Did Rajat Gupta Pass Confidential Information to Raj Rajaratnam?

The SEC (Securities and Exchange Commission) announced on Tuesday that insider trading charges had been filed against Rajat Gupta.

The SEC alleges that Gupta, a former director at both Goldman Sachs and Proctor + Gamble (he resigned his seat on Proctor + Gamble's board of directors following the charges), used his seats on the Goldman and P+G boards to obtain and funnel confidential and nonpublic information to Galleon Management founder and hedge fund manager Raj Rajaratnam. Rajaratnam was arrested by the FBI in late 2009 on allegations of insider trading and is set to go to trial later this year.

The SEC claims that Gupta, upon learning of confidential news that related to Goldman Sachs and Proctor + Gamble, would immediately funnel information to Rajaratnam. Rajaratnam would then turn around and act on this information, which ended up generating millions of dollars in both profits and loss avoidance for his firm.

In their filing, the SEC points to four separate instances where Gupta allegedly violated his fiduciary duty to Goldman and P+G and passed material, nonpublic information to Rajaratnam:

1. The SEC alleges that Gupta, upon hearing that Berkshire Hathaway would soon be announcing a $5 billion investment in Goldman Sachs, immediately called Rajaratnam. Over the next few days, the Galleon Tech funds bought substantial numbers of Goldman Sachs shares and call options. Goldman Sachs would rise in price after the Berkshire news was released, which allowed the Galleon Tech funds to make a substantial short-term profit.

2. The SEC alleges that Gupta, upon hearing that Goldman's Q4 2008 earnings would be much softer than previously expected, placed a call to Rajaratnam that resulted in the Galleon Tech funds unloading their existing positions in Goldman Sachs. The SEC alleges that the Galleon funds saved $3 million in losses by getting out of their long positions before the Q4/2008 earnings were released by Goldman Sachs.

3. The SEC alleges that Gupta, upon hearing that Goldman's Q2 2008 earnings would be stronger than expected, placed multiple calls to Rajaratnam that resulted in the Galleon Tech funds purchasing large quantities of Goldman call options and shares. Goldman predictably rose following the earnings release, and the Galleon funds ended up generating more than $13 million in profits.

4. The SEC alleges that Gupta, upon hearing that Proctor + Gamble's organic sales would be softer than expected for the October-December 2008 quarter, placed a call to Rajaratnam that resulted in the Galleon funds shorting a substantial number of PG shares. The shares predictably dropped after the news was released, which allowed the Galleon funds to generate illicit profits of over $570,000.

--

A number of people have been charged as a result of the Galleon investigation, but Mr. Gupta is definitely one of the biggest fish.

Mr. Gupta's lawyer maintains his client's innocence, calling the allegations "totally baseless".

Raja Gupta, in addition to serving on the board's of numerous companies, was the head of McKinsey + Company from 1994 to 2003.

Source: NYTimes.com - Ex-Goldman Director Accused of Passing Illegal Tips

Filed under: Stock Market Scandals