With American authorities formally charging the former McKinsey managing director, Rajat Gupta, with insider trading, questions are being raised about his future on the boards of several Indian institutions.

On March 1, the U.S. Securities and Exchange Commission (SEC) announced insider trading charges against Mr. Gupta, formerly on the boards of both Goldman Sachs and Procter and Gamble, for illegally tipping off a hedge fund manager with confidential information about quarterly earnings at both firms and an impending $5 billion investment in Goldman.

The tips allegedly earned more than $18 million for the Galleon Group, whose founder Raj Rajaratnam will face insider trading charges in court later this week. Mr. Gupta was a direct or indirect investor in some of Galleon's funds at the time, according to the SEC.

Lawyer denies charges

His lawyer Gary Naftalis refuted the charges. “Mr. Gupta has done nothing wrong,” he said in a statement. “There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo.”

Mr. Gupta stepped down from the Goldman Sachs board last March, barely a month before reports suggested that U.S authorities were probing his role in passing on tips to Mr. Rajaratnam, a friend and business associate. He also resigned from the Procter and Gamble board after the SEC's order, “to prevent any distraction,” according to a company spokesman.

However, Mr. Gupta, one of the best-known Indian Americans in the business world, continues to remain as chairman of the boards of several Indian institutions. That includes the Indian School of Business (ISB) and the Public Health Foundation of India.

ISB, Hyderabad, a premier business school which Mr. Gupta helped to found, defended its chairman in an official statement. “We note that the U.S Securities and Exchange Commission (SEC) has initiated administrative and civil proceedings against our Chairman, Rajat Gupta. We also note the statement of counsel for Rajat Gupta, which asserts that the allegations are totally baseless. The ISB community is confident that Rajat Gupta will be vindicated. He continues to be the Chairman of the ISB Executive Board,” said the statement.

While the PHFI offices were shut on Wednesday and thus unavailable for an official response, several board members contacted privately also declined to comment. Some said the issue could be raised at PHFI's executive committee meeting on March 21 and its board meeting on April 1.

IIT Delhi alumnus

Mr. Gupta is an alumnus of the Indian Institute of Technology, Delhi and shot to fame when he was appointed the first non-American head of consulting firm McKinsey.

The US SEC has been investigating his role in the insider trading scam revolving around Mr. Rajaratnam for almost a year. It now says Mr. Gupta called Mr. Rajaratnam immediately after a telephonic meeting of the Goldman Board in September 2008 approving a $5 billion investment by Berkshire Hathaway. Within a minute of the Gupta-Rajaratnam call and just minutes before the close of the markets, Mr. Rajaratnam arranged for Galleon funds to purchase more than 1,75,000 Goldman shares. They were sold the following day after the information became public, making illegal profits of over $900,000. Similar telephone calls provided Galleon with early, insider information regarding quarterly results, according to the SEC.

Narayan Lakshman reports from Washington:

Robert Khuzami, Director of the SEC's Division of Enforcement, said: “Mr. Gupta was honoured with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets,” adding, “directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions.”

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