AFP – The U.S. Securities and Exchange Commission (SEC) charged former Goldman Sachs and Procter & Gamble director Rajat Gupta on Tuesday with insider trading in a high-profile hedge fund case.
The SEC announced the charges for “illegally tipping off Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information about the quarterly earnings of both firms, as well as an impending $5 billion investment by Berkshire Hathaway in Goldman Sachs.”
Gupta, described as “a friend and business associate of Rajaratnam,” allegedly shared confidential information obtained during his tenure as a board member at Goldman Sachs and P&G, according to the SEC.
Rajaratnam allegedly used the insider information to trade on behalf of some of Galleon’s hedge funds or shared it with others at his firm, who then traded on it before the companies made public announcements.
The insider trading scheme allegedly orchestrated by Rajaratnam and others generated more than $18 million in illicit profits and loss avoidance, according to the SEC.
A Scandal That Shakes Wall Street
Gupta, a Connecticut-based business consultant and former managing director of global consulting firm McKinsey & Company, was at the time a direct or indirect investor in at least some of the Galleon hedge funds, according to the SEC.
Additionally, the former Goldman Sachs director “had other potentially lucrative business interests with Rajaratnam,” the agency added.
“Gupta was entrusted with the highest level of confidence by leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets,” stated Robert Khuzami, head of the SEC’s enforcement division, in a statement.
“Directors who violate boardroom confidentiality for personal gain will be held accountable for their illegal actions.”
Gupta’s Resignation and Defense
Following the charges, Procter & Gamble announced that Gupta had ‘voluntarily’ resigned, effective immediately.
Gupta “strongly denied” the SEC’s accusations but decided to step down “to prevent any distraction to the P&G board and our business,” said Paul Fox, spokesperson for the global pharmaceuticals and consumer goods giant, in a statement to AFP.
Fox added that P&G is fully cooperating with the investigation.
According to the SEC, Gupta tipped off Galleon about P&G’s weaker-than-expected sales growth in the final quarter of 2008, allowing the hedge fund to pocket over $570,000 in illicit profits.
Gupta’s Background and Ties to Other Institutions
Gupta joined the Goldman Sachs board in November 2006, serving on the audit, compensation, corporate governance, and nominating committees.
In March 2010, Goldman announced that Gupta would not seek re-election, amid speculation about his possible involvement in the insider trading investigation.
Born in India and a naturalized U.S. citizen, Gupta was appointed chairman of the International Chamber of Commerce last July.
A Harvard Business School graduate, he has been affiliated with numerous organizations, including the United Nations, where former Secretary-General Kofi Annan appointed him in 2005 as his special adviser for management reform.
Another Chapter in the Galleon Network Scandal
The SEC had previously charged Rajaratnam and others in a broader insider trading scheme linked to Galleon hedge funds.
Sri Lankan-born Rajaratnam and his co-defendant Danielle Chiesi were indicted in December 2009 by a federal grand jury in New York on charges of using non-public information obtained from company executives to generate approximately $20 million in illegal profits.
Rajaratnam has pleaded not guilty and is expected to stand trial next week.
Meanwhile, Chiesi, a former consultant at New Castle Funds, pleaded guilty in January to three counts of conspiracy to commit securities fraud.
To date, around 30 people have pleaded guilty in connection with this scandal, which has shaken Wall Street’s financial elite.