By Sam Mamudi, MarketWatch
NEW YORK (MarketWatch) -- A director of Goldman Sachs Group Inc. told a hedge fund manager about Warren Buffett's $5 billion investment in the bank before the deal was made public, according to a report published Friday.
The Wall Street Journal, citing a person close to the situation, said Goldman director Rajat Gupta gave Raj Rajaratnam, head of the Galleon Group hedge fund, advance notice of the deal.
Gupta told Goldman last month he wouldn't pursue another term as a director after being told that prosecutors were examining conversations between him and Rajaratnam.
The Journal quoted Gupta's lawyer as saying that Gupta "has neither violated the law nor done anything else improper."
When asked by Goldman's in-house lawyers, Gupta denied wrongdoing in the Rajaratnam matter, added the Journal.
Goldman has said Gupta will stay on its board until his term ends next month, though the Journal said he didn't take part in a board meeting on Monday. The paper also reported that since 2006, Gupta has earned $1.7 million from the directorship.
The news of Gupta's involvement with Rajaratnam comes as part of the government's investigation into the latter's affairs. On March 22, it alleged Rajaratnam or co-conspirators traded on non-public information about Goldman. The government has since revealed that Rajaratnam received advanced notice of Buffett's deal, said the Journal.
Buffett's investment in Goldman came at the height of the financial crisis in September 2008. His reputation as a savvy, value-based investor meant the deal was viewed as strong backing for the sector at a time when there were fears other banks would join Lehman Bros. in bankruptcy.
Friday's Journal said that the deal came about after Goldman reached out to Buffett as it looked for ways to raise capital. It asked Buffett what it would take for him to invest, said the paper. Buffett received preferred shares with a 10% dividend and warrants. The Journal estimated that Buffett's Berkshire Hathaway Inc. has made $750 million on the deal so far.
In the days before the investment, Goldman's stock had fallen more than 40% and reached $86 a share on Sept. 18. On the day the deal was announced, on Sept 23, the stock was at $125 a share. Shares of Goldman closed at $159.05 each on Thursday.
The stock is down about 14% in the past week, following news that the Securities and Exchange Commission is filing a civil lawsuit against the bank alleging fraud relating to the creation and marketing of a synthetic collateralized debt obligation.
Sam Mamudi is a reporter for MarketWatch, based in New York.Download the 2009 Warren Buffett Letter & 2009 Annual Report to Berkshire Hathaway Shareholders
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