FORD
03-06-2011, 03:42 PM
Ex-Goldman director charged with insider trading
By DANIEL WAGNER and MARCY GORDON, AP Business Writers Daniel Wagner And Marcy Gordon, Ap Business Writers Tue Mar 1, 6:37 pm ET
WASHINGTON – Depicting moment-to-moment detail, the Securities and Exchange Commission on Tuesday laid out civil fraud charges linking a former Goldman Sachs board member to the biggest hedge fund insider-trading case ever.
It's a portrait of corporate board meetings leading to secret phone calls, to stock-trading orders and finally to huge illicit profits made within hours.
The SEC charged Rajat Gupta, who has also served on the boards of Procter & Gamble and the parent company for American Airlines. Gupta was a guest at President Barack Obama's first state dinner.
But at the height of the financial crisis, Gupta passed along privileged financial information that helped enrich the target of the government's sweeping probe, the SEC alleges.
A pivotal moment came on Sept. 23, 2008. Gupta listened via teleconference as the Goldman Sachs board approved an offer from Warren Buffett's Berkshire Hathaway to invest $5 billion in the banking giant.
Seven minutes before the stock markets closed, Gupta hung up the call. He dialed Raj Rajaratnam. The two men spoke briefly.
Within a minute, Rajaratnam directed his hedge fund, the Galleon Group, to buy 175,000 shares of Goldman stock. The next day, he would sell them. His profit: nearly $1 million.
Those and other allegations lie at the core of charges suggestive of a financial thriller. The SEC lays out how it says Gupta gave Rajaratnam details about Goldman and P&G that hadn't been made public. Those leaks enriched Rajaratnam's funds by nearly $18 million, officials say.
Rajaratnam stands at the center of the government's broad insider trading investigation. His hedge fund delivered profits exceeding $50 million, thanks to inside information about public companies' earnings and plans for mergers and acquisitions, prosecutors say.
In their investigation, criminal investigators relied on wiretaps and search warrants, tactics normally reserved for cases against drug dealers and mobsters.
Now, Gupta is being charged in that broadening probe.
"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.
At the time he was passing along information to Rajaratnam, the SEC charges, Gupta was an investor in some of the Galleon hedge funds. He also had other business interests with Rajaratnam.
Gupta's attorney, Gary Naftalis, called the allegations "totally baseless."
The SEC hasn't accused Gupta of trading stocks illegally or sharing profits with Rajaratnam, Naftalis said. And Gupta actually lost $10 million in one of Rajaratnam's fund at the same time that he allegedly passed on the information, Naftalis said.
It's unusual for a business leader as prominent as Gupta to face insider-trading charges. Inside corporate information is exploited most often by lower-level employees seeking quick profits that would dwarf their pay.
Yet Gupta is the ultimate insider. He ran McKinsey, the nation's highest-profile consulting firm, and served on the board of Goldman, whose executives are often tapped for top-level federal positions.
The SEC's filing outlines frequent contact between Gupta and Rajaratnam at pivotal moments in 2008. At the time, investors feared that many Wall Street banks might collapse under the weight of toxic mortgage investments.
The SEC's version of events includes these:
• On June 10, Goldman CEO Lloyd Blankfein called board members to share better-than-expected financial results for the previous quarter. He reached Gupta in the early evening. Gupta and Rajaratnam spoke by phone that night and then again the next morning.
Rajaratnam's funds bought 350,000 shares of stock. They also picked up 5,500 contracts that would be worthless unless the stock rose. By the next week, positive financial results had boosted Goldman's share price. Galleon sold the shares and the contracts. The profits totaled $13.6 million.
• On Sept. 21, Blankfein told the board of the Berkshire deal. 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 says.
Goldman's board agreed on Sept. 23 to the Berkshire deal in a call that ended at 3:53 p.m. After speaking with Gupta, Rajaratnam bought 175,000 more Goldman shares before the market closed. His firm sold the shares the next day for a $900,000 profit.
• On Oct. 23, Blankfein and chief financial officer David Viniar told the board on a conference call that Goldman would likely report its first quarterly loss since going public in 1999. Twenty-three seconds after hanging up, Gupta called Rajaratnam. The next day, Rajaratnam's funds sold their remaining Goldman stock. Selling early allowed the funds to avoid $3 million in losses, the SEC says.
Goldman, which wasn't accused of any wrongdoing, declined to comment on the charges. When Goldman appointed Gupta to its board of directors in 2006, the investment bank's release said Gupta would serve on the Audit, Compensation and Corporate Governance and Nominating Committees of the Board.
Rajaratnam, a one-time billionaire who's free on $100 million bail, has pleaded not guilty to criminal securities fraud charges. He has maintained that he traded only on information already public.
