WASHINGTON-Depicting moment-to-moment detail, the Securities and Exchange Commission yesterday laid out civil fraud charges linking a former Goldman Sachs board member to the biggest hedge fund insider-trading case ever.It's a portrait of corporate board meetings leading to secret phone calls, to stock-trading orders and finally to huge illicit profits made within hours.The SEC charged Rajat Gupta, who has also served on the boards of Procter & Gamble and the parent company for American Airlines. Gupta was a guest at President Barack Obama's first state dinner.
But at the height of the financial crisis, Gupta passed along privileged financial information that helped enrich the target of the government's sweeping probe, the SEC alleges.A pivotal moment came on September 23, 2008. Gupta listened via teleconference as the Goldman Sachs board approved an offer from Warren Buffett's Berkshire Hathaway to invest $5 billion in the banking giant.Seven minutes before the stock markets closed, Gupta hung up the call. He dialed Raj Rajaratnam. The two men spoke briefly.
Within a minute, Rajaratnam directed his hedge fund, the Galleon Group, to buy 175,000 shares of Goldman stock. The next day, he would sell them. His profit-nearly $1 million.Those and other allegations are at the core of charges suggestive of a financial thriller. The SEC spells out how it says Gupta gave Rajaratnam financial details about Goldman and P&G that hadn't been made public. Those leaks enriched Rajaratnam's funds by nearly $18 million, officials say.Rajaratnam is at the center of the government's broad insider trading investigation. His hedge fund delivered profits exceeding $50 million, thanks to inside information about public companies' earnings and plans for mergers and acquisitions, prosecutors say.
In their investigation, criminal investigators relied on wiretaps and search warrants, tactics normally reserved for cases against drug dealers and mobsters.Now, Gupta is being charged in that broadening probe."Gupta was honoured with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets," SEC Enforcement Director Robert Khuzami said.At the time he was passing along information to Rajaratnam, the SEC charges, Gupta was an investor in some of the Galleon hedge funds. He also had other business interests with Rajaratnam.
Gupta's attorney, Gary Naftalis, called the allegations "totally baseless."The SEC hasn't accused Gupta of trading stocks illegally or sharing profits with Rajaratnam, Naftalis said. And Gupta actually lost $10 million in one of Rajaratnam's fund at the same time that he allegedly passed on the information, Naftalis said.The SEC's filing outlines the two men's frequent contact at pivotal moments in 2008. At the time, investors feared many Wall Street banks might collapse under the weight of toxic mortgage investments.
The SEC's version of events includes these:
On June 10, Goldman CEO Lloyd Blankfein called board members to share better-than-expected financial results for the previous quarter. He reached Gupta in the early evening. Gupta and Rajaratnam spoke by phone that night and then again the next morning.Rajaratnam's funds bought 350,000 shares of stock. They also picked up 5,500 contracts that were worthless unless the stock rose. By the next week, positive financial results had boosted Goldman's share price. Galleon sold the shares and the contracts. The profits totaled $13.6 million.
On September 21, Blankfein told the board of the Berkshire deal. Over the next two days, Rajaratnam's funds bought 120,000 shares of Goldman. He picked up one-third of those shares while on the phone with Gupta, the SEC says.Goldman's board agreed on September 23 to the Berkshire deal during a call that ended at 3.53 pm. After speaking with Gupta, Rajaratnam bought 175,000 more Goldman shares before the market closed. His firm sold the shares the next day for a $900,000 profit.
On October 23, Blankfein and chief financial officer David Viniar told the board on a conference call that Goldman would likely report its first quarterly loss since going public in 1999. Twenty-three seconds after hanging up, Gupta called Rajaratnam. The next day, Rajaratnam's funds sold their remaining Goldman stock. Selling early allowed the funds to avoid $3 million in losses, the SEC says.Goldman, which wasn't accused of any wrongdoing, declined to comment on the charges. When Goldman appointed Gupta to its board of directors in 2006, the investment bank's release said Gupta would serve on the Audit, Compensation and Corporate Governance and Nominating Committees of the Board.
(AP)