors call the largest hedge fund insider-trading probe ever.
The Securities and Exchange Commission announced the civil charges against Rajat Gupta on Tuesday. The SEC said Gupta told Raj Rajaratnam, founder of the Galleon Group hedge fund, that Warren Buffett's Berkshire Hathaway planned to invest $5 billion US in Goldman before it was publicly announced at the height of the financial crisis.
Gupta also is charged with giving Rajaratnam confidential earnings information from Goldman and Procter & Gamble. Gupta served on Goldman's board from 2006 until last May. He was a P&G board member from 2007 until resigning Tuesday, after the charges were announced.
Gupta was an investor in some of the Galleon hedge funds when he passed the information along, and he had other business interests with Rajaratnam, the SEC said. Rajaratnam used the information from Gupta to illegally profit in hedge fund trades, the SEC said.
Prosecutors have said Rajaratnam generated profits of more than $50 million after getting inside information about public companies' earnings and plans for mergers and acquisitions. The information on Goldman made Rajaratnam's funds $17 million richer, the SEC said. The P&G data created illegal profits of more than $570,000 for Galleon funds managed by others, the SEC said.
"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.
Gupta's attorney, Gary Naftalis, called the allegations "totally baseless."
Naftalis noted that the SEC isn't accusing Gupta of trading in the stocks of the companies himself or sharing profits with Rajaratnam on the trades. Gupta actually lost his $10 million investment in a hedge fund managed by Rajaratnam at the time he allegedly passed on the information, Naftalis said.
The SEC's complaint lays out, in moment-to-moment details, its allegations of how the insider trading occurred. It notes how often the two men spoke in September 2008, when Goldman was negotiating a deal with Buffett's investment firm.
At the time, Wall Street was reeling from the failure of investment bank Lehman Bros. Goldman CEO Lloyd Blankfein told the bank's board of a possible investment by Berkshire on Sept. 21. Over the next two days, Rajaratnam's funds bought 120,000 shares of Goldman. He picked up one-third of those shares while on the phone with Gupta, the SEC said.
On Sept. 23, Goldman's board agreed to the Berkshire deal during a call that ended at 3:53 p.m. Gupta called Rajaratnam once the call ended. In the minutes before the market closed, Rajaratnam bought 175,000 more Goldman shares. Rajaratnam sold those shares the next day. His profit: $900,000.