Former Goldman Director Charged With Insider Trading

The Securities and Exchange Commission on Tuesday accused the former head of consulting giant McKinsey & Company of leaking confidential information to Raj Rajaratnam, the Galleon Group founder now awaiting trial on securities fraud and conspiracy charges.

The commission says that the former McKinsey executive, Rajat Gupta, passed along information he gleaned while serving on the boards of Goldman Sachs and Procter & Gamble. Among the tips that Mr. Gupta is alleged to have provided, was word that Warren E. Buffett would invest $5 billion in Goldman Sachs in September 2008 as the financial crisis raged. That information, the S.E.C. says, generated “illicit profits and loss avoidance of more than $17 million” for various Galleon funds. Mr. Gupta is also accused of disclosing to Mr. Rajaratnam information about Procter & Gamble’s 2008 fourth-quarter results on the eve of their release. The trial of Mr. Rajaratnam is scheduled to start in federal district court in Manhattan on March 8.

Gary Naftalis, a lawyer for Mr. Gupta, said that the S.E.C. allegations were “totally baseless.”

“Mr. Gupta has done nothing wrong,” he said.

“There is no allegation that Mr. Gupta traded in any of
these securities or shared in any profits as part of any quid pro quo.” Mr. Gupta, he noted, had lost his entire $10 million investment in a fund managed by Mr. Rajratnam during the period of the S.E.C. allegations. Mr. Gupta, 62, served on Goldman’s board from November 2006 through May 2010 and has been on P.&G.’s board since 2007. “Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions,” said Robert Khuzami, director of the S.E.C. division of enforcement.

The S.E.C.’s allegations were outlined in an order that institutes administrative and cease-and-desist proceedings against Mr. Gupta. The order provides some detail on what Goldman’s board was told in the chaotic wake of the collapse of Lehman Brothers. At a special meeting on Sunday, Sept. 21, 2008, the board was updated on the strategic alternatives the firm was considering and the strong net revenue Goldman was seeing even with financial markets in turmoil.

The S.E.C. says that the next morning Mr. Gupta and Mr. Rajaratnam “very likely had a telephone conversation,” noting that the Galleon Tech funds bought 80,000 shares of Goldman that day. The following Tuesday afternoon, the board held a conference call to approve Mr. Buffett’s $5 billion preferred stock investment in Goldman.

“Immediately after disconnecting from the board call, Gupta called Rajaratnam from the same line, ” the S.E.C. order says. A minute later, Galleon Tech funds bought more than more than 175,000 additional shares of Goldman just before the market closed, the agency says. After the close, Goldman announced the investment and its shares rallied the next day. The Galleon funds netted a profit of more than $900,000 on the Goldman shares, the S.E.C. contends. Mr. Gupta headed McKinsey from 1994 to 2003 and left as a partner in 2007. A former colleague at McKinsey, Anil Kumar, pleaded guilty to fraud charges related to the Galleon cased.

Mr. Kumar admitted receiving $1.75 million in payments from Mr. Rajaratnam after providing information from 2004 to 2009.