We have huge respect for “innocent until proven guilty.” We also try to give anyone accused of anything the benefit of the doubt.But having now read the SEC’s insider trading charges against Rajat Gupta, the former Goldman Sachs board member who stands accused of passing inside information to hedge-funder Raj Rajaratnam (also charged), we can’t imagine any possible explanation for what occurred other than the one the SEC has laid out.
Gupta’s lawyer has dismissed the charges as “baseless.”
Rajaratnam’s lawyer, meanwhile, says the charges are just an attempt by the SEC to discredit a witness who would be favourable to Rajaratnam at trial.
In light of the evidence the SEC has presented (see below), both statements seem laughable.
Rajat Gupta graduated from Harvard Business School. He was a senior partner at McKinsey & Co. He was a member of the board of Goldman Sachs and Procter & Gamble. He has been in business for more than 40 years. If anyone would know how devastating the mere appearance of impropriety can be in such circles, it would be Gupta.
And yet, repeatedly, if the SEC’s complaint is accurate, Gupta ended confidential board calls with the Goldman and P&G boards and, within seconds, picked up the phone to call Rajaratnam, who immediately bought or sold shares of Goldman and P&G. Prior to making the trades, Rajaratnam also told colleagues, who, unbeknownst to him, were co-operating with the feds, that he had received confidential information from a Goldman and P&G board member and that that was why he was making the trades.Even without wire taps (which the SEC may well have), how are Gupta and Rajaratnam possibly going to explain that?
We are ready to listen to any explanation Gupta’s lawyer and Rajaratnam’s lawyer want to give us, and we’ll try to keep an open mind.
In the meantime, however, having read the SEC’s complaint, we can conclude nothing other than that both are guilty as charged.
(And we should add that, for Gupta especially, this behaviour is appalling. It is a violation of the most basic and important duty of any senior executive, let alone a board member. The fact that it apparently occurred not at dime-a-dozen public companies–and not even at dime-a-dozen Fortune 500 companies–but at Goldman Sachs and Procter & Gamble, is a disgrace.)
Here are some of the allegations and evidence, as laid out by the SEC. Again, if there’s an innocent explanation, we invite the attorneys for Messrs. Gupta and Rajaratnam to give us a call.
(And if any of you can think of one, feel free to jot it down in the comments below.)
Gupta Disclosed Material Nonpublic Information to Rajaratnam Concerning
Berkshire’s $5 Billion Investment in Goldman Sachs
12. In September 2008, Gupta disclosed to Rajaratnam material nonpublic
information he learned as a member of the Goldman Sachs Board of Directors concerning,
among other things, Berkshire’s $5 billion investment in Goldman Sachs, which was
publicly announced on September 23, 2008. Rajaratnam, in turn, caused the Galleon Tech
funds to trade based on the material nonpublic information that Gupta disclosed.
13. Soon after the bankruptcy filing of Lehman Brothers Holdings Inc.
(“Lehman”) on September 15, 2008 —which sent the financial markets into an
unprecedented tailspin — senior management of Goldman Sachs began considering
various strategic alternatives as they tried to navigate through the ongoing financial crisis.
These alternatives included a potential investment from an institutional investor like
Berkshire, and were variously discussed at Goldman Sachs Board meetings and posting
calls during the week and a half following Lehman’s bankruptcy filing.
14. Goldman Sachs executives continued to explore various strategic
alternatives the weekend after the Lehman bankruptcy. The Goldman Sachs Board
convened a Special Meeting on Sunday, September 21, 2008. During that meeting, which
Gupta attended via teleconference, the Board approved Goldman Sachs becoming a Bank
Holding Company. The Goldman Sachs Board was also updated on certain strategic
alternatives that had been considered over the weekend.
15. Goldman Sachs CEO Lloyd Blankfein (“Blankfein”) had a long-standing
practice of informing the Board during posting calls, meetings and phone calls about the
then-current financial status of the firm. Goldman’s net revenues had been particularly
strong in the week leading up to the meeting – despite the fact that the week had begun
with Lehman’s bankruptcy and that the financial markets were in a general state of turmoil.
While the Board’s determination to convert Goldman Sachs into a Bank Holding Company
was publicly disclosed on the evening of September 21, information concerning Goldman
Sachs’s strategic alternatives and strong net revenue remained confidential.
16. Telephone records and calendar entries indicate that, on the morning of
Monday, September 22 — the day after the Sunday evening Goldman Sachs Board
meeting — Gupta and Rajaratnam very likely had a telephone conversation. Shortly after
that conversation, Rajaratnam caused the Galleon Tech funds, which held no preexisting
long or short position in Goldman Sachs securities at the time, to purchase over 80,000
Goldman Sachs shares.
17. On the morning of September 23, Rajaratnam placed a call to Gupta which
lasted over 14 minutes. Less than a minute after the call began, Rajaratnam caused the
Galleon Tech funds to purchase more than 40,000 additional Goldman Sachs shares.
18. A Special Telephonic Meeting of the Goldman Sachs Board was convened
at 3:15 p.m. on September 23, during which the Board considered and approved a $5
billion preferred stock investment by Berkshire in Goldman Sachs and a public equity
offering. As Gupta knew, Berkshire was one of the most respected and influential
investors and its decision to make such a large investment in Goldman Sachs would likely
be viewed as a strong vote of confidence in the firm when the information was disclosed to
the public. The infusion of a large amount of new capital in the firm also would likely be
viewed favourably by investors. Gupta participated in the Board meeting telephonically,
staying connected to the call until approximately 3:53 p.m. Immediately after disconnecting from the Board call, Gupta called Rajaratnam from the same line. Within a minute after this telephone conversation, at 3:56 p.m. and 3:57 p.m., and just minutes before the close of the markets, Rajaratnam caused the Galleon Tech funds to purchase more than 175,000 additional Goldman Sachs shares. Rajaratnam later informed a
conspirator that he received the information upon which he placed the trades minutes
before the close.
19. Goldman Sachs publicly announced the Berkshire investment, along with a
$2.5 billion public stock offering, after the market close on September 23. Goldman
Sachs’s stock price, which had closed at $125.05 per share on September 23, opened at
$128.44 per share the following day and rose to a closing price that day of $133.00 per
share, a gain of 6.36% from the prior day’s closing price.
20. On September 24, Rajaratnam caused the Galleon Tech funds to liquidate
the long position they had built on September 23, generating profits of over $900,000.
That’s one of several allegations in the complaint. The others are just as persuasive.