Former Goldman Sachs Director Surrenders to FBI on Insider-Trading Charges

(October 26, 2011) — Rajat Gupta, the former director at Goldman Sachs accused of funneling tips to Galleon Group LLC hedge fund manager Raj Rajaratnam, has been indicted by US prosecutors on insider trading charges.

The indictment makes Gupta the highest-ranking executive to be accused of wrongdoing in a four-year securities-fraud investigation of insider trading at hedge funds. The charges carry a potential penalty of 105 years in prison.

Gupta has been charged with five counts of securities fraud and one count of conspiracy to commit securities fraud in the indictment. The US Securities and Exchange Commission has additionally sued Gupta for insider trading, claiming he illegally tipped convicted hedge fund manager Rajaratnam while serving on the boards of Goldman Sachs and Procter & Gamble (P&G).

Robert S. Khuzami, Director of the SEC’s Division of Enforcement, stated in a release on the regulator’s charges: “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.”

The indictment comes as the Federal Bureau of Investigation and prosecutors in the office of Manhattan US Attorney Preet Bharara have spent four years probing illegal trading at hedge funds, technology firms, banks, and consulting firms. “From 2008 through January 2009, Gupta disclosed to Raj Rajaratnam material, nonpublic information that Gupta had learned in his capacity as a member of the boards of directors of Goldman Sachs and P&G with the understanding that Rajaratnam would use the inside information to purchase and sell securities,” according to the indictment.

In a release, Bharara said: “Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders. As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr. Gupta’s breach of duty. Today we allege that the corruption we have seen in the trading cubicles, investment firms, law firms, expert consulting firms, medical labs, and corporate suites also insinuated itself into the boardrooms of elite companies.”

In May, Rajaratnam, the hedge-fund tycoon and co-founder of Galleon Group LLC at the heart of a US insider-trading investigation, was found guilty of all counts against him. The counts against him included nine of securities fraud and five of conspiracy to commit securities fraud.