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The Chief Officers' Network - your business advantage / Management / Public Companies / Insider trading: another milestone in the Rajat K. Gupta case


Much to his chagrin, Gupta, a former managing director with consultancy McKinsey & Company and a director at Goldman Sachs is spending several festive seasons behind bars. In June this year he was convicted of insider trading related offences for passing market sensitive information to Rajaratnam and, in October, Gupta was sentenced to two years . Their friend, Anil Kumar, was convicted in 2011 - the promptly gave evidence against Gupta and Rajaratnam..

Much of the material written about the three is somewhat disingenuous. Gupta is repeatedly referred to as an "Indian-American." He's Indian. But during his business career he settled in the USA and is now a US citizen. A Wikipedia entry about Gupta is sycophantic, surprisingly light on his criminal activities and other detrimental matters.

In fact, extensive telephone tapping evidence proved conclusively that Gupta, Rajaratnam, Kumar and others almost routinely exchanged information that was at least confidential and at worst market sensitive (which in the USA is called "material non-public").

Roomy Khan worked for Intel: she was convicted of "wire fraud" - she passed sensitive, confidential information to Rajaratnam.

When Goldman Sachs was trying to avoid the fate of Lehman Bros, it is alleged, Rajaratnam tried to get information on the proposed share purchase by Warren Buffet's Berkshire Hathaway fund.

In one aspect of the case, according to the New York Times, Gupta took part in a Goldman Sachs telephone board meeting then, having hung up, called Rajaratnam whose funds, Galleon, promptly sold Goldman shares, resulting in a loss of some USD3 million being avoided. And in insider trading cases, avoiding a loss is as much a bad thing as making a profit.

Yesterday, the latest stage in the saga reached a conclusion: administrative proceedings against Rajaratnam reached a conclusion. Gupta's conviction was relevant because it was decided on the same facts. But Rajaratnam has not been convicted of a criminal offence.

The SECís complaint, filed 26 October, 2011, alleges that, among other things, Rajat K. Gupta passed to his business associate Raj Rajaratnam, Galleon Managementís founder and managing general partner, confidential information Gupta learned in the course of his duties as a member of the Board of Directors of The Goldman Sachs Group, Inc.

The complaint alleges that Gupta disclosed material non-public information concerning Berkshire Hathaway Inc.ís USD5.000 million investment in Goldman Sachs in September 2008, and concerning Goldman Sachsís financial results for both the second and the fourth quarter of 2008.

Rajaratnam used the information he learned from Gupta to trade profitably in certain Galleon hedge funds. By engaging in this conduct, Gupta and Rajaratnam broke Section 10(b) of the Securities Exchange Act of 1934, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act of 1933.

The Final Judgment in the SECís case orders Rajaratnam to surrender his share of the profits gained and losses avoided as a result of the insider trading plus pre-judgment interest on that amount.

The SECís claims against Gupta remain pending.

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