Insider trading: Ex-Goldman Sachs director Rajat Gupta pleads not guilty
Insider trading has been a target of both the Bush and Obama administrations. The case against Rajat Gupta, a former director of both Goldman Sachs and Procter & Gamble, is part of a major crackdown on insider trading.
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For example, on Sept. 23, 2008, Gupta learned in a telephone meeting of the Goldman Sachs board that Berkshire Hathaway would make a $5 billion investment in the company. The news came at a time of substantial turmoil in the financial markets following the collapse of Lehman Brothers.Skip to next paragraph
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According to the indictment, 16 seconds after disconnecting from the board meeting, Gupta was on the phone with Rajaratnam’s office. The call went through at 3:54 p.m. – six minutes before the stock market would close for the day.
The indictment says Gupta disclosed inside information to the hedge fund manager concerning Berkshire Hathaway’s impending investment in Goldman Sachs.
Four minutes later at 3:58 p.m. – with only two minutes left in the trading day – Rajaratnam caused the purchase of 350,000 shares of Goldman Sachs stock, worth a total value of $43 million, the indictment says.
After the markets closed for the day, Goldman Sachs publicly announced the Berkshire investment.
The next day, when Goldman’s stock rose from $124 per share to $128 per share, Rajaratnam sold 217,000 shares of Goldman stock. He recorded an $840,000 profit, according to the indictment.
“Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders,” said Preet Bharara, US Attorney for the Southern District of New York.
“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,” Mr. Bharara said.
Janice Fedarcyk of the Federal Bureau of Investigation said Gupta’s actions were intentional rather than the result of 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 39 seconds elapsed between his learning of crucial Goldman Sachs information and lavishing it on his good friend,” Ms. Fedarcyk said.
“That information (captured by the FBI) was conveyed by phone so quickly it could be termed instant messaging,” she said.
The second Goldman Sachs disclosure came on Oct. 23, 2008. An internal financial analysis showed that the firm had lost $2 per share for the quarter. This was potentially shocking information for the market because the firm had never before lost money in a quarter. The confidential information was disclosed during a telephone meeting among board members.
According to the indictment, 23 seconds after hanging up from the board meeting, Gupta called Rajaratnam with the news of Goldman’s red ink quarter.
The next morning, Rajaratnam caused certain Galleon Funds to sell all their Goldman stock. The move prevented millions in losses, the indictment says.
Gupta engaged in the same behavior while serving on Procter & Gamble’s board, according to the indictment.
In January 2009, he allegedly tipped off Rajaratnam that P&G’s sales figures would be lower than expected. Armed with the inside information, the hedge fund sold short 180,000 shares of P&G stock.
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