Goldman Sachs Ex-Board Member Indicted

     MANHATTAN (CN) – Federal prosecutors accuse former Goldman Sachs board member Rajat K. Gupta of conspiring with convicted Galleon hedge fund founder Raj Rajaratnam to trade on inside information.



     Amid worldwide turmoil in the markets in September 2008, Gupta called Rajaratnam to tell him about Berkshire Hathaway’s $5 billion investment in Goldman Sachs “approximately 16 seconds” after it was discussed during a telephone board meeting, the indictment claims.
     Rajaratnam was sentenced to 11 years in prison earlier this month.
     Gupta is the biggest fish accused so far in the wide-ranging investigation that federal prosecutors call the biggest inside-trading ring ever prosecuted.
     Gupta is charged with conspiracy and five counts of securities fraud.
     The SEC filed parallel charges.
     Gupta served on the corporate boards during the time covered by the federal indictment, in which capacity he “regularly received confidential information about P&G’s earnings, contemplated and actual corporate transactions, and other significant developments prior to P&G’s public announcement of such information,” according to the indictment.
     Prosecutors say Gupta and Rajaratnam, the head of the Galleon fund, had “numerous business dealings with each other” and “a personal relationship and friendship.”
     All the following allegations, whether quoted or paraphrased, are from the 22-page federal indictment.
     It claims that Gupta invested millions of dollars in at least two Galleon offshore funds, through an offshore entity he created. The value of those investments was $2.4 million on March 31, 2005.
     In 2005, Gupta, Rajaratnam and a third person formed an investment fund called Voyager Capital Partners. Gupta put $5 million into it, and Rajaratnam put in $40 million. Gupta put another $5 million into it in 2007, giving him a 20 percent equity interest in it, to Rajaratnam’s 80 percent. Some Voyager funds were invested in Galleon hedge funds, including those managed by Rajaratnam.
     In 2006, Gupta, Rajaratnam and others “became founding partners of a private equity fund focused on investments in emerging markets in Asia.” Gupta, chairman of the private equity fund from its beginning until about March 2010, committed $22.5 million to the fund; Rajaratnam put in $50 million.
     After presenting this background, prosecutors say Gupta had a duty to maintain confidentiality of information he received as a member of the Goldman Sachs and Procter & Gamble boards.
     But prosecutors say that from “at least in or about 2008 through in or about January 2009,” Gupta and Rajaratnam, and others, known and unknown, “participated in a scheme to defraud by disclosing material, nonpublic information relating to Goldman Sachs and P&G (the ‘inside information’) and/or executing securities transactions on the basis of the inside information.”
     Gupta obtained the inside information in his capacity as a member of the two boards, and “disclosed the inside information to Rajaratnam, with the understanding that Rajaratnam would use the inside information to purchase and sell securities,” the complaint states.
     Rajaratnam then “caused the execution of transactions in the securities of Goldman Sachs, P&G, and other companies on the basis of the inside information, and shared the inside information with other coconspirators at Galleon, thereby earning illegal profits (and illegally avoiding losses) of millions of dollars.” (Parentheses in indictment.)
     Prosecutors say Gupta learned on Sept. 23, 2008, amid worldwide turmoil in stock markets, that the Goldman Sachs board had approved a $5 billion investment from Berkshire Hathaway. Gupta participated by telephone in a special meeting of the Goldman Sachs board. The Berkshire Hathaway investment was confidential until it was made public after the 4 p.m. closing of the New York Stock Exchange that day.
     But the indictment states: “Approximately 16 seconds after Rajat K. Gupta, the defendant, disconnected his telephone from the special meeting of the Goldman Sachs Board on September 23, 2008, at approximately 3:54 p.m., Gupta’s assistant called Rajaratnam at his office in New York, New York, and shortly thereafter, connected Gupta to the call. During that call, Gupta disclosed inside information to Rajaratnam concerning Berkshire Hathaway’s investment in Goldman Sachs.”
     Four minutes later – 2 minutes before the NYSE closed for the day – Rajaratnam had Galleon order the purchase of 350,000 shares of Goldman Sachs stock, worth $43 million.
     “Of that amount, the Galleon Tech Funds purchased approximately 217,200 shares of Goldman Sachs common stock at approximately $124 per share, at a total cost of approximately $27 million.”
     Goldman Sachs announced the Berkshire Hathaway investment after the market closed, and the next day Goldman Sachs opened at $128.44, up more than $3 from its pre-announcement closing price of $125.05. Rajaratnam that day sold all the Goldman Sachs stock he had bought, making “an illegal profit of approximately $840,000,” according to the indictment.     
     Exactly 1 month later, the indictment alleges, on Oct. 23, 2008, Gupta learned, again by participating in a Goldman Sachs board meeting by telephone, that Goldman Sachs’ “confidential internal financial analyses showed that for the quarter ending November 28, 2008, the company had, at that point, lost nearly $2 per share. That information was particularly significant because in the firm’s history as a public company, it had never before lost money in any quarter.”
     This time Gupta waited “approximately 23 seconds” to call Rajaratnam with the inside information, prosecutors say. They spoke for 13 minutes, during which time “Gupta disclosed to Rajaratnam inside information concerning Goldman Sachs’s negative interim earnings.”
     Next morning, Rajaratnam had Galleon Tech Funds “sell its entire long position in Goldman Sachs stock, which consisted of approximately 150,000 shares, at prices ranging from $97.74 to $102.17.” Those trades “illegally avoided a loss of several million dollars.”
     Gupta also called Rajaratnam with inside information about Procter & Gamble earnings, again after participating by telephone in a meeting, of the Audit Committee of P&G’s Board, the indictment says. Based on that information, Rajaratnam sold short 180,000 shares of Procter & Gamble.
     In a 4-page section on “Overt Acts,” the indictment then lays out other inside information that Gupta allegedly provided Rajaratnam.
     Prosecutors seek forfeiture of “at least a sum of money in United States currence which was derived from proceeds traceable to the commission of the securities fraud offenses alleged in counts one through six,” or if that money cannot be located, forfeiture of substitute assets.

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