Ex-Goldman Sachs director Gupta arrested, charged in insider trading case

October 26th, 2011 - 11:13 pm ICT by BNO News  

NEW YORK (BNO NEWS) — Former Goldman Sachs director Rajat Gupta was arrested by the Federal Bureau of Investigation (FBI) on Wednesday morning and indicted for allegedly engaging in an insider trading scheme.

Gupta, 62, is a former corporate chairman and member of the Board of Directors of investment banking and securities firm Goldman Sachs. He is also the former head of global consulting firm McKinsey & Co.

According to a six-count indictment unsealed on Wednesday, Gupta allegedly gave information to founder and former head of the Galleon Group Raj Rajaratnam about the earnings, financial performance and business transactions of Goldman Sachs and the Procter & Gamble Company, where Gupta also sat on the board.

Rajaratnam of Galleon, which was one of the largest hedge fund management firms in the world, was convicted in May of 14 counts of conspiracy and securities fraud. He was subsequently sentenced on October 13 to 11 years in prison and ordered to pay forfeiture in the amount of $53,816,434 and a $10 million fine.

Gupta has been charged with one count of conspiracy to commit securities fraud and five counts of securities fraud. According to the indictment unsealed in Manhattan federal court, Gupta and Rajaratnam maintained a personal and business relationship during which Gupta invested money in at least two different Galleon funds and formed separate investment and private equity funds with Rajaratnam.

From 2008 through January 2009, Gupta allegedly disclosed inside information to Rajaratnam that he had learned in his capacity as a member of the Boards of Directors of Goldman Sachs and the Procter & Gamble Company. He disclosed this information with the understanding that Rajaratnam would use the information to purchase and sell securities.

According to prosecutors, Rajaratnam in turn caused the execution of transactions in the securities of Goldman Sachs and Procter & Gamble Company on the basis of the inside information. He also shared the information with others at Galleon, resulting in illegal profits and illegally avoiding losses of millions of dollars.

“The inside information included confidential information about the companies’ earnings and financial performance, as well as certain corporate transactions that were being undertaken by Goldman Sachs and [Procter & Gamble Company],” prosecutors said in a statement.

One example of insider trading provided in the indictment happened on September 23, 2008, minutes before the close of the stock market. Gupta had allegedly participated in a conference call with the Goldman Sachs Board during which it was agreed to accept a $5 billion investment by Berkshire Hathaway, a multi-national holding company.

Just 16 seconds after Gupta disconnected from the conference call, Gupta allegedly called Rajaratnam who in turn directed certain Galleon funds to purchase approximately 217,200 shares of Goldman Sachs common stock at a total cost of approximately $27 million.

After markets closed, which happened just two minutes after Galleon funds bought Goldman Sachs common stock, Goldman Sachs publicly announced the investment by Berkshire Hathaway. The next morning, Goldman Sachs’ stock opened for trading at a price more than $3.00 per share higher than the previous day.

On September 24, 2008, Rajaratnam then directed Galleon to sell the 217,200 Goldman Sachs shares, generating an illegal profit of approximately $840,000. Details of other instances of alleged insider trading were also detailed in the indictment.

“Today’s surrender is the latest step in an initiative launched by the FBI in 2007 targeting hedge fund insider trading,” said Janice K. Fedarcyk, the Assistant Director-in-Charge of the FBI New York Field Office. “The alleged conduct of Mr. Gupta is not an inadvertent slip of the tongue. His eagerness to pass along inside information to Rajaratnam is nowhere more starkly evident than in the two instances where a total of thirty-nine seconds elapsed between his learning of crucial Goldman Sachs information and lavishing it on his good friend. That information (captured by the FBI) was conveyed by phone so quickly it could be termed instant messaging.”

Preet Bharara, U.S. Attorney for the Southern District of New York, said Gupta had been entrusted by some of the premier institutions of American business to sit inside their boardrooms and receive their confidential information. “As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr. Gupta’s breach of duty,” he said.

Bharara added: “Today we allege that the corruption we have seen in the trading cubicles, investment firms, law firms, expert consulting firms, medical labs, and corporate suites also insinuated itself into the boardrooms of elite companies.”

If convicted, Gupta faces a maximum penalty of five years in prison on the conspiracy charge and 20 years in prison on each of the five securities fraud charges. In addition, with respect to the conspiracy charge, Gupta faces a maximum fine of $250,000 or twice the gross gain or loss derived from the alleged crimes. He also faces for each of the securities fraud charge a maximum fine of $5 million or twice the gross gain or loss derived from the crime.

Gupta was scheduled to appear in Federal District Court in New York on Wednesday afternoon.

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