Former Goldman board member Rajat Gupta faces insider trading charges for profiting from confidential information during the financial crisis. Image: CC World Economic Forum/Flickr

The level of notoriety that Goldman Sachs either enjoys or endures increased Tuesday. The Securities and Exchange Commission filed insider trading charges against Rajat K. Gupta, one of its former board members. Goldman Sachs was also forced to admit that it could lose billions from lawsuits by investors who were bilked by the bank during the financial crisis.

Gupta busted for Buffett tip

The SEC  is suing former Goldman Sachs board member Rajat K. Gupta for insider trading on suspicions that he passed confidential information to Raj Rajaratnam of the Galleon Group, a financier scheduled to go on trial for securities fraud and conspiracy charges. The SEC said that while Gupta served on Goldman Sachs and Procter & Gamble boards, he tipped off Rajaratnam that Warren Buffett was going to invest $5 billion in Goldman Sachs. Buffett bet on Goldman in September, 2008, during the worst of the financial crisis, a move that helped prevent the bank from collapsing and provided assurance to the markets that all was not lost. Rajaratnam allegedly used the insider trading information from Gupta to generate “illicit profits and loss avoidance of more than $17 million,” according to the SEC.

Why was Gupta lining Galleon’s pockets?

The SEC also charged Gupta for passing Rajaratnam information about Goldman Sachs financials for the second and fourth quarters of 2008 before the reports were made public. Additional insider trading charges against Gupta include giving Rajaratnam information about Procter & Gamble’s 2008 fourth-quarter financials the day before they were released. Rajaratnam allegedly used the Procter & Gamble data to generate $570,000 in ill-gotten gains for his Galleon Group. While a board member at Goldman Sachs and Procter & Gamble, Gupta directed investing for several Galleon hedge funds that the SEC has tied to the insider trading scheme. Gupta also had numerous other business deals brewing with Rajaratnam, who is scheduled to go on trial in federal district court in Manhattan on March 8.

Goldman overwhelms penalties with profits

After the SEC insider trading charges against Gupta made the news, Goldman Sachs shares dropped 1.2 percent. Goldman also reported that it could stand to lose $3.4 billion in damages over lawsuits involving mortgage backed securities it sold that became worthless during the financial crisis. Goldman released the information to comply with new SEC transparency rules regarding financial liabilities. In 2010 Goldman paid a $550 million SEC fine, the largest ever assessed to a Wall Street bank, for deceiving investors with collateral debt obligations. Yet 2010 was the fourth best year for profits in Goldman’s history. The firm’s trading revenue dropped 33 percent from the previous year in 2010, but revenue from investing and lending more than doubled.

Sources

New York Times

Forbes

Wall Street Journal

Business Week

It’s been a good year for scammers — or a bad year, depending on how you look at it. From Bernie Madoff to Sky Capital, people who bilk others out of their money are getting caught. You can add Raj Rajaratnam to that list now, as he was arrested yesterday and charged with four counts of conspiracy and eight counts of securities fraud.

Of course, Raj Rajaratnam couldn’t do it alone; it takes more than one person to conspire. Six people, including ex-directors at a Bear Stearns Cos. hedge fund were charged in the scheme, which federal prosecutors said involved insider trading. While regular Americans are just trying to scrape by with installment loans for bad credit, Raj Rajaratnam and his alleged partners in crime are accused of conducting a $20 million scheme.

Who is Raj Rajaratnam?

Raj Rajaratnam is a billionaire and the founder of the Galleon Group hedge fund. He was born in Sri Lanka, but moved to the U.S. in 1981. He is now the 236th richest American, though I doubt that will be true anymore after his trial Bloomberg.com says:

Prosecutors said they used wiretaps on the billionaire’s phone. “A number of the calls intercepted over the wiretap consist of Rajaratnam either providing, receiving, or seeking material nonpublic information about various publicly traded companies,” a complaint says.

Federal prosecutors say Raj Rajaratnam and his co-conspirators conducted the biggest ever hedge fund insider trading scheme.

Raj Rajaratnam and friends

The  other people accused in the insider trading scheme are Rajiv Goel, of Intel Capital, Anil Kumar, who was a director at McKinsey & Co., IBM Corp. executive Robert Moffat, Bear Stearns Asset Management official Danielle Chiesi and Mark Kurland, also from Bear Stearns. Bloomoberg.com says:

It’s the first time wiretaps were used to target insider trading, and the arrests show a new level of prosecutorial aggressiveness towards Wall Street. Tips came from insiders and others at hedge funds, investor relations firms, and companies including Intel, IBM, McKinsey, and companies whose shares were traded in the scheme.

In closing, I’ll leave you with the words of U.S. Attorney Preet Bharara, who wins the award for most obvious quote of the decade:

“Greed, sometimes, is not good.”