Back in April of last year, I was indignantly informed by Rajat Gupta’s PR people that he wasn’t being investigated by the SEC, just examined. “This is an important distinction,” they told me.
Well, it seems that either the examination subsequently turned into an investigation, or else that the distinction wasn’t that important after all:
The SEC’s Division of Enforcement alleges that Rajat K. Gupta, a friend and business associate of Rajaratnam, provided him with confidential information learned during board calls and in other aspects of his duties on the Goldman (GS) and P&G (PG) boards. Rajaratnam used the inside information to trade on behalf of some of Galleon’s hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms. The insider trading by Rajaratnam and others generated more than $18 million in illicit profits and loss avoidance. Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Rajaratnam.
The insider dealing seems to have been pretty blatant: Minutes or even seconds after getting off board conference calls with Lloyd Blankfein, Gupta would pick up the phone and call Rajaratnam, who would then make huge trades in Goldman stock:
A Special Telephonic Meeting of the Goldman Sachs Board was convened at 3:15 p.m. on September 23, during which the Board considered and approved a $5 billion preferred stock investment by Berkshire in Goldman Sachs … Gupta participated in the Board meeting telephonically, staying connected to the call until approximately 3:53 p.m. Immediately after disconnecting from the Board call, Gupta called Rajaratnam from the same line. Within a minute after this telephone conversation, at 3:56 p.m. and 3:57 p.m., and just minutes before the close of the markets, Rajaratnam caused the Galleon Tech funds to purchase more than 175,000 additional Goldman Sachs shares …
Gupta dialed into the October 23, 2008, Board meeting around the time it was scheduled to start and remained on the call until 4:49 p.m. Just 23 seconds after disconnecting from the call, Gupta called Rajaratnam … The following morning, just as the financial markets opened at 9:30 a.m., Rajaratnam … explained that Wall Street expects Goldman Sachs to earn $2.50 per share but that Rajaratnam had heard the prior day from a member of the Goldman Sachs Board that the company was actually going to lose $2 per share.
It wasn’t just Goldman, either: The SEC complaint says that Gupta did substantially the same thing with inside information about P&G, where he was also on the board.
This is just a civil complaint at this time, but if the SEC wins I fully expect criminal charges to be forthcoming. And the question must be asked: Is it fair to blame Goldman for hiring Gupta to its board? I’m not sure about that. On the one hand, it’s impossible to catch all criminal tendencies of potential board members. On the other hand, Goldman historically didn’t seem to care much about its board, which seems to have existed largely to rubber-stamp the decisions of management. I think it cares more now, however. It’s learned its lesson.
Update: Gupta’s counsel has released a statement:
Statement of Gary Naftalis, Counsel for Rajat Gupta
The SEC’s allegations are totally baseless. Mr. Gupta’s 40-year record of ethical conduct, integrity, and commitment to guarding his clients’ confidences is beyond reproach. Mr. Gupta has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder. 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. In fact, Mr. Gupta had lost his entire $10 million investment in the GB Voyager Fund managed by Rajaratnam at the time of these events, negating any motive to deviate from a lifetime of honesty and integrity.