- Associated Press - Wednesday, October 26, 2011

NEW YORK (AP) — A former Goldman Sachs board member surrendered to federal authorities Wednesday to face criminal charges stemming from a massive hedge-fund insider-trading case.

Rajat Gupta was taken into federal custody, but the charges were not immediately disclosed.

The Securities and Exchange Commissioner originally brought civil fraud charges against Mr. Gupta in March. The SEC alleged that, at the height of the financial crisis, he passed along privileged financial information that helped enrich Raj Rajaratnam, a former billionaire hedge-fund manager who was the prime target of the criminal probe.

Mr. Gupta’s lawyer responded by accusing the SEC of launching a “flawed case premised in large part on unreliable evidence being used in an attempt to bring down a man of sterling reputation and remarkable achievements without the procedural safeguards historically accorded to all persons similarly charged.”

The Indian-born, Harvard-educated Mr. Gupta also has served on the boards of Procter & Gamble and the parent company of American Airlines. He was a guest at President Obama’s first state dinner.

Mr. Gupta’s name played prominently at the criminal trial earlier this year of Rajaratnam, who was convicted after prosecutors used a trove of wiretaps on which he could be heard coaxing a crew of corporate tipsters into giving him an illegal edge on blockbuster trades.

Jurors heard testimony that at an Oct. 23, 2008, Goldman board meeting, members were told that the investment bank was facing a quarterly loss for the first time since it had gone public in 1999.

Prosecutors produced phone records showing Mr. Gupta called Rajaratnam 23 seconds after the meeting ended, causing Rajaratnam to sell his entire position in Goldman the next morning and save millions of dollars.

Rajaratnam also earned close to $1 million when Mr. Gupta told him that Goldman had received an offer from Warren Buffett’s Berkshire Hathaway to invest $5 billion in the banking giant, prosecutors said.

In one tape played at trial, Rajaratnam could be heard grilling Mr. Gupta about whether the Goldman Sachs board had discussed acquiring a commercial bank or an insurance company.

“Have you heard anything along that line?” Rajaratnam asked Mr. Gupta.

“Yeah,” Mr. Gupta responded. “This was a big discussion at the board meeting.”

Prosecutors sought to maximize the impact of the Gupta tape by calling Goldman Sachs Chairman Lloyd Blankfein to testify that the phone call violated the investment bank’s confidentiality policies.

Mr. Gupta’s lawyer, Gary P. Naftalis, said Tuesday night that his client and Rajaratnam communicated for “legitimate reasons.” He said his client didn’t trade in any securities, didn’t tip Rajaratnam so he could trade and didn’t share in any profits.

“The facts demonstrate that Mr. Gupta is an innocent man and that he has always acted with honesty and integrity,” Mr. Naftalis said in an emailed statement.

Rajaratnam, who’s in his mid-50s, was sentenced this year to 11 years in prison. His lawyers had argued for 6½ to nine years. Defense lawyer Terence Lynam asked the judge to show compassion because of Rajaratnam’s illnesses, saying, “He does not deserve to die in prison.”

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