by T. GormanPosted on Posted in SECActions

Former Goldman Sachs and Procter & Gamble director Rajat Gupta was charged with insider trading in a criminal indictment and an SEC complaint. He is alleged to have repeatedly tipped Raji Rajaratnam who is also named as a defendant in the Commission’s complaint. These may well be the most significant insider trading cases to stem from the Galleon investigation. They may also be the most difficult for the Manhattan U.S. Attorney’s Office and the SEC since they do not appear to be based on the kind of wire tap evidence that was critical in the conviction of Mr. Rajaratnam and others. U.S. v. Gupta, Case No. 11 crim 907 (S.D.N.Y. Unsealed Oct. 26, 2011); SEC v. Gupta, Civil Action No. 11 Civ 7566 (S.D.N.Y. Filed Oct. 26, 2011).

The criminal indictment alleges one count of conspiracy to commit securities fraud and five counts of securities fraud and contains a forfeiture allegation and a demand for a money judgment. The SEC’s complaint alleges violations by each defendant of Exchange Act Section 10(b) and Securities Act Section 17(a).

The indictment and the enforcement complaint center on three key transactions involving information Mr. Gupta obtained at either Goldman Sachs or Proctor & Gamble board meetings which he allegedly passed to his long time friend and business partner Raji Rajaratnam for trading:

The Berkshire investment in Goldman: At a September 23, 2008 meeting the Goldman Sachs board the directors approved the investment of $5 billion in their firm by Berkshire Hathaway. The announcement was made after the close of trading that day. Prior to that time and just “16 second after Rajat K. Gupta . . disconnected his telephone from the special meeting. . . “ his assistant called Mr. Rajaratnam and then connected the two men, according to the indictment. Two minutes before the market close the Galleon Tech Funds purchased about $27 million of Goldman Sachs stock. It was sold the next day at a profit of $840,000.

Goldman 4Q08 financial results: At a board meeting on October 23, 2008 the directors learned that the company would suffer its first quarterly loss since going public. It would be about $2.00 per share. “Approximately 23 seconds” after disconnecting from the telephonic board meeting Mr. Gupta called Mr. Rajaratnam. The two men spoke for 13 minutes according to the indictment. The next morning Mr. Rajaratnam caused the Galleon Tech Funds to liquidate its entire long position in Goldman stock, about 150,000 shares. On December 16, 2008 the quarter results were announced. By selling its holdings Galleon avoided a loss of “several million dollars” according to the indictment.

P&G 2Q08 results: A January 29, 2009 audit committee meeting which began at 9:00 a.m. reviewed the quarterly results which compared negatively to the guidance previously issued. At about 1:18 p.m. the same day Mr. Gupta called Mr. Rajaratnam from Switzerland. The two men spoke for eight minutes, according to the indictment. The same afternoon Mr. Rajaratnam caused certain Galleon funds to sell short about 180,000 shares of P&G stock.

None of the court papers claim that Mr. Gupta directly and personally profited from the insider trading. Rather, the indictment and the SEC complaint detail the long history of personal and business dealings involving the two men. Those include joint investments in various enterprises. In this regard the indictment alleges that the illegal tips enhanced the relationship of the two men: “Rajat K. Gupta . . provided the Inside Information to Rajaratnam because of Gupta’s friendship and business relationships with Rajaratnam. Gupta benefitted and hoped to benefit from his friendship and business relationships with rajaratnam in various ways, some of which were financial.”

Also absent from the suits is the rendition of wire tap evidence quoting the two men talking which proved critical in earlier Galleon criminal trials. The indictment and complaint appear to be based largely on the kind of facts and circumstances evidence keyed to meetings, telephone calls and trading that the SEC typically relies on. The indictment does suggest, however, that there is wire tap evidence supporting some charges. At the Galleon trial tapes were played which did however reference conversations between Mr. Gupta and Mr. Rajaratnam. This is echoed in the indictment. For example, following his conversation with Mr. Gupta on October 24, 2011 which is alleged to have concerned the quarterly Goldman financial results, the indictment specifies that Mr. Rajaratnam “spoke by telephone with a Galleon portfolio manager . . . [stating] that he had heard the day before from someone on the Goldman Sachs Board . . .[that the company] was losing $2 per share . . “ A similar allegation is made concerning the January 2009 P&G audit committee meeting. The criminal trial is scheduled to begin before Judge Rakoff on April 19, 2012.

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by T. GormanPosted on Posted in SECActions

Dark pools have been a subject of concern to Congress, the SEC and the public for years. Despite those concerns the pools are used by institutional and other large traders to cloak their trading activity and minimize its market impact. In contrast to the typical securities market where details about the order are publically displayed, dark pools make display little or no information about customer orders.

Now the SEC has brought its first action involving a dark pool. The misrepresentations about the manner in which the pool functioned and the undisclosed conflicts at the center of its operations suggest that the pool was only dark for some traders. In the Matter of Pipeline Trading Systems LLC, Adm. Proc. File No. 3-1460 (Oct. 24, 2011).

The actions named as Respondents Pipeline Trading Systems, LLC, Fred Federspiel and Alfred Berkley. Pipeline is a registered broker dealer and registered alternative trading system or ATS. Messrs. Federspiel and Berkley are, respectively, the founder and CEO and Chairman of Pipeline. The Order alleges violations of Securities Act Section 17(a)(2) and the pertinent rules under Regulation ATS.

Pipeline began operation in 2004 as an alternative trading system. The system operated as a dark pool. It assured potential users that Pipeline’s proprietary system would reduce market impact by denying day traders, predator dealers and other speculators the information they need to front run institutional orders. Customers were told that Pipeline utilized a trading system that was designed to prevent users from uncovering customer order information for the purpose of trading in front of those orders. Pipeline customers were also assured that all were treated equally.

Pipeline represented that it used a “natural” liquidity to fill orders. Such a system excludes trading opportunities generated by a dealer or by the trading venue itself specifically for the purpose of filling a particular customer order. Press releases suggested that rising trading volume on the venue accounted for the increasing number of “natural” trades.

In fact the representations were false and concealed a conflict of interest, according to the Order. The vast majority of the trades executed in the ATS were with Milstream Strategy Group LLC, a wholly owed affiliate of the pool. Milsream operated by trying to anticipate or predict the trading intentions of Pipeline customers. The affiliate would then trade elsewhere in the same direction as customers prior to filling their orders in the pool. Pipeline favored Milstream, and facilitated this trading, by at times making certain proprietary information available to its affiliate. The traders at this affiliate were compensated for giving Pipeline customers favored treatment.

The Respondents resolved the action by consenting to the entry of a cease and desist order based on the sections and rules cited in the Order. In addition, Pipeline agreed to pay a civil penalty of $1 million while Respondents Federspiel and Berkeley each agreed to pay a penalty of $100,000.

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