On the eve of the criminal insider trading trial of Raja
Rajaratnam the SEC unveiled the latest chapter in the investigation into the
founder of Galleon Management LLC: he had been illegally tipped by a former
Goldman Sachs and current Proctor and Gamble board member. In an Order for
Proceedings the SEC's Division of Enforcement alleges four tips by Rajart Gupta
to Mr. Rajaratnam. Three concerned Goldman Sachs. One concerned Proctor and
Gamble. Each alleged tip is apparently inferred from detail drawn from
telephone, trading and other records. In two instances Mr. Rajaratnam is
alleged to have confirmed to a co-conspirator that he had inside information.
All of the tips resulted in profitable trades or losses avoided. Those totaled
about $18 million according to the Enforcement Division. In the Matter of
Rajart K. Gupta, Adm. Proc. File No. 3-14279 (Filed March 1, 2011).
Mr. Gupta was a member of the Goldman Sachs board of
directors from late 2006 through May 2010. During that time he served on
several committees including the Audit and Corporate Governance Committees. He
joined the board of P&G in 2007. As a member of that board he has also has
served on various committees including the Audit Committee.
Messrs. Gupta and Rajaranam are friends and business
associates. Mr. Gupta is the founder and chairman of New Silk Route Partners
LLC, an investment firm. That firm was previously known as Taj Capital
Partners. It was started by Messrs. Gupta and Rajaratnam and others in 2006. Mr.
Gupta is also alleged to have had a variety of lucrative business interests
with Mr. Rajaratnam, including an investment in one of the Galleon funds.
The Order is built on four alleged tips:
The Berkshire investment:
The first tip involved the $5 billion investment in Goldman Sachs made by
Berkshire Hathaway as the market crisis was unfolding. The arrangement was
announced on September 23, 2008. According to the Order, on September 21, 2008
a special Sunday Goldman board meeting was held. Mr. Gupta dialed in on the
telephone. During the meeting the board approved the investment bank becoming a
bank holding company and was updated on various strategic alternatives. The
next morning the Order alleges that it is "very likely" based on various
records that Raja Rajaratnam and Mr. Gupta spoke on the phone
On September 23 the two men spoke on the telephone for 14
minutes. One minute into the call Galleon purchased 40,000 shares of Goldman
Sachs. Later that day the board approved the Berkshire Hathaway deal. Three
minutes after Mr. Gupta signed off of the telephone call from the board meeting
he placed a call to Raja Rajaratnam who then purchased 175,000 Goldman shares
just prior to the close of the market. Later Mr. Rajaratnam told a
co-conspirator he had information about the investment. The position was
liquidated at a profit of about $900,000 after the public announcement.
Goldman's 4Q08 results:
The second centers on the $2.1 billion loss publicly announced by Goldman on
December 17, 2008, the only period loss since the company became public. The
Order alleges that on October 23, 2008 the Respondent dialed into a Goldman
meeting. At the time the board was advised about the financial condition of the
company. A loss was projected. Twenty three seconds after signing off the call,
Mr. Gupta telephoned Mr. Rajaratnam. The call lasted 13 minutes. At the opening
of the market on October 24 Galleon sold Goldman shares. When the quarterly
results were announced the share price tumbled. Galleon avoided a loss of over
$3 million according to the Division of Enforcement's allegations.
Goldman's 2Q08 results:
Goldman announced quarterly results on June 17, 2008. The firm performed better
than had been expected despite the turbulent markets. About one week prior to
the announcement the Chairman of the firm telephoned the Respondent. The date
and time of the call are not specified. During the evening of June 10 Mr. Gupta
and Mr. Rajaratnam had a series of short calls which culminated in one lasting
18 minutes. The next morning Mr. Rajaratnam called the Respondent prior to the
opening of the markets. Just after the opening Galleon purchased 5,500 call
options for Goldman shares. Additional shares were also acquired. After the
results were announced the position was sold at a profit of $13.6 million.
P&G Quarter December 2008:
The final tip is alleged to have involved P&G quarterly results. Those
results were announced on January 30, 2009. The day before the release the
audit committee reviewed it. The Respondent was on the call. The organic
results would be less that previously predicted. Following the call Mr. Gupta
telephoned Mr. Rajaratnam according to the Order. Subsequently, Galleon sold
180,000 P&G shares short. That position was closed following the release of
the results by the company at a profit of $570,000.
The Order alleges violations of Securities Act Section
17(a) and Exchange Act Section 10(b). The action is proceeding to litigation.
The administrative and cease and desist proceeding will determine what
remedies, if any, are appropriate including disgorgement and a civil penalty.
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