A former member of the board of directors of Goldman Sachs and Procter & Gamble appeared in federal court in New York Wednesday to face charges that he leaked confidential information to a hedge fund manager who used the tips to earn easy profits and avoid significant losses.
Rajat Gupta, of Westport, Conn., pleaded not guilty and was released on $10 million bond. The case marks the latest development in a major crackdown on the insider trading on Wall Street that has been the target of both the Bush and Obama administrations.
The federal court is blocks from where Occupy Wall Street protesters have been demonstrating. Among their complaints: that Wall Street financial institutions have an inordinate amount of power, both political and economic, and that Wall Street greed has been to the detriment of the 99 percent of the public the movement claims to represent.
Mr. Gupta surrendered to FBI agents after a six-count indictment was unsealed alleging his involvement in an insider-trading scheme that extended from 2008 to January 2009. The charges include conspiracy to commit securities fraud and five counts of securities fraud.
Gupta allegedly passed “material nonpublic information” about Goldman Sachs and Procter & Gamble to Raj Rajaratnam, founder of the Galleon Group hedge funds.
The inside information was worth $17 million in illegal profits and loss avoidance, according to federal documents.
Mr. Rajaratnam has been at the center of a major federal investigation into insider trading among hedge fund managers. He was convicted in May of 14 counts of conspiracy and securities fraud. Two weeks ago he was sentenced to 11 years in prison. Rajaratnam was also ordered to forfeit $53.8 million and pay a $10 million fine.
Gupta was an investor and director in one of Galleon’s investment funds that had holdings in other Galleon hedge funds, including some funds that bought or sold stock based on Gupta’s alleged insider tips. His arrest is an outcome of the investigation into Galleon Group launched five years ago at the Securities and Exchange Commission.
According to federal documents, the alleged Gupta-Rajaratnam insider-trading scam involved timely phone calls placed by Gupta informing Rajaratnam of financial developments likely to affect the relevant company’s stock price.
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.
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.