March 1 (Bloomberg) -- Rajat K. Gupta, a former Goldman Sachs Group Inc. board member, was accused of insider trading by U.S. regulators who said he passed confidential information to Galleon Group founder Raj Rajaratnam including Berkshire Hathaway Inc.’s $5 billion investment in Goldman Sachs.
Gupta, 62, also tipped Rajaratnam on quarterly earnings at Goldman Sachs and Procter & Gamble Co., where he also was a board member, according to a Securities and Exchange Commission administrative order filed today. The tips generated more than $18 million, the SEC said.
Gupta, the former worldwide director of consulting firm McKinsey & Co., was a direct or indirect investor in some of the Galleon hedge funds at the time of the tips, the SEC said. Gupta, who stepped down from Goldman Sachs’ board last year, resigned today from Procter & Gamble’s board “to prevent any distraction,” company spokesman Paul Fox 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.
“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.”
Rajaratnam, who is fighting SEC and Justice Department insider-trading claims, is scheduled to go to trial March 8.
$10 Million ‘Lost’
Gupta has also served on the boards of American Airlines parent AMR Corp.; Harman International Industries Inc.; Genpact Ltd., the business outsourcing company; and Russia’s Sberbank. The SEC did not allege any wrongdoing in connection with those companies.
Naftalis said there is no allegation that Gupta made any trades or shared in any profits. Gupta lost his entire $10 million investment in a fund managed by Rajaratnam at the time of the events, Naftalis said.
According to the SEC, Gupta called Rajaratnam immediately after a September 2008 conference call during which Goldman Sachs’ board considered and approved the investment by Warren Buffett’s Berkshire Hathaway as well as a public equity offering. Within a minute of Gupta’s call, Rajaratnam arranged for Galleon funds to purchase more than 175,000 Goldman Sachs shares, the SEC alleged.
Galleon sold the shares the following day after the information became public, making illicit profits of more than $900,000, the SEC said.
The SEC action “is simply an effort to destroy a favorable witness,” said John Dowd, Rajaratnam’s attorney at Akin Gump Strauss Hauer & Feld LLP. “There is no case, absolutely none. No conversations, no benefit, no nothing. These are old friends and Mr. Gupta is a distinguished human being.”
Ed Canaday, a spokesman for Goldman Sachs in New York, declined to comment on the accusations against Gupta. Berkshire Hathaway didn’t immediately respond to a message seeking comment left with Carrie Kizer, an assistant to Buffett.
Gupta also illegally disclosed to Rajaratnam information about Goldman Sachs’s financial results for the second quarter of 2008 after a phone call to discuss earnings with Chief Executive Officer Lloyd Blankfein, according to the SEC. Between that night and the following morning, there was “a flurry of calls” between Gupta and Rajaratnam, the agency said.
Following the calls, Galleon bought more than 350,000 Goldman Sachs shares and 5,500 call options, generating more than $13.6 million in illicit profits for the Galleon funds, the SEC said.
Gupta also told Rajaratnam that Procter & Gamble’s sales would fall short of public predictions for the fourth quarter of 2008, the SEC said. Galleon sold short, or bet against, about 180,000 of the company’s shares, making more than $570,000 in illegal profits, according to the SEC’s order.
When Goldman Sachs appointed Gupta to its board in November 2006, Blankfein described him as a “valued source of counsel to institutions, governments and business leaders around the world” and said Goldman Sachs shareholders would benefit from his “strategic and operational expertise and judgment.”
On March 19, 2010, Goldman Sachs said Gupta wouldn’t stand for re-election to the company’s board, without providing any reason. In the statement, Blankfein said Gupta had made “important contributions” to the firm. On April 15, the Wall Street Journal reported that U.S. prosecutors were investigating whether Gupta had passed on tips to Rajaratnam.
Gupta, in a January 2003 speech to students at the London Business School, defended the work that McKinsey & Co. had done for Enron Corp. and Swissair, two high-profile bankruptcies, and said consulting firms should attend to their public images.
“Reputation is vitally important,” Gupta said. “It has implications on how we construct teams and it is being paid a lot more attention to than ever before.”
The SEC said administrative proceedings will take place to determine whether Gupta will have to pay any fines or face other penalties such as a bar from serving as an officer or director at a public company.
Ellen Davis, a spokeswoman for Manhattan U.S. Attorney Preet Bharara, declined comment on whether criminal charges would be filed against Gupta.
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