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Goldman Sachs Shareholder Sues Ex-Director Rajat Gupta

07 June, 2011

A Goldman Sachs Group Inc shareholder sued Rajat Gupta, a former director of the investment bank, over trades revealed in civil and criminal insider trading cases against Gupta and convicted Galleon hedge fund founder Raj Rajaratnam.

The lawsuit, filed in Manhattan federal court on Monday, said Goldman shareholder James Mercer of Kirkland, Washington, sought judgment for profits from millions of dollars in transactions. It said Mercer wrote to the Goldman board on March 11 explaining that Gupta failed to disclose the details of his conduct and relationship with Rajaratnam as required by statute.

Rajaratnam, 53, was convicted last month on charges of securities fraud and conspiracy for insider trading, including Goldman corporate secrets leaked to him by his friend Gupta.

The former director is an unindicted co-conspirator in the case and denies any wrongdoing. He faces civil charges in the Rajaratnam matter filed by the U.S. Securities and Exchange Commission and is fighting those allegations with his own lawsuit against the market regulator.

Gupta’s lawyer, Gary Naftalis, said the shareholder lawsuit “is without merit and we will vigorously defend it.”

A spokesman for Goldman Sachs declined to comment. The firm was identified as a nominal plaintiff by the shareholder.

During Rajaratnam’s two-month trial, U.S. prosecutors played secretly-recorded phone conversations in which Rajaratnam is heard discussing information he received from Gupta about Goldman Sachs. These and other conversations between the two men in 2008 are also cited in the SEC’s complaint against Gupta.

The shareholder lawsuit focused on short-swing trading — trading within a period of less than six months. The SEC alleges that profits and loss avoidance amounted to $17 million from tips on Berkshire Hathaway’s $5 billion investment in Goldman at the height of the financial crisis and its second and fourth quarter financial results in 2008.

“Mr Rajaratnam/Galleon engaged in short-swing trading of Goldman Sachs securities, which generated substantial profits,” the lawsuit said. “Mr Gupta was a beneficial owner of these securities because he had a pecuniary interest in the profits generated by this trading activity.”

It said Gupta “as a statutory insider and beneficial owner of securities traded profitably on the short swing, must therefore disgorge all profits from those trades to issuer Goldman Sachs.”

Rajaratnam and Gupta, who was also the former global head of McKinsey & Co executive consultancy, were co-founders of a private equity investment firm New Silk Route Partners LLC in 2006.

The case is James Mercer v Rajat Gupta, U.S. District Court for the Southern District of New York, No. 11-3828.


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