The Securities and Exchange Commission has reeled in a very big fish in the government’s widespread investigation into insider trading and the activities of Galleon Management founder and hedge fund manager Raj Rajaratnam.
The regulator filed insider trading charges against Rajat K. Gupta, a consultant who has served on the boards of directors at Goldman Sachs and Procter & Gamble, alleging he illegally tipped Rajaratnam with information about the quarterly earnings at both firms as well as Berkshire Hathaway’s $5 billion investment in Goldman. Rajaratnam used the inside information generate more than $18 million in illicit profits and loss avoidance.
The SEC says Gupta is a friend and business associate of Rajaratnam. Gupta is a Founding Partner and the Chairman of New Silk Route Partners LLC, an investment firm that was originally called Taj Capital Partners and was founded by Gupta, Rajaratnam, and others in 2006. At the time of the insider trading activities, Gupta was a direct or indirect investor in at least some of Galleon’s hedge funds, and had other potentially lucrative business interests with Rajaratnam
Gupta is also a former managing director of McKinsey & Company worldwide. From November 2006 through May 2010, Gupta was a member of Goldman’s Board, serving as a member of the Board’s Audit Committee, Corporate Governance and Nominating Committee, and Compensation Committee. Since 2007, he has also been a member of Procter & Gamble’s Board of Directors, and has served on the Board’s Audit Committee and its Innovation and Technology Committee. Gupta also serves on the Boards of Directors of AMR Corp. and Harman International.
Gupta holds a Bachelor of Technology degree in mechanical engineering from the Indian Institute of Technology and an MBA from Harvard Business School, where he had served on the Advisory boards. He also has served on the Rockefeller Foundation board of trustees in 2006.
In other words, he has been a very well respected member of the global business community. But, this did not stop him from willfully providing confidential inside information to Rajaratnam, according to the SEC.
For example, the regulator alleges that while a member of Goldman’s Board, Gupta tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in the investment bank and Goldman’s upcoming public equity offering before the information was publicly announced.
On another occasion, Gupta illegally disclosed to Rajaratnam inside information about Goldman’s positive financial results for the second quarter of 2008. According to the SEC, Goldman CEO Lloyd Blankfein called Gupta and other outside directors on June 10, when the company’s financial performance was significantly better than analysts’ consensus estimates. Blankfein discussed the earnings figures with Gupta during the call. The SEC says between that night and the following morning, there was a “flurry of calls” between Gupta and Rajaratnam.
Rajaratnam’s subsequent transactions involving out-of-the-money Goldman call options and Goldman shares generated profits of more than $13.6 million for Galleon’s funds.
The SEC also 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. “Mere seconds” after a 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, enabling the hedge fund manager to avoid losses of more than $3 million.
Gupta also illegally disclosed to Rajaratnam inside information about Procter & Gamble’s financial results. In one case, Gupta warned that the company’s organic sales growth would be lower than expected. Galleon funds then wound up making more than $570,000 from selling short P&G shares.
At least one group was relived to read this news — The expert networks — who for at least one day were spared further embarrassment in the ever-widening insider trading scandal.
