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Buffett's Goldman Sachs Investment in 2008 Plays Key Role in New Insider Trading Accusations

Rajat Gupta
Eric Piermont | AFP | Getty Images
Rajat Gupta

The SEC is accusing a former board member at Goldman Sachs with illegally giving Galleon hedge fund founder Raj Rajaratnam advance notice of Berkshire Hathaway's $5 billion dollar investment in Goldman at the height of the credit crisis.

The SEC says Rajaratnam bought 175,000 Goldman shares after getting a call from Rajat Gupta about the deal, before it was announced late in the day on September 23, 2008.

Gupta, says the SEC, had just gotten off a conference call in which the Goldman board had discussed and approved the cash infusion from Warren Buffett's company.

The next day, Goldman shares gained on the announcement that Buffett was casting a vote of confidence in the firm.

Rajaratnam, according to the SEC, sold his Goldman shares, generating an "illicit" profit of over $900,000.

Here's how the SEC's news release describes the alleged scheme:

In the order that institutes administrative and cease-and-desist proceedings against Gupta, the SEC’s Division of Enforcement alleges that, while a member of Goldman’s Board of Directors, Gupta tipped Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman and Goldman’s upcoming public equity offering before that information was publicly announced on Sept. 23, 2008. Gupta called Rajaratnam immediately after a special telephonic meeting at which Goldman’s Board considered and approved Berkshire’s investment in Goldman Sachs and the public equity offering. Within a minute after the Gupta-Rajaratnam call and just minutes before the close of the markets, Rajaratnam arranged for Galleon funds to purchase more than 175,000 Goldman shares. Rajaratnam later informed another participant in the scheme that he received the tip on which he traded only minutes before the market close. Rajaratnam caused the Galleon funds to liquidate their Goldman holdings the following day after the information became public, making illicit profits of more than $900,000.

Gupta is also accused of providing Rajaratnam with inside information on upcoming earnings reports by Goldman, as well as Procter & Gamble, where Gupta also served as a director.

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Gupta's attorney has issued a statement calling all of the SEC's allegations "totally baseless." Gary Naftalis says Gupta "has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder."

The statement continues:

There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo. In fact, Mr. Gupta had lost his entire $10 million investment in the GB Voyager Fund managed by Rajaratnam at the time of these events, negating any motive to deviate from a lifetime of honesty and integrity.

Current stock prices:

Berkshire Class B:

Berkshire Class A:

Goldman Sachs:

Procter & Gamble:

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