Gupta, who surrendered before the FBI earlier, was arrested and charged with committing securities fraud as he shared confidential information with hedge fund manager Rajaratnam.
Rajat Gupta, former corporate chairman and member of the Boards of Directors of Goldman Sachs and Procter & Gamble was today charged in a six count indictment for engaging in insider trading with jailed Galleon Group founder Raj Rajaratnam.
Gupta, who surrendered before the FBI earlier, was arrested and charged with committing securities fraud as he shared confidential information with hedge fund manager Rajaratnam.
"Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders.
"As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Gupta's breach of duty," Manhattan US Attorney Preet Bharara said.
Gupta, 62, surrendered to the Federal Bureau of Investigation and is expected to appear in Federal District Court later today.
He is charged with one count of conspiracy to commit securities fraud and five counts of securities fraud. He faces a maximum penalty of five years in prison on the conspiracy charge and 20 years in prison on each of the securities fraud charges.
In addition, with respect to the conspiracy charge, Gupta faces a maximum fine of USD 250,000 or twice the gross gain or loss accrued from the crime.
For each of the securities fraud charges, Gupta faces a maximum fine of USD 5 million or twice the gross gain or loss derived from the crime.
Meanwhile, Gary Naftalis, Gupta's lawyer, said in a statement issued earlier that his client is innocent.
Gupta "did not trade in any securities, did not tip Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo," Naftalis said, adding that he would fight any charges.
Securities laws prohibit company insiders from divulging corporate secrets to those who then profit from them.
A native of Kolkata, Gupta had a meteoric rise to corporate success after he graduated from Harvard Business School.
According to the indictment unsealed today in Manhattan federal court, from 2008 through January 2009, Gupta disclosed to Rajaratnam material, nonpublic information that he had learned in his capacity as a member of the Boards of Directors of Goldman Sachs and P&G with the understanding that Rajaratnam would use the inside information to purchase and sell securities.
Rajaratnam was convicted in a jury trial on May 11, 2011, of 14 counts of conspiracy and securities fraud. He was sentenced on October 13, 2011, to 11 years in prison, and ordered to pay forfeiture in the amount of $53,816,434, and a $10 million fine.
Gupta and Rajaratnam maintained a personal and business relationship. Gupta invested money in at least two different Galleon funds and formed separate investment and private equity funds with Rajaratnam.
Rajaratnam earned illegal profits of millions of dollars through the information Gupta provided him.
The inside information included confidential information about the companies' earnings and financial performance, as well as certain corporate transactions that were being undertaken by Goldman Sachs and P&G.
The indictment said that on September 23, 2008, shortly before the close of the market in the afternoon, Gupta attended over the phone a meeting of the Goldman Sachs Board. During that meeting, the Board agreed to accept a USD 5 billion investment by Warren Buffet's Berkshire Hathaway.
"Approximately 16 seconds after Gupta disconnected his phone from the Goldman Sachs Board call, his assistant called Rajaratnam. At approximately 3:58pm, just two minutes before the close of the market, Rajaratnam caused certain Galleon funds to purchase approximately 217,200 shares of Goldman Sachs common stock at a total cost of approximately $27 million," the indictment said.
Goldman Sachs publicly announced the investment by Berkshire Hathaway following the close of the market on September 23. The next morning, Goldman Sachs's stock opened for trading at a price that was more than $3.00 per share higher than the preannouncement closing price on September 23.
The next day Rajaratnam sold the 217,200 Goldman Sachs shares that had been purchased on September 23, generating an illegal profit of approximately $840,000.
Then on October 23, 2008, Gupta participated by telephone in a meeting of the Goldman Sachs Board in which senior executives of Goldman Sachs updated the Board on significant developments at the company.
Goldman Sachs's internal financial analyses showed that for the quarter ending November 28, 2008, the company had lost nearly $2 per share, which was substantially worse than the prevailing market expectations, the indictment said.
This information was particularly significant because in the firm's history as a public company, it had never before lost money in any quarter. Goldman Sachs did not publicly disclose those negative interim financial results, and that information was confidential.
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