Ex-Goldman Director Accused of Passing Illegal Tips
By PETER LATTMAN
Seokyong Lee/Bloomberg News
Rajat Gupta. http://dealbook.nytimes.com/2011/03/01/former-goldman-director-charged-with-insider-trading/?src=me&ref=business
The Securities and Exchange Commission has accused a former director of Goldman Sachs and Procter & Gamble of passing illegal tips about those companies to Raj Rajaratnam, the Galleon Group founder who is to go on trial next week on insider trading charges.
The former director, Rajat K. Gupta, is accused of passing along information on the two companies’ earnings as well as word of Warren E. Buffett’s $5 billion investment in Goldman Sachs in 2008.
As a longtime senior executive at McKinsey & Company, Mr. Gupta, 62, is the most prominent business executive ensnared by the government in a wide-ranging investigation into insider trading on Wall Street. He ran McKinsey from 1994 to 2003 and counts as friends and associates some of the most powerful people in business.
In comparison, many of the defendants charged earlier with insider trading were junior traders and lawyers or midlevel executives. Over the last 18 months, federal prosecutors in Manhattan have charged 46 people with insider trading; of those, 29 have pleaded guilty.
But the S.E.C.’s civil case against Mr. Gupta reaches into the most elite boardrooms of corporate America.
“Mr. 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, the S.E.C.’s director of enforcement, in a statement. “Directors who violate the sanctity of boardroom confidences for private gain will be held to account for their illegal actions.”
The proceeding against Mr. Gupta perhaps most acutely stings Goldman, which has had at least three run-ins with the S.E.C. over the last year. Last summer, it struck a $550 million settlement with the agency over its sale of a complex mortgage investment, without admitting or denying wrongdoing. And earlier this year it canceled an opportunity for its clients to invest in Facebook because of worries that the publicity around the deal could violate S.E.C. rules. A Goldman spokesman declined to comment.
The S.E.C. case ties Mr. Gupta to Mr. Rajaratnam, the Sri Lankan-born billionaire hedge fund manager at the center of the government’s insider trading inquiry. Mr. Rajaratnam, who is fighting the criminal charges against him, is to go on trial on Tuesday.
The S.E.C. filing contends that Mr. Gupta provided details about Goldman’s financial health and plans after the collapse of Lehman Brothers rocked the financial markets. On Sept. 23, 2008, the Goldman board met via telephone to consider and approve Mr. Buffett’s $5 billion purchase of preferred shares in Goldman.
“Immediately after disconnecting from the board call, Gupta called Rajaratnam from the same line,” the S.E.C. filing says. A minute later, Galleon funds bought more than more than 175,000 shares of Goldman just minutes before the market closed, the agency says.
After the close, Goldman announced the investment, and its shares rallied on the vote of confidence by Mr. Buffett. The Galleon funds netted a profit of more than $900,000, the S.E.C. says.
In another instance, the S.E.C. said that Mr. Gupta passed along an illegal Goldman tip to Mr. Rajaratnam after a call that previewed Goldman’s positive quarterly earnings results one week before they were publicly announced. Soon after, Mr. Gupta is said to have initiated a flurry of telephone calls with Mr. Rajaratnam, who then directed his fund to load up on Goldman stock and call options. When the stock rose the next day, Mr. Rajaratnam exited his positions and earned more than $13.6 million in profits, the S.E.C. said.
Mr. Gupta is also accused of disclosing information to Mr. Rajaratnam about P.& G.’s 2008 fourth-quarter earnings on the eve of their release.
In the long investigation of Mr. Rajaratnam, thousands of conversations were recorded, including some with Mr. Gupta. But the S.E.C filing refers to none of those conversations. In recounting phone calls between the two men, the filing does not provide details of their content.
Gary Naftalis, a lawyer for Mr. Gupta, said the S.E.C. accusations were “totally baseless.”
“Mr. Gupta has done nothing wrong,” he said. “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.”
The case against Mr. Gupta tarnishes an otherwise sterling business career. Born in Kolkata, India, Mr. Gupta earned an M.B.A. from Harvard Business School in 1973 and joined McKinsey upon graduation. He was elected head of the consulting firm in 1994, the first non-Westerner to hold that post.
Mr. Gupta, 62, met Mr. Rajaratnam, who was born in Sri Lanka, in the middle of the last decade through their work for the Indian School of Business. Mr. Gupta co-founded the school and is its chairman, and Mr. Rajaratnam was a major donor to the school.
Mr. Gupta was a regular presence at Galleon’s offices at Madison Avenue and 57th Street and showed up there periodically for lunch. Mr. Rajaratnam’s secretary would order in Indian or Chinese food and the two men would sit in Mr. Rajaratnam’s office and chat, according to a former employee who spoke only on the condition of anonymity.
In 2006, Mr. Rajaratnam and Mr. Gupta worked together to start New Silk Route, a private equity firm focused on investments in India. Mr. Rajaratnam never had an active role in the New Silk Route. A spokeswoman for New Silk Route declined to comment.
Mr. Rajaratnam told his staff that Galleon had formally engaged McKinsey to help them better understand companies and run special projects where the fund could “do a deeper dive” into companies, the former employee said. Nothing came of the engagement, said this person.
Mr. Gupta is the second McKinsey executive to be ensnared by the government’s insider-trading inquiry. Anil Kumar, a senior McKinsey executive and onetime protégé of Mr. Gupta, pleaded guilty in January to leaking confidential information about a merger to Mr. Rajaratnam and is cooperating in the criminal case against Mr. Rajaratnam.
“We were saddened to learn about the civil charges against our former colleague,” said a McKinsey spokesman about Mr. Gupta, who left McKinsey in 2007.
Mr. Gupta holds philanthropic posts, including a senior advisory post at the Bill & Melinda Gates Foundation and a board seat at the Rockefeller Foundation. He lives in Westport, Conn.
Mr. Gupta voluntarily resigned on Tuesday from the P.&G. board, which he joined in 2007. A company spokesman said he resigned to prevent any distraction to P.&G. and its board.
At Goldman, Mr. Gupta said he would not stand for re-election in March 2010 and stepped down from the board in May.
Mr. Gupta earned more than $2.5 million as a director at Goldman and P.&G. Mr. Gupta is also a member of the board of AMR, the parent company of American Airlines. An American Airlines spokesman declined to comment.
The case against Mr. Gupta has an unusual procedural twist. Under the Dodd-Frank Act, the S.E.C. can seek a full range of penalties against people not employed by a financial services firm through a relatively streamlined proceeding before an S.E.C. administrative law judge.
Historically, if the agency sought penalties against a public company director like Mr. Gupta, it had to sue in federal court, where the defendant has full discovery rights of the S.E.C.’s case, including all of its witnesses.
Mr. Naftalis, the lawyer for Mr. Gupta, said in a statement that his client’s “40-year record of ethical conduct, integrity and commitment to guarding his clients’ confidences is beyond reproach.”
He also said that Mr. Gupta lost his $10 million investment in a fund managed by Mr. Rajaratnam that collapsed during the financial crisis, “negating any motive to deviate from a lifetime of honesty and integrity.”
Ben Protess contributed reporting.
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