SEC Charges Gupta


New York – The insider trading investigation took a nasty turn yesterday, with a former Goldman director being charged by the SEC in a civil suit. The SEC alleges that Rajat Gupta leaked information about Warren Buffet’s investment in Goldman Sachs in 2008, ahead of the announcement of the investment. The SEC case indicates that Gupta had just disconnected from a Goldman board meeting when he called Raj Rajaratnam (Galleon Group) before the close of markets. Goldman subsequently announced the investment after the close.

Mr. Gupta is the highest placed individual to be named in the insider trading investigation to date.  Of the 46 people charged by federal prosecutors, 29 have pleaded guilty. Mr. Gupta has not been a board member at Goldman since May of 2010, but resigned today from the board of Proctor and Gamble, which he is also accused of leaking insider information about. Mr. Gupta ran consulting giant McKinsey from 1994 to 2003.  He remains on the board of the parent company of American Airlines (AMR).

Mr. Gupta is alleged to have leaked Goldman results to Mr. Rajaratnam in the second and fourth quarters of 2008; Proctor and Gambles results in the fourth quarter of 2008; and Buffet’s $5 million investment in Goldman Sachs in September 2008.

A lawyer for Mr. Gupta, Gary Naftalis, said that the claims were “totally baseless” and that “Mr. Gupta has done nothing wrong”. “There is no allegation that that Mr. Gupta traded in any of these securities or shared in profits as a part of a quid pro quo.”  However, a former colleague of Mr. Gupta at McKinsey, Anil Kumar, has pleaded guilty to fraud charges related to the Galleon case.

We note that his lawyer’s comments do not address the leaking of material non-public information. Rather, his comments only address whether Mr. Gupta benefited from leaking the information. This is a standard defense approach, but does not protect Mr. Gupta under the misappropriation theory of insider trading law. The SEC alleges that Mr. Gupta breached his fiduciary duty to Goldman and Proctor and Gamble when he improperly passed the confidential information to Rajarathnam – which constitutes “tipping.” A tipping case does not require the tipper to directly benefit from the tipping.

While the most likely outcome of the SEC’s case will be a settlement, some believe that prosecutors are attempting to flip Mr. Gupta into testifying in the criminal case against Raj Rajaratnam (Galleon) that is about to begin.


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