Wednesday, March 2, 2011

The SEC's Inconvenient Case Against a Corporate Director

Yesterday, the SEC leveled charges of leaking inside information against Rajat Gupta, a former director of Goldman Sachs & Co. and Proctor & Gamble Co. He stands accused of passing inside information he obtained as a director of these two companies to Raj Rajaratnam, the founder of Galleon Group, an investment firm, who allegedly took advantage of that information to make millions in trading profits. Among other things, Gupta supposedly gave Rajaratnam advance notice of Berkshire Hathaway's 2008 $5 billion investment in Goldman. This investment was a crucial vote of confidence in GS, made at a time when the financial crisis cast doubt on the prospects of all major Wall Street firms. That this moment of salvation was allegedly corrupted by insider trading resulting from a Goldman director's leak only reinforces popular perceptions of Wall Street as a den of thieves.

Gupta has categorically denied the SEC's allegations, and pledged to fight the charges. Nevertheless, the case is rather inconvenient for Congressional Republicans hellbent on slashing the SEC's budget. Insider trading cases often involve high level corporate employees and executives. But they almost never reach the board of directors. Goldman was the premier investment bank in America during the financial crisis, and Proctor & Gamble is an iconic American business corporation. That these two companies would have a director allegedly leaking inside information to an investment firm illustrates why vigorous federal financial regulation is needed.

Insider trading isn't the focus of the Dodd-Frank bill. But uncovering alleged leaking by a director of elite American corporations casts a shadow over the complaints of the Chamber of Commerce and others that the Dodd-Frank legislation unfairly burdens honest and misunderstood businesses. If the allegations against Gupta prove true, they will remind us that private sector management and governance processes are not foolproof, and that federal oversight remains essential.

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