A Goldman Sachs Group Inc. director tipped off a hedge-fund billionaire about a $5 billion investment in Goldman by Warren Buffett‘s Berkshire Hathaway Inc. before a public announcement of the deal at the height of the 2008 financial crisis, a person close to the situation says.
The revelation marks a significant turn in the government’s case against Raj Rajaratnam, the hedge-fund titan at the center of the largest insider-trading case in a generation. Mr. Buffett’s investment in Goldman in September 2008 was a watershed moment in the financial crisis. One of the world’s savviest investors, Mr. Buffett helped allay fears about the instability of the financial system by backing America’s leading investment bank.
The new disclosure stems from a government examination into whether the Goldman director, Rajat Gupta, gave inside information to Mr. Rajaratnam. In a court filing March 22, the government alleged that Mr. Rajaratnam or “co-conspirators” traded on non-public information about Goldman. In a filing last week, the government provided more details about the information it alleges Mr. Rajaratnam received, including advance notice about the Buffett transaction with Goldman.
That information came from Mr. Gupta, a person familiar with the matter says. Federal prosecutors notified Mr. Gupta in a letter that they had intercepted phone conversations between him and Mr. Rajaratnam. Mr. Gupta told Goldman last month he wouldn’t seek re-election as a director.
Mr. Gupta hasn’t been charged in the case, and denies any wrongdoing in the matter. The government’s examination of him was first reported last week in The Wall Street Journal. Mr. Rajaratnam, founder of the Galleon Group hedge fund, is fighting criminal insider-trading charges in the case. He declined to comment on any discussions with Mr. Gupta. Goldman also declined to comment.
“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,” says Mr. Gupta’s lawyer, Gary Naftalis. A spokeswoman for the U.S. Attorney’s office declined to comment.
The Buffett investment buoyed Goldman’s shares. In the days leading up to the deal, the firm’s stock had slid more than 40%—to $86 intraday on Sept. 18. By the time the deal was announced, on Sept. 23, its shares surged 45% to $125. On Thursday, Goldman’s shares were up 12 cents to $159.05.
The investment, preferred shares in Goldman paying a 10% dividend, has been lucrative for Mr. Buffett: Berkshire has reaped profits totaling $750 million.
In papers filed in a New York federal court late last week, the government disclosed for the first time details about inside information Mr. Rajaratnam allegedly obtained regarding Goldman. Prosecutors said this included non-public information about the Berkshire investment in Goldman in September 2008, as well as Goldman earnings before their release to the public between June and September 2008, a time of market tumult.
Mr. Gupta wasn’t mentioned in the filing. A person familiar with the matter says that Mr. Gupta spoke with Mr. Rajaratnam about the non-public data regarding Berkshire. Goldman has made no public disclosures about the U.S. notification received by Mr. Gupta in the insider-trading probe.
The firm says Mr. Gupta will remain on as a director until next month, when his term ends. Since 2006, he has received a total of $1.7 million in compensation as a Goldman director. Goldman’s in-house lawyers interviewed Mr. Gupta about the matter, and he denied wrongdoing, a person familiar with the matter says.
Mr. Gupta didn’t participate in a Goldman board meeting this Monday after the Securities and Exchange Commission charged the firm in a separate civil case with fraud over a derivatives deal it arranged; Goldman denies wrongdoing in the SEC case.
Mr. Rajaratnam is one of 21 people who have been charged in the Galleon insider trading case. Of those, 11 have pleaded guilty while Mr. Rajaratnam and former hedge fund consultant, Danielle Chiesi, have vowed to fight the charges.
Mr. Gupta was told by prosecutors in a letter that his conversations with Mr. Rajaratnam were intercepted through wiretap recordings by the government of Mr. Rajaratnam’s phones. It couldn’t be determined whether wiretap recordings include discussion between Mr. Gupta and Mr. Rajaratnam of the Berkshire investment. Such wiretap recordings are at the center of the government’s case against Mr. Rajaratnam.
Under the federal statute governing wiretaps by the government, prosecutors send letters to some of the individuals whose conversations are captured in the recordings. Not everyone who turns up on the government’s recordings receives such a letter, however, unless the conversation in question is of interest to the government.
In order to bring charges against Mr. Gupta, prosecutors would need to believe that they could prove that Mr. Gupta knowingly provided Mr. Rajaratnam with inside information. Mr. Gupta, 61 years old, and Mr. Rajaratnam were close associates and once had a business partnership together. They met frequently, sometimes several times a month, at Galleon’s midtown Manhattan offices, people familiar with the matter say. Mr. Gupta was invited to attend parties hosted by Galleon, one of those people says.
Mr. Gupta was head of consulting firm McKinsey & Co. from 1994 to 2003 and remained at the firm until 2007; he also sits on the board of AMR Corp. and Procter & Gamble Co. There is no indication that trading in shares of either of those companies is being scrutinized by the government. McKinsey, AMR and Procter & Gamble declined to comment.
The exact nature of the conversation between Mr. Gupta and Mr. Rajaratnam couldn’t be determined. Goldman declined to comment on when its board was notified about the Buffett transaction.
In the weekend leading up to the 2008 Buffett deal, Goldman Chief Executive Lloyd Blankfein, co-presidents Gary Cohn and Jon Winkelried, Chief Financial Officer David Viniar and others discussed ways to raise capital. They zeroed in on Mr. Buffett. His Goldman broker, Byron Trott, who has since left Goldman, called Mr. Buffett, asking him what it would take to get him to do a deal, says a person close to the situation.
Mr. Buffett responded that he wanted preferred shares with a 10% dividend and warrants. By the time the market closed that day, Sept. 23, 2008, Mr. Buffett’s deal had been nailed down.
Goldman, meanwhile, worked the phones to sell an additional $5 billion in common stock to other investors. The two deals—$5 billion from investors and the $5 billion preferred stock investment—from Mr. Buffett were announced that day, helping set the stage for a powerful recovery for both Goldman and the financial world.
—Susanne Craig contributed to this article.