[JURIST] Former Goldman Sachs [corporate website] Director Rajat Gupta was arrested [complaint, PDF] Wednesday on five counts of securities fraud and one count of conspiracy to commit securities fraud. The charges come in connection to his relationship with Raj Rajaratnam [JURIST news archive], co-founder of the Galleon Group, who was sentenced to 11 years [JURIST report] in federal prison for insider trading earlier this month. The US Securities and Exchange Commission [official website] unsealed the findings of its investigation which allege that Gupta disclosed material and nonpublic facts to Rajaratnam that he learned during board meetings. One of the allegations holds that Gupta informed Rajaratnam of Berkshire Hathaway Inc.’s investment into Goldman Sachs in September 2008. It also alleges that Gupta disclosed details of Goldman Sachs’ financial situation in both the second and fourth quarter of 2008. Pree Bharara, the US Attorney in New York, asserts that Gupta failed to do his duty [press release, PDF]:

Rajat Gupta was entrusted by some of the premier institutions of American business to sit inside their boardrooms, among their executives and directors, and receive their confidential information so that he could give advice and counsel for the benefit of their shareholders. As alleged, he broke that trust and instead became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Mr. Gupta’s breach of duty.

The government might have a difficult time proving its case since the most crucial evidence against Gupta came out in Rajaratnam’s trial in the form of phone calls between Rajaratnam and his employees. Those phone calls might not be admissible in court if the judge deems them hearsay.

Rajaratnam was convicted of 14 counts of insider trading [JURIST report] in May in the largest hedge fund insider trading case in US history. Several other defendants have pleaded guilty in connection with the case. Former hedge fund consultant Danielle Chiesi pleaded guilty [JURIST report] in January. Former IBM senior vice president Robert Moffat was sentenced to six months in prison in September and ordered him to pay a $50,000 fine for his role in the scheme after pleading guilty [JURIST reports] in March 2010. Former Intel Capital executive Rajiv Goel pleaded guilty [JURIST report] to insider trading charges in February 2010. Rajaratnam, Chiesi, Goel and Moffat were arrested in October 2009 and charged [complaint, PDF] along with two other individuals and two business entities with insider trading. The complaint alleged that the individuals provided Galleon Group and another hedge fund with material nonpublic information about several corporations upon which the funds traded, generating $25 million in illicit gain. Rajaratnam and Chiesi originally pleaded not guilty [JURIST report] in December 2009 after being indicted for insider trading.