He is scheduled to go on trial next week in a probe that has produced criminal charges against more than 25 people. Of those, 19 have pleaded guilty, with a majority of them cooperating.
John Dowd, a lawyer for Rajaratnam, said of the SEC case against Gupta:
"There is absolutely no merit to it. This is simply an effort to destroy a favorable witness. ... These are old friends, and Mr. Gupta is a distinguished human being."
The case against Gupta will be heard by an administrative law judge at the SEC. That proceeding will determine whether Gupta should pay restitution and civil fines and whether he should be barred from serving on a public company, the SEC said.
Gupta left Goldman's board in May. On Tuesday, after the charges were announced, he stepped down from the board of P&G.
Gupta, 62, of Westport, Conn., remains a board member of AMR Corp., parent company of American Airlines. He's also chairman of Genpact Ltd., a Bermuda-based outsourcing contractor that trades on the NYSE. And he's on the board of Harman International Industries Inc., a consumer electronics company based in Stamford, Conn.
Gupta is one of India's most high-profile immigrants, When India's prime minister visited the White House for a state dinner in 2009, Gupta received a coveted invitation and attended.
He entered the Harvard Business School in 1971 and joined the blue-chip consulting firm McKinsey after graduation. Gupta became McKinsey's first non-Western head when he became worldwide managing director of the firm from 1994 to 2003.
"Prosecutors are going after the biggest heads, and now it has infiltrated the largest brokerage and hedge funds around," said Andrew Stoltmann, a Chicago lawyer who's handled insider-trading cases. "We are seeing the reaches of insider trading at the highest level."
The criminal securities fraud charges against Rajaratnam, who has both U.S. and Sri Lankan citizenship, was announced in October 2009 by federal prosecutors in Manhattan. Prosecutors described it as the largest hedge fund insider-trading prosecution in history.
It was also described as the first time investigators had made extensive use of wiretaps in an insider-trading probe.
Late last year, prosecutors revealed that the Rajaratnam investigation had resulted in an expanded probe. It was to focus on people in the securities industry who give insider information about public companies to hedge funds but disguise the information as the product of research.
If convicted, Rajaratnam faces up to 185 years in prison.
___
Associated Press Writers Larry Neumeister and Rachel Beck in New York and Dan Sewell in Cincinnati contributed to this report.
By DANIEL WAGNER and MARCY GORDON, AP Business Writers Daniel Wagner And Marcy Gordon, Ap Business Writers Tue Mar 1, 6:37 pm ET
WASHINGTON – Depicting moment-to-moment detail, the Securities and Exchange Commission on Tuesday laid out civil fraud charges linking a former Goldman Sachs board member to the biggest hedge fund insider-trading case ever.
It's a portrait of corporate board meetings leading to secret phone calls, to stock-trading orders and finally to huge illicit profits made within hours.
The SEC charged Rajat Gupta, who has also served on the boards of Procter & Gamble and the parent company for American Airlines. Gupta was a guest at President Barack Obama's first state dinner.
But at the height of the financial crisis, Gupta passed along privileged financial information that helped enrich the target of the government's sweeping probe, the SEC alleges.
A pivotal moment came on Sept. 23, 2008. Gupta listened via teleconference as the Goldman Sachs board approved an offer from Warren Buffett's Berkshire Hathaway to invest $5 billion in the banking giant.
Seven minutes before the stock markets closed, Gupta hung up the call. He dialed Raj Rajaratnam. The two men spoke briefly.
Within a minute, Rajaratnam directed his hedge fund, the Galleon Group, to buy 175,000 shares of Goldman stock. The next day, he would sell them. His profit: nearly $1 million.
Those and other allegations lie at the core of charges suggestive of a financial thriller. The SEC lays out how it says Gupta gave Rajaratnam details about Goldman and P&G that hadn't been made public. Those leaks enriched Rajaratnam's funds by nearly $18 million, officials say.
Rajaratnam stands at the center of the government's broad insider trading investigation. His hedge fund delivered profits exceeding $50 million, thanks to inside information about public companies' earnings and plans for mergers and acquisitions, prosecutors say.
In their investigation, criminal investigators relied on wiretaps and search warrants, tactics normally reserved for cases against drug dealers and mobsters.
Now, Gupta is being charged in that broadening probe.
"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.
At the time he was passing along information to Rajaratnam, the SEC charges, Gupta was an investor in some of the Galleon hedge funds. He also had other business interests with Rajaratnam.
Gupta's attorney, Gary Naftalis, called the allegations "totally baseless."
