SEC charges Raj Gupta as insider trading bust widens

March 1, 2011: 1:13 PM ET

The Galleon insider trading ring has enveloped a big fish on Wall Street with the SEC's charges against Rajat Gupta, a former member of the board of Goldman Sachs and a former managing director of McKinsey & Co.

Raj GuptaDammit, Rajat. We gave you the benefit of the doubt. We said that we wished it were not so. That it might all be all series of coincidences—that a former managing director of McKinsey & Co. wouldn't lower himself to pedestrian insider trading. That a former managing director of McKinsey & Co. wasn't for sale. But it looks like we wished too far. It's all alleged, of course, but as far as we can tell, you better start sizing yourself up for a new suit of pinstripes.

This morning, the Securities and Exchange Commission charged Gupta with the very same allegations we'd ruminated about, but also threw in a few others for good measure.

It's simple stuff, really. Gupta was a member of the board of Goldman Sachs (GS) until April of this year. According to the SEC, immediately after a special telephonic board meeting on September 23, 2008 about Warren Buffett's impending $5 billion investment in the firm, Gupta called hedge fund heavy Raj Rajaratnam of the Galleon Fund and its apparently never-ending list of insider trades. If we're still giving out benefit of the doubt, we might say that Gupta had called just to say hello. Whatever their conversation happened to entail, less than a minute later, Rajaratnam bought 175,000 shares of Goldman Sachs. It's all a coincidence, folks. Nothing to see here. Move along, now.

Oh, wait, there's more. In the second quarter of 2008, Goldman CEO Lloyd Blankfein called board member Gupta on June 10 to give him the good news that things were on the up-and-up, that Goldman would perform better than expected that quarter. They hung up, and Gupta called—guess who?—Rajaratnam. They were probably just trading pleasantries. Still, within minutes of the market opening on June 11, says the SEC, Rajaratnam bought out-of-the-money options on Goldman and more than 350,000 Goldman shares.

Gupta (allegedly…) didn't just give Rajaratnam the good news, mind you. He was also on alert when it was bad. On October 23, 2008, Goldman executives told the board about impending poor results. Within seconds, Gupta called Rajaratnam. Again, presumably, just to say hello. Allegedly, Rajaratnam avoided losses of some $3 million due this tidbit.

It doesn't even stop there. Gupta was—until today—a board member of Procter & Gamble (PG). (Tick, tock…) The SEC alleges that he told Rajaratnam about poor results he'd been alerted to in P&G audit committee meetings just a few hours after-the-fact on January 29, 2009. For some reason, Rajaratnam's Galleon Group decided to go short P&G that very day. They made $570,000. Did you know that Gupta is also on the board of American Airlines (AMR) and outsourcer Genpact? He's also the chairman and co-founder of the Indian private equity firm New Silk Route. (Tick, tock. Allegedly..)

All-in, Rajaratnam is alleged to have made $17 million in profits from Gupta's tips. As for Gupta? He allegedly traded a lifelong reputation for discretion and integrity in exchange for a couple of bucks he didn't even need. (Although there are those who would argue he sold McKinsey out long ago.) For shame, Rajat. For shame.

Update: Gupta's lawyer Gary Naftalis responds with a statement: "The SEC's allegations are totally baseless. Mr. Gupta has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder."

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Duff McDonald
Duff McDonald
Contributing Editor, Fortune

Duff McDonald is a contributing editor at Fortune. He has also written for New York, Vanity Fair, Condé Nast Portfolio, GQ, WIRED, Time, Newsweek, and others. In 2004, he was the recipient of two Canadian National Magazine Awards -- best business story (gold) and best investigative reporting (silver) -- for "Conrad's Fall" in National Post Business. Last Man Standing, his biography of Jamie Dimon, chairman and CEO of JPMorgan Chase, was published by Simon & Schuster in October 2009. He is also the co-author, with Owen Burke, of The CEO, a satire.

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