Federal regulators in the United States have charged a former Goldman Sachs board member with insider trading, saying he provided confidential information to the central figure in a major hedge-fund probe.
The Securities and Exchange Commission (SEC) announced the civil charges against Rajat Gupta on Tuesday.
The agency said Gupta told Raj Rajaratnam, the founder of the Galleon Group hedge fund, that Warren Buffett's Berkshire Hathaway planned to invest US$5 billion in Goldman before it was publicly announced in September 2008, at the height of the financial crisis.
Gupta also is charged with giving Rajaratnam confidential quarterly-earnings information from Goldman and Procter & Gamble.
Gupta served as a board member at Goldman from 2006 until last May. He was board member at P&G until voluntarily resigning on Tuesday, after the charges were announced.
Gupta was an investor in some of the Galleon hedge funds when he passed the information along, and he had other business interests with Rajaratnam that were potentially lucrative, the SEC said. Rajaratnam used the information from Gupta to illegally profit in hedge-fund trades, the SEC said.
The information on Goldman made Rajaratnam's funds US$17 million richer, the SEC said.
The Proctor & Gamble data created illegal profits of more than US$570,000 for Galleon funds managed by others, the SEC said.
Gupta "has vigorously denied the SEC accusations that are being levelled at him and is stepping down in the interests of the company, to prevent any distraction to the P&G board and our business," Paul Fox, P&G spokesman in Cincinnati, said Tuesday.
Gupta's attorney, Gary Naftalis, wasn't immediately available for comment. Gupta also is a board member of AMR Corp, the parent company of American Airlines.
Rajaratnam, a one-time billionaire who is free on US$100-million bail, is scheduled to go on trial next week in a probe that has resulted in criminal charges against more than 25 people. Of those, 19 have already pleaded guilty to charges, with the majority of them cooperating.
Prosecutors have said Raja-ratnam generated profits of more than US$50 million by getting inside information about earnings statements by public companies and plans for mergers and acquisitions. He has pleaded not guilty and has maintained that he only traded on information that was already public.
Jim McCarthy, a spokesman for Rajaratnam, declined to comment on the civil charges against Gupta.
"Prosecutors are going after the biggest heads and now it has infiltrated the largest brokerage and hedge funds around," said Andrew Stoltmann, a Chicago securities attorney who has handled insider-trading cases. "We are seeing the reaches of insider trading at the highest level."
The case against Gupta will be heard by an administrative law judge at the SEC. That proceeding will determine whether Gupta should pay restitution and civil fines and if he should be barred from serving as an officer or director of a public company, the SEC said.
The criminal-securities fraud against Rajaratnam, who has both US and Sri Lankan citizenships, was announced in October 2009 by federal prosecutors in Manhattan. Prosecutors described it as the largest hedge fund insider-trading prosecution in history. It was also described as the first time investigators made extensive use of wiretaps in an insider-trading probe. The investigative tool is more traditionally used in drug and organisation crime probes.
Late last year, prosecutors revealed that the Rajaratnam investigation had resulted in an expanded probe focusing on those in the securities industry who provide insider information about public companies to hedge funds, but disguise the information as the product of research.
If convicted, Rajaratnam faces up to 185 years in prison. Potential penalties in insider-trading cases can sound ominous when the statutory limits are stacked together. But they can shrink dramatically when the cases are resolved.