The SEC hasn't accused Gupta of trading stocks illegally or sharing profits with Rajaratnam, Naftalis said. And Gupta actually lost $10 million in one of Rajaratnam's fund at the same time that he allegedly passed on the information, Naftalis said.
It's unusual for a business leader as prominent as Gupta to face insider-trading charges. Inside corporate information is exploited most often by lower-level employees seeking quick profits that would dwarf their pay.
Yet Gupta is the ultimate insider. He ran McKinsey, the nation's highest-profile consulting firm, and served on the board of Goldman, whose executives are often tapped for top-level federal positions.
The SEC's filing outlines frequent contact between Gupta and Rajaratnam at pivotal moments in 2008. At the time, investors feared that many Wall Street banks might collapse under the weight of toxic mortgage investments.
The SEC's version of events includes these:
• On June 10, Goldman CEO Lloyd Blankfein called board members to share better-than-expected financial results for the previous quarter. He reached Gupta in the early evening. Gupta and Rajaratnam spoke by phone that night and then again the next morning.
Rajaratnam's funds bought 350,000 shares of stock. They also picked up 5,500 contracts that would be worthless unless the stock rose. By the next week, positive financial results had boosted Goldman's share price. Galleon sold the shares and the contracts. The profits totaled $13.6 million.
• On Sept. 21, Blankfein told the board of the Berkshire deal. 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 says.
Goldman's board agreed on Sept. 23 to the Berkshire deal in a call that ended at 3:53 p.m. After speaking with Gupta, Rajaratnam bought 175,000 more Goldman shares before the market closed. His firm sold the shares the next day for a $900,000 profit.
• On Oct. 23, Blankfein and chief financial officer David Viniar told the board on a conference call that Goldman would likely report its first quarterly loss since going public in 1999. Twenty-three seconds after hanging up, Gupta called Rajaratnam. The next day, Rajaratnam's funds sold their remaining Goldman stock. Selling early allowed the funds to avoid $3 million in losses, the SEC says.
Goldman, which wasn't accused of any wrongdoing, declined to comment on the charges. When Goldman appointed Gupta to its board of directors in 2006, the investment bank's release said Gupta would serve on the Audit, Compensation and Corporate Governance and Nominating Committees of the Board.
Rajaratnam, a one-time billionaire who's free on $100 million bail, has pleaded not guilty to criminal securities fraud charges. He has maintained that he traded only on information already public.
He is scheduled to go on trial next week in a probe that has produced criminal charges against more than 25 people. Of those, 19 have pleaded guilty, with a majority of them cooperating.
John Dowd, a lawyer for Rajaratnam, said of the SEC case against Gupta:
"There is absolutely no merit to it. This is simply an effort to destroy a favorable witness. ... These are old friends, and Mr. Gupta is a distinguished human being."
The case against Gupta will be heard by an administrative law judge at the SEC. That proceeding will determine whether Gupta should pay restitution and civil fines and whether he should be barred from serving on a public company, the SEC said.
Gupta left Goldman's board in May. On Tuesday, after the charges were announced, he stepped down from the board of P&G.
Gupta, 62, of Westport, Conn., remains a board member of AMR Corp., parent company of American Airlines. He's also chairman of Genpact Ltd., a Bermuda-based outsourcing contractor that trades on the NYSE. And he's on the board of Harman International Industries Inc., a consumer electronics company based in Stamford, Conn.
Gupta is one of India's most high-profile immigrants, When India's prime minister visited the White House for a state dinner in 2009, Gupta received a coveted invitation and attended.
He entered the Harvard Business School in 1971 and joined the blue-chip consulting firm McKinsey after graduation. Gupta became McKinsey's first non-Western head when he became worldwide managing director of the firm from 1994 to 2003.
"Prosecutors are going after the biggest heads, and now it has infiltrated the largest brokerage and hedge funds around," said Andrew Stoltmann, a Chicago lawyer who's handled insider-trading cases. "We are seeing the reaches of insider trading at the highest level."
The criminal securities fraud charges against Rajaratnam, who has both U.S. and Sri Lankan citizenship, was announced in October 2009 by federal prosecutors in Manhattan. Prosecutors described it as the largest hedge fund insider-trading prosecution in history.
It was also described as the first time investigators had made extensive use of wiretaps in an insider-trading probe.
Late last year, prosecutors revealed that the Rajaratnam investigation had resulted in an expanded probe. It was to focus on people in the securities industry who give insider information about public companies to hedge funds but disguise the information as the product of research.
If convicted, Rajaratnam faces up to 185 years in prison.
___
Associated Press Writers Larry Neumeister and Rachel Beck in New York and Dan Sewell in Cincinnati contributed to this report.