As the FT suggested Wednesday morning, Buffett’s investment in Goldman Sachs forms a key part of both cases, along with two other alleged instances relating to the bank, and a further two relating to Procter & Gamble, where Gupta was also a board member.
In each case, Gupta is alleged to have passed Raj Rajaratnam material non-public information that the latter used to trade to both their benefit. (Gupta had a “variety of business dealings” and was “an investor in, and a director of, Galleon’s GB Voyager Multi-Strategy Fund SPC” — basically a Galleon-only fund of funds.)
Here are excerpts from the SEC filing related to the Buffett purchase. We pick up the story shortly after a Goldman board meeting to discuss the imminent deal with Berkshire Hathaway…
Immediately after disconnecting from the Board call, Gupta called Rajaratnam from the same line. Within a minute after that telephone conversation, at 3:56 p.m. and 3:57 p.m., and just minutes before the close of the markets, Rajaratnam caused certain Galleon hedge funds to purchase more than 217,200, Goldman Sachs shares (Rajaratnam had actually attempted to purchase far more shares, placing an order for 350,000). Rajaratnam later informed a co-conspirator that he received the information upon which he placed the trades minutes before the close.
Rajaratnam closed out his long position the next day (Goldman ended up 6.36 per cent), generating profits of $800k, according to the filing.
There are also two alleged instances of insider trading on advance knowledge of Goldman earnings results, for Q2 2008 and Q4 2008.
Next we pick up the story just after Goldman CEO Lloyd Blankfein has told the board to expect a Q4 loss, the first in the company’s publicly listed history…
Gupta dialed into the October 23, 2008, Board posting call around the time it was scheduled to start and remained on the call until 4:49 p.m. Just 23 seconds after disconnecting from the call, Gupta called Rajaratnam. The call lasted approximately 13 minutes. The following morning, just as the financial markets opened at 9:30 a.m., Rajaratnam caused certain Galleon hedge funds to begin selling their holdings of Goldman Sachs stock. The funds finished selling off their holdings — which had consisted of 150,000 shares — that same day at prices ranging from $97.74 to $102.17 per share. The same day (October 24, 2008), in discussing trading and market information with another co-conspirator in the trading scheme, Rajaratnam explained that “the street” expected Goldman Sachs to earn $2.50 per share but that Rajaratnam had heard the prior day from a member of the Goldman Sachs Board that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades on the basis of the material nonpublic information that Gupta provided, Galleon hedge funds avoided losses of more than $3.6 million.
The rest of the allegations are similar and you can read them in full in the complaints.
Early commentary on the case has suggested that it represents an extension of the SEC’s reach, not only into the heart of the US boardroom but also into a broader definition of insider trading. “Gupta stands accused of spreading financial gossip but not making money off it himself,” writes the Atlantic. The WSJ says it sets a “precedent”:
The government is expected to argue that the relationship between the two men, who socialized and invested together, is emblematic of the back-scratching that pervades the corporate world and can sometimes veer into insider trading. Gupta’s arrest has financial experts thinking about the precedent this case could set.
Not so fast. Despite the high profile defendant, the case is pretty standard stuff. The complaints make clear that it’s not just about abandoning fiduciary duties to confidentiality, but also about the material gains Gupta stood to make. Moreover, too much shouldn’t be read into Gupta’s high-profile status as a harbinger of a new bravery at the SEC. It’s better thought of as the logical extension of an existing case: insider trading investigations have high fixed costs. It takes a lot of time and effort to produce one complaint but the marginal costs to produce further complaints are relatively low, since insider trading often involves a network. It’s a lot easier to catch the next guy in a network of informants than it is to build an entirely fresh case.
The trouble with defining insider trading – FT Alphaville
A Complete Guide To The Insider Charges Against Raj Gupta — The Highest Ranking Insider Trading Defendant Ever (GS) – Business Insider