Colin Barr

Following the money in banking, economics, and Washington

Goldman's $17 million boardroom betrayal

March 1, 2011: 12:51 PM ET

Rajat Gupta's most famous betrayal wasn't his most lucrative, by a long shot.

Gupta will go down as the board member who sold out Goldman Sachs (GS) in 2008 as it reached for a lifebuoy thrown by Warren Buffett. By leaking the news of that $5 billion investment a day early, Gupta netted the Galleon hedge fund that traded on his inside information nearly $1 million, securities regulators say.

Betrayed

But Gupta's illicit early disclosure of the Goldman-Berkshire Hathaway (BRKA) deal was actually by far the least lucrative of three Goldman-related leaks engineered by Gupta during the financial crisis, according to papers filed Tuesday.

The Securities and Exchange Commission said in a cease-and-desist order against Gupta that Galleon racked up more than $17 million in profits and avoided losses on illicit Goldman trades during 2008, thanks to information Gupta fed Galleon founder Raj Rajaratnam. Gupta also made Galleon $570,000 by leaking information from a 2009 Procter & Gamble (PG) board meeting, the SEC says.

Rajaratnam is fighting civil and criminal insider-trading charges in what is shaping up as the biggest insider trading case in a generation.

The most prominent case involving Gupta centers around the preferred stock investment Berkshire Hathaway and Goldman announced after the market closed on Tuesday, Sept. 23, 2008. Gupta "very likely" called Rajaratnam that Monday, the SEC said, to discuss what was said at a Sunday afternoon board meeting.

Rajaratnam, whose funds didn't hold any Goldman stock at the start of the week, ended up holding 295,000 Goldman shares as of the close of business Tuesday, the SEC said. It then sold all the shares Wednesday, reaping a profit of more than $900,000.

Yet for all the drama of that episode – Rajatnaram bought the majority of those shares just minutes before the stock market closed Tuesday, just after getting off the phone with Gupta – that profit pales in comparison with those Galleon allegedly reaped by using Gupta-provided tips on Goldman's financials.

The most lucrative trades came in June, as Goldman was worrying about how long Lehman Brothers and other wholesale-funded investment banks might hold out in a world of falling asset prices and tighter financing.

CEO Lloyd Blankfein called Gupta and other outside directors a week before the firm's scheduled June 17, 2008, announcement of second-quarter results. Blankfein informed Gupta of Goldman's numbers, which were "strong in an extremely difficult environment, and significantly better than analyst consensus estimates," the SEC said.

Gupta responded by starting "a flurry of short calls" with Rajaratnam that evening and the next morning. Over the next two days, Galleon added to its holdings of Goldman call options and bought 350,000 shares outright.

Galleon then sold the call options June 16, reaping $7 million in profits, and the shares the next day after the earnings were announced, bringing in an additional $6.6 million.

In Gupta's last betrayal of Goldman's boardroom confidences, he told Rajaratnam in October that the board had been told the firm was on track to lose almost $2 a share for the fourth quarter ending the next month – a result that would shock Wall Streeters who were expecting the firm to continue profiting from the meltdown and make $2.50 a share.

Accordingly, Galleon dumped 120,000 Goldman shares on Oct. 23 at prices around $100 a share – $24 above their close on Dec. 16, when the firm announced its fourth-quarter losses. Their insider-driven early exit saved the Galleon funds $3 million, the SEC said.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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