The SEC charged former McKinsey & Co. global head Rajat Gupta with facilitating insider trading by illegally tipping convicted hedge fund manager Raj Rajaratnam while serving on the boards of Goldman Sachs and Procter & Gamble (P&G). The SEC also filed new insider trading charges against Rajaratnam after first charging him with insider trading in October 2009.   (Click here to read our related story in WHO'S News - 10/26/11.) SEC Complaint. The complaint, filed in federal court in Manhattan, alleges that Gupta illegally tipped Rajaratnam with insider information about the quarterly earnings of both Goldman Sachs and P&G,  as well as an impending $5 billion investment in Goldman by Berkshire Hathaway.  Galleon's Rajaratnam, who recently was convicted of multiple counts of insider trading in other securities, used that information to trade on behalf of several Galleon hedge funds - thus generating profits or avoiding losses, in excess of $23 million.

“Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets to the disadvantage of investors, shareholders, and fellow directors.  Directors who exploit board room confidences for private gain can be certain they will ultimately be held responsible for their illegal actions.” -- Robert Khuzami, SEC Enforcement

Examples of Tipped Information. Mr. Gupta apparently passed on to Rajaratman and others that he learned in his activities as a director of both Goldman and P&G.  During this period, Gupta had a variety of business dealings with Rajaratnam and stood to benefit from his relationship with him.

• As a Goldman director, Gupta board member tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was publicly announced on 9/23/08.  Rajaratnam purchased more than 215,000 Goldman.  The SEC further points out that Rajaratnam began his trading only minutes before market close.  Later in the day, Rajaratnam informed another participant of the insider tips.

• Gupta learned that Goldman would be reporting negative financial results for the 4th quarter of 2008.  Mere seconds after the 10/23/08 board call ended, Gupta tipped Rajaratnam, who then arranged for certain Galleon funds to begin selling their Goldman holdings shortly after the financial markets opened the following day until the funds finished selling off their holdings, which had consisted of more than 150,000 shares.  In discussing trading and market information that day with another participant in the insider trading scheme, Rajaratnam explained that while Wall Street expected Goldman to earn $2.50 per share, he heard the prior day from a Goldman board member that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades based on inside information provided by Gupta, the Galleon funds avoided losses of more than $3.6 million.

• Another time, Gupta learned from Goldman CEO Lloyd Blankfein that the firm’s quarterly earnings would be significantly better than analyst consensus estimates.  The following morning, minutes after the markets opened, Rajaratnam started to purchase 350,000 Goldman shares and options - including 7,350 out-of-the-money call options.  shares.  Rajaratnam liquidated these positions on or around 6/17/08 - the date when Goldman announced its quarterly earnings.

• Gupta illegally disclosed to Rajaratnam inside information about P&G’s financial results for the quarter ending December 2008, after Gupta participated in a conference call involving the P&G Audit Committee 1/29/09.  Gupta learned that P&G would be reporting quarterly earnings the next day - which would note that P&G expected organic sales to be less than previously publicly predicted.  Gupta called Rajaratnam in the early afternoon on 1/29/09 and Rajaratnam shortly afterwards informed another participant in the insider trading scheme what he had learned.  Galleon funds then sold short approximately 180,000 P&G shares, making illicit profits of more than $570,000.

SEC Sanctions. The Commission seeks to disgorge the defendants on a joint and several basis their ill-gotten gains plus prejudgment interest, and to order payment of financial penalties.  The SEC further seeks to permanently prohibit Gupta from acting as an officer or director of any registered public company, and to permanently enjoin him from associating with any broker, dealer or investment adviser. SEC Staff Credits.   Investigation, which continues, by:  John Henderson (Market Abuse Unit in NY);  Diego Brucculeri, James D’Avino (New York Regional Office).  Litigation effort by Kevin McGrath, Valerie Szczepanik (New York Regional Office). For further details, go to:   [SEC PR 11-223, 10/26/11],  which links to the SEC Complaint.