Former Goldman Sachs director arrested

The long-running federal investigation of insider trading on Wall Street netted one of its biggest fish Wednesday as federal prosecutors unsealed charges against Rajat Gupta, a prominent former director of Goldman Sachs Group Inc. and Procter & Gamble.

Gupta, whose name surfaced in testimony earlier this year at the insider trading trial of Galleon Group billionaire Raj Rajaratnam, was accused in the criminal case and a Securities and Exchange Commission civil complaint of providing tips worth $23 million in illegal profits to and loses avoided by the hedge fund.

The six-count Manhattan federal court indictment included charges that Gupta tipped off Rajaratnam to information from confidential Goldman board meetings in 2008, passing along word of a planned $5 billion investment in Goldman by Warren Buffett and on another occasion tipping him to an imminent negative quarterly earnings reports.

In those instances, Gupta allegedly called Rajaratnam 16 seconds and 23 seconds after the close of the Goldman board meetings. In the case of the Buffett tip, Rajaratnam bought more than 200,000 shares within 4 minutes of getting the heads up, and ended up making $800,000, prosecutors said.

"The conduct alleged is not an innocent slip of the tongue by Mr. Gupta," said Janice Fedarcyk, head of the FBI's New York office. "That information was conveyed by phone so quickly it could be termed instant messaging."

Until Wednesday's charges, the government's 2-year-old insider trading investigation had focused on hedge funds, analysts and traders, not the corporate elite. In addition to Goldman and Procter, Gupta formerly headed the corporate consulting firm McKinsey & Co. and served on the board of Bill Gates' charitable foundation.

Gupta, 62, of Westport, Conn., pleaded not guilty in a brief court appearance. He was released on a $10 million bond secured by his house, and trial was set for next April. His lawyer, Gary Naftalis, called the charges "totally baseless."

In addition to the Goldman charges, prosecutors also accused Gupta of passing confidential Procter & Gamble board information about its earnings and a plan to sell its Folgers coffee line to J.M. Smucker Inc. They did not specify his profit in return for supplying the tips, but said he had a "business and personal" relationship with Rajaratnam.

He allegedly invested $2.2 million in two Galleon funds, put $10 million in a separate investment fund with Rajaratnam called Voyager Capital, and had committed $22 million to a private equity fund with Rajaratnam.

The lack of clear evidence that Gupta himself traded on or profited from the tips could be a centerpiece of any trial. Naftalis, in a statement, said Gupta "did not tip Mr. Rajaratnam so he could trade and did not share in any profits as part of any quid pro quo."

Naftalis said his client may have been calling Rajaratnam to talk about his $10 million Voyager investment, which he eventually lost -- "negating any motive to deviate from a lifetime of probity and distinguished service."

Gupta faces five years in prison on one conspiracy charge, and 20 years on each of five securities fraud charges. Earlier this month, Rajaratnam was sentenced to 11 years in prison for trading on insider information.