SEC charges ex-Goldman director in insider case

By Jonathan Stempel

NEW YORK (Reuters) - A former Goldman Sachs Group Inc director was charged by a U.S. securities regulator with leaking details about Warren Buffett's critical $5 billion investment in the bank to Galleon Group founder Raj Rajaratnam.

The U.S. Securities and Exchange Commission said Rajat Gupta tipped Rajaratnam by phone just minutes before the public learned of the investment by Buffett's Berkshire Hathaway Inc, which helped ensure Goldman's stability at the height of the global financial crisis.

Gupta, a longtime executive at the consultant McKinsey & Co, was also accused of illegally tipping Rajaratnam about quarterly earnings at Goldman and Procter & Gamble Co, where he was a director before resigning on Tuesday.

The SEC said Rajaratnam used the tips from Gupta, a "friend and business associate," to trade for Galleon funds, generating more than $18 million of illegal gains. It also said Gupta invested in at least some Galleon hedge funds.

"Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets," SEC enforcement chief Robert Khuzami said in a statement.

The 62-year-old Gupta is one of the highest-ranking corporate executives implicated in the government's wide-ranging insider trading probe, which has resulted in criminal or civil charges against dozens of individuals.

Tuesday's charges, in a civil administrative proceeding by the SEC, mark the first time that activities said to have taken place at Goldman were directly implicated in that probe.

"It is striking the SEC refers to phone calls immediately before the trades," said Kip Weissman, a partner at Luse Gorman Pomerenk & Schick PC in Washington and a former SEC enforcement lawyer. "This suggests there was a witness, or that the SEC has more circumstantial evidence."


Gary Naftalis, a lawyer for Gupta, called the SEC allegations "totally baseless" and said his client had lost his entire $10 million investment in a Galleon fund that Rajaratnam managed, known as GB Voyager.

"Mr. Gupta has done nothing wrong," Naftalis said in a statement. "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."

Gupta sat on Goldman's board from November 2006 until last May, and served on its corporate governance committee.

The Westport, Connecticut, resident had served on Procter & Gamble's board since 2007 before resigning on Tuesday.

"He's stepping down in the interest of the company, to prevent any distraction to the P&G board or our business," company spokesman Paul Fox said.

Goldman spokesman Ed Canaday and Rajaratnam spokesman Jim McCarthy declined to comment. Berkshire did not immediately return a request for comment.

Rajaratnam's criminal insider trading trial is scheduled to begin on March 8. He also faces SEC civil charges. Rajaratnam has denied wrongdoing.


Gupta is one of a web of associates in Corporate America that investigators have said Rajaratnam used to learn advance tips about potentially market-moving news.

Gupta, a Harvard Business School graduate, was previously a worldwide managing director at McKinsey, where he worked for more than three decades.

The Gupta case "does not help in instilling confidence in Main Street investors that they're getting a fair shake at these multinational companies," said Michael Nix, co-chief investment officer at Greenwood Capital Associates.

Prosecutors have said a Morgan Stanley banker also leaked inside information that found its way to Rajaratnam.

Former McKinsey consultant Anil Kumar pleaded guilty in January 2010 to leaking inside information about a possible merger to Rajaratnam, in return for $1.75 million.

White-collar defense lawyers said civil administrative proceedings may afford the SEC a more friendly forum in which to pursue its case. They also allow the regulator to avoid having to amend its own lawsuit against Rajaratnam.

"It's faster, the evidence rules are more liberal, and the SEC can wield a bigger hammer in penalties, which can include barring someone from the securities industry." Weissman said.

Goldman shares fell $2.04, or 1.2 percent, to $161.74 in afternoon trading on the New York Stock Exchange.


The SEC alleged that Gupta tipped Rajaratnam about Goldman's results for the second and fourth quarters of 2008, resulting in more than $16.6 million of illicit gains.

It said he tipped Rajaratnam about Procter & Gamble's results for the final quarter of 2008, resulting in more than $570,000 of profit.

The SEC said Gupta had at least two phone calls with Rajaratnam shortly before Goldman announced Berkshire's investment in Goldman on September 23, 2008.

It said this included a call just before the market closed that day, immediately after Gupta disconnected from a phone link to the board meeting where Goldman approved the investment. Goldman announced the Berkshire stake after U.S. markets closed.

Rajaratnam's trades in Goldman based on these tips resulted in more than $900,000 of profit, the SEC said.

(Reporting by Jonathan Stempel in New York; Additional reporting by Matthew Goldstein, Grant McCool and Phil Wahba in New York and Joe Rauch in Charlotte, North Carolina; editing by Dave Zimmerman and John Wallace)