Warren Buffett’s decision to invest in Goldman Sachs Group Inc. during the financial crisis was leaked to a hedge fund by Rajat K. Gupta, who was then on the bank’s board, U.S. regulators said.
Gupta alerted hedge-fund manager Raj Rajaratnam to Buffett’s $5 billion investment in the company before the deal was made public in September 2008, the Securities and Exchange Commission said in an administrative order today. Rajaratnam’s Galleon Group made more than $18 million on that tip and other insider information from Gupta, the SEC said.
“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 Director Robert Khuzami said in a statement. “Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions.”
Buffett, the 80-year-old chairman of Berkshire Hathaway Inc., has spoken out against Wall Street greed and said the pursuit of short-term profit can compromise longer-term performance. His 2008 investment was a bet “not just on the strength of Goldman, but its integrity,” Berkshire Director Ron Olson said in an interview with Bloomberg Television last year.
Buffett didn’t respond to a request for comment to Carrie Kizer, an assistant. Ed Canaday, a spokesman at Goldman Sachs, declined to comment on the SEC’s accusation against Gupta. Berkshire makes $500 million a year in interest on the Goldman Sachs investment. Warrants that Buffett negotiated as part of the deal give Berkshire a paper profit of more than $2 billion.
“The SEC’s allegations are totally baseless,” Gupta’s attorney, Gary Naftalis, said in a statement. “Mr. Gupta has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder.”
Buffett’s support buoyed New York-based Goldman Sachs as the bank navigated the credit crunch and was criticized by lawmakers. Buffett, whose relationship with Goldman Sachs dates to his childhood when he met an executive of the bank, defended the firm and Chairman Lloyd Blankfein after the company was sued by the SEC for fraud last year.
“If it’s just one individual found to have acted improperly, I don’t think it will have long-term consequence unless something is implicated in the Goldman control structure,” said Charles Elson, director of the University of Delaware’s John. L. Weinberg Center for Corporate Governance.
Buffett is “an important client as well as an investor,” said Blankfein, also Goldman Sachs’s chief executive officer, in an interview in April. Buffett, the world’s third-richest person, said in May that he supports Blankfein “100 percent.”
Goldman Sachs settled the SEC’s lawsuit in July by agreeing to pay $550 million, and said it made a mistake in omitting disclosure to investors. The regulator had said the bank’s clients weren’t told when they invested in a collateralized debt obligation from the bank that a hedge fund picked mortgages in the investment and was betting on them to fail. Buffett said it makes no difference who was on the other side of a trade.
Gupta, who stepped down from Goldman Sachs’s board last year, was a direct or indirect investor in some of the Galleon hedge funds at the time of the tips, the SEC said. Gupta, 62, also passed information on quarterly earnings at Goldman Sachs and Procter & Gamble Co., where he also was a board member, the SEC said.
John Dowd, a lawyer for Rajaratnam, said there is “no merit” to the SEC’s claims against Gupta.
“This is simply an effort to destroy a favorable witness,” Dowd said in a statement.
Buffett relied on Goldman Sachs for some of his biggest deals, including the $4.5 billion acquisition of Marmon Holdings Inc. in 2008 and the $1.45 billion takeover of McLane Co. Those deals were facilitated by Byron Trott, the former Goldman Sachs managing director of whom Buffett said, “I trust him completely.”
Berkshire’s warrants give Buffett the option to buy $5 billion of Goldman Sachs stock at $115 a share. That compares with $161.31 at 4:15 p.m. in New York Stock Exchange composite trading.