Shocking Insider Trading Accusations Against Former Goldman Sachs Board Member (GS)

The SEC has just unveiled a case against Rajat Gupta, who is a former board member of Goldman Sachs (NYSE: GS) and Procter & Gamble (NYSE: PG). The SEC is alleging that Gupta tipped off billionaire hedge fund manager Raj Rajaratnam about a capital injection from Berkshire Hathaway (NYSE:BRK.B) during the height of the financial crisis, as well as about Goldman Sachs' quarterly earnings results ahead of the official release.

Rajaratnam, in turn, immediately traded on the information, making millions in profits. The indictment also alleges that Gupta tipped the hedge fund manager, who is currently under indictment as a result of other insider trading allegations, about material, non-public developments at Procter & Gamble. Reports indicate that Gupta was on the advisory board and an investor in Rajaratnam's Galleon hedge funds.

If the charges are in fact true, it is rather shocking. This is extremely blatant stuff. It doesn't get any more clear-cut than a hedge fund manager getting a tip from a board member about soon to be released earnings results and then trading on that information within minutes of receiving it. These allegations are very, very serious and it is accusations like this that undermine confidence in U.S. equity markets.

Furthermore, it is hard to fathom what would make Rajaratnam and Gupta to engage in this kind of blatant, illegal conduct. Both were extremely wealthy, and ostensibly, extremely successful. I think that the worst possible explanation for such conduct is that it was extremely widespread on Wall Street, and that the perpetrators had little fear of getting caught. What other logical explanation could there be for such blatant illegality?