SEC v. Gupta: SEC Charges Director, Hedge Fund Manager in Insider Trading Scheme
On October 26, 2011, the Securities and Exchange Commission (“SEC”) brought suit in Federal District Court against Rajat K. Gupta and Raj Rajaratnam, charging the two men with insider trading under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Section 17(a) of the Securities Act of 1933 (“Securities Act”). The SEC previously brought an administrative proceeding against Gupta based on the same conduct; that proceeding was later dismissed.
According to the SEC’s complaint, Gupta was a member of the board of directors at Goldman Sachs and at Procter & Gamble in 2008 and 2009. Rajaratnam managed Galleon Management, LP (“Galleon”), a hedge fund in which Gupta had a financial interest. The SEC alleged that during 2008-09, Gupta disclosed material non-public information to Rajaratnam, who then traded on that information. Gupta allegedly provided Rajaratnam with confidential financial information ahead of Goldman Sachs’ second and fourth quarter 2008 financial results, as well as tipping him ahead of the public announcement of Berkshire Hathaway’s third quarter 2008 investment in the company. In addition, Gupta allegedly provided Rajaratnam with confidential financial information ahead of Procter and Gamble’s fourth quarter 2008 financial results. Rajaratnam allegedly traded on the information.
Under the “classical theory” of insider trading, an insider and outsider breach a fiduciary duty to shareholders when the insider knowingly or recklessly discloses material non-public information to the outsider, and the latter knows or should know of the breach. The SEC alleged that Gupta learned insider information in his capacity as a director of Goldman Sachs and Procter & Gamble, that he knew or recklessly disregarded that the information was confidential, and that he provided the information to Rajaratnam with the expectation of a benefit. Rajaratnam, in turn, allegedly knew or should have known that the information he received constituted a breach of Gupta’s fiduciary duties to keep the information confidential.
The SEC is seeking to permanently enjoin both Gupta and Rajaratnam from taking similar actions in the future, to bar Gupta from serving as an officer or director of a public company, and to enjoin Gupta from associating with broker dealers and investment advisers. In addition, the SEC is seeking disgorgement of all profits and avoided losses stemming from the actions, as well as civil penalties. Gupta has sought to block the use of wiretap evidence in the case.
The primary materials for the case are available on the DU Corporate Governance website.
A previous series of posts on the SEC’s administrative proceeding against Gupta is here.
Finally, Gupta's legal difficulties are not limited to the SEC case: the United States has indicted Gupta for conspiracy to commit securities fraud.