Goldman Director Linked to Insider Trading on Buffett Investment

Galleon Group founder Raj Rajaratnam Rajat may have engaged in insider trading on Goldman Sachs Group Inc. (NYSE: GS) stock by profiting from a tip from Rajat Gupta, a director at Goldman, The Wall Street Journal reported, citing a person it didn't identify.

The new disclosure stems from a government examination into whether Gupta gave inside information to Mr. Rajaratnam about a $5 billion investment Warren Buffett's Berkshire Hathaway (NYSE: BRK.A, BRK.B) made in the Wall Street bank before it became public knowledge.

In a March 22 court filing, the government revealed more details about the information it alleges Rajaratnam received, alleging that he or "co-conspirators" traded on non-public information, including advance notice about the Buffett investment in Goldman.

That information came from Gupta, a person familiar with the matter told The Journal. Federal prosecutors notified Gupta in a letter that they had intercepted phone conversations between him and Rajaratnam. Gupta told Goldman last month he wouldn't seek re-election as a director.

Coming on the heels of the Securities and Exchange Commission's (SEC) fraud lawsuit against Goldman, the bad publicity just keeps growing for the investment bank.

The SEC recently alleged that Goldman Sachs and an employee deceived clients on the sale of mortgage-related investments. The case focuses on a collateralized debt obligation (CDO) that yielded a $1 billion payout for hedge fund Paulson & Co. when the CDO lost value. The investors, including IKB Deutsche Industriebank AG, lost an equal amount.

Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, has said the investors who took the opposite position to Paulson were aware of the risk and the lawsuit has no merit.

Gupta has yet to be charged in the insider trading case, and denies any wrongdoing in the matter.

"Mr. Gupta is unaware of any examination of any such issue and has done nothing wrong," a spokeswoman for Gupta said in a statement responding to the report.

Rajaratnam, founder of the Galleon Group hedge fund, is fighting criminal insider-trading charges in the case, and, through his attorney, also denied breaking the law.

"Rajat has neither violated any law nor done anything else improper. He has always conducted himself with integrity in his business, philanthropic and personal life," Gupta's lawyer, Gary Naftalis told The Journal.

The investigation focuses on trading in Goldman shares between June and October 2008.

In the weekend leading up to the Buffett deal, Goldman CEO Blankfein, and other officers of the bank discussed ways to raise capital. Buffett's Goldman broker, Byron Trott, called Buffett, asking him what it would take to get him to do a deal, a person close to the situation told The Journal.

Buffett responded that he wanted preferred shares with a 10% dividend and warrants, which the parties agreed to on Sept. 23.

Prior to the deal with Buffett, Goldman's stock had plummeted more than 40%-to $86 intraday on Sept. 18. By the time the deal was nailed down and announced on Sept. 23, its shares had surged 45% to $125.

Berkshire has reaped profits totaling $750 million on the deal.

Berkshire Director Thomas Murphy told Bloomberg Television that Buffett remains comfortable with his investment.

"He's not concerned with the investment at all," Murphy said in an interview, citing a telephone conversation with Buffett. "He has to see what's going to happen on it, but I think he has great confidence in Goldman."

Buffett's investment was partly a bet on the "integrity" of Goldman Sachs, Berkshire director Ronald Olson told Bloomberg last week before the lawsuit was filed.

"When Warren and Berkshire stepped up to make this investment, it was a very strong statement of its belief, his belief, in not just the strength of Goldman but its integrity," Olson said in an interview.

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