FBI arrests Gupta in Galleon insider-trading case

Rajat Gupta surrendered to the FBI on October 26 after being accused of leaking information to Galleon founder Raj Rajaratnam

Former Goldman Sachs director Rajat Gupta has been taken into custody by the US Federal Bureau of Investigation on charges relating to the Galleon insider-trading case.

Gupta surrendered to the FBI at 8.10 am this morning at the FBI's office in downtown New York.

The US Securities and Exchange Commission (SEC) accused Gupta in March of leaking details about Berkshire Hathaway's $5 billion investment in Goldman Sachs in 2008 to Galleon Group founder Raj Rajaratnam. He allegedly also gave Rajaratnam inside information on the quarterly earnings of Goldman Sachs and Procter & Gamble (P&G) – he was a director of both companies.

The jury in the Rajaratnam case heard that, in an October 2008 private meeting of Goldman Sachs board members, it was announced the firm had incurred a quarterly loss for the first time in its history. Phone records showed Gupta called Rajaratnam 23 seconds later, at which point all Galleon's stock in Goldman Sachs was sold.

Rajaratnam used this insider information to trade on behalf of Galleon's hedge funds. At the time, Gupta was a direct or indirect investor in at least some of these funds.

Gupta served as a Goldman Sachs board member from 2006 to 2010, and served on P&G's board from 2007 until he stepped down yesterday.

The case against Rajaratnam and his associates made use of a substantial amount of wiretap evidence, a technique not previously used by financial enforcement agencies.

Rajaratnam was sentenced to 11 years in prison on October 14, the longest sentence ever handed down to an insider trader in the US. Three of his co-conspirators have also been jailed: Robert Moffat, a former senior vice-president at IBM; Mark Kurland, co-founder of hedge fund New Castle Partners; and Danielle Chiesi, a former employee of New Castle.

The civil charges against Gupta were dropped by the SEC in August, but it reserved the right to file an action against him in federal court. It filed new insider-trading charges against Gupta today.

"Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets to the disadvantage of investors, shareholders and fellow directors," says Robert Khuzami, director of the SEC's division of enforcement. "Directors who exploit boardroom confidences for private gain can be certain they will ultimately be held responsible for their illegal actions."

An indictment unsealed in a Manhattan federal court today charged Gupta with five counts of securities fraud and one count of conspiracy to commit securities fraud, the FBI announced.

Gupta's lawyer denies the charges.

"Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless. The facts demonstrate Gupta is an innocent man and has always acted with honesty and integrity. He 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," he says.

If convicted, Gupta faces a possible prison sentence of up to 105 years.