On
16 June 2012, a twelve-member jury convicted the India
born and educated Rajat Gupta, former head of consultancy
major McKinsey and Company and former board member at
Goldman Sachs and Procter and Gamble (among other firms).
He was found guilty on three counts of securities fraud
and one charge of conspiracy. All convictions were related
to insider trading in Goldman stocks, which were among
the charges on which hedge fund manager Raj Rajaratnam
of Galleon Group had been earlier convicted. Rajat Gupta,
the jury concluded, provided confidential information
to Rajaratnam with regard to Goldman Sachs that permitted
him to enter into and profit from trades based on insider
knowledge.
One member of the jury that handed down the conviction
suggested that it was an unfortunate and bad end to
a story of somebody living the American dream of economic
and social success of the highest order for a person
who was not born privileged. Having been celebrated
in India as a management guru and role model, this conviction
has also turned out to be a bad end to a story that
every member of India's professional elite in the neoliberal
era is being tutored to want to live. Gupta had lived
out the middle class Indian dream as well. Born to middle
class parents, he had to struggle against the odds resulting
from being orphaned by the death of his parents when
he was in his teens. He earned his entry into the Indian
Institute of Technology in Delhi and found his way to
the Harvard Business School for an MBA. He then joined
McKinsey and Company and rose to be elected its managing
director in 1994, to which position he was re-elected
twice to hold office for a total of nine years.
Wealth or net worth, estimated at $84 million in 2008
by his personal banker, was only one fall-out of Gupta's
career. He seems to have earned a reputation for combining
dynamism (epitomised by the aggressive expansion of
McKinsey under his leadership) with the ability to deliver
sage advice and promote philanthropic causes. In India,
he was also known as an institution builder, having
been central to the establishment of the well-funded
and backed Indian School of Business, which won itself
an instant reputation. Given these and many other features
of his track record, admirers and analysts the world
over are puzzled by the evidence and circumstances leading
to his conviction. As his lawyer, Gary Naftalis, is
reported to have argued before the jury: "Rajat
Gupta was in the seventh decade of an accomplished and
praiseworthy life. It strains common sense that [he]
would... throw away everything he had done for 40 years,
and wilfully and knowingly commit crimes. That just
doesn't make sense." (John Gapper, The Financial
Times, June 20, 2012).
There are many reasons why even in the US the Gupta
case has grabbed headlines, not least of which is the
fact that he is among the highest executives in terms
of position and stature that government prosecutors
have been able to bring to conviction. They include
three that should have favoured Gupta's acquittal rather
than conviction. The first was his reputation, whether
cultivated or not, as a sage and saint in the management
world. The second was the fact that the prosecution
did not have hard evidence in the form of taped conversations
that established his direct and personal involvement
in Galleon's insider trading operations. And the third
was the perception that given the wealth and position
he had it did not make sense for him to commit crime
to earn what he could have from the Rajaratnam connection.
The conviction was in the first instance based on circumstantial
evidence that strongly suggested that Gupta had passed
on information garnered as a director of Goldman Sachs
to Rajaratnam, which the latter used for profit. Particularly
damaging was the evidence that on September 23, 2008,
Gupta called and spoke to Rajaratnam almost immediately
after the Goldman Sachs board had approved through a
conference call a $5 billion investment in Goldman shares.
Minutes later, rushing to beat the closing of the market,
traders ordered by Rajaratnam bought $40 million worth
of Goldman shares to profit from a rise in their prices.
The jury also found convincing the prosecution's argument
that Gupta informed Rajaratnam in October 2008 that
Goldman was set to report a drop in profits over the
quarter, and that Rajaratnam then made good use of it
to trade in Goldman Sachs' equity for profit. A damaging
piece of evidence here was a recording in which Rajaratnam
declares that he had heard from somebody on the board
of Goldman that the company was set to report a loss.
These charges stuck even though the jurors were scrupulous
enough to acquit Gupta on other similar charges relating
to Galleon's trading in the stocks of Procter and Gamble
on the grounds that the evidence was not strong enough
to implicate Gupta. What was most damaging perhaps was
the failure of the defence to convince the jury that
since Gupta and Rajaratnam had fallen out as partners
by the time the events of 2008 occurred, Gupta could
not have benefited from providing Rajaratnam with information
and would not have provided any with that purpose. In
sum, an attempt was made to rule out conspiracy, though
there were occasions such as one underlined by the prosecutors
in which Gupta in a conversation with Rajaratnam, "launches
right into a detailed discussion of what happened at
a Goldman board meeting in St Petersburg as if he's
talking about what happened at a Yankees game."
However, the jury was not persuaded. It seems to have
been partly swayed by the fact that Rajaratnam had put
in a substantial investment in a firm titled New Silk
Route Partners (founded in 2006) that was a joint venture
with Gupta and others and allegedly Gupta's dream project.
Gupta and Rajaratnam, together with a third patrner,
also formed GB Voyager Multi-Strategy Fund in 2007,
with Gupta investing $10 million (which he claims to
have subsequently lost leading to his estrangement from
Rajaratnam). In these and other ways Gupta was seen
to have had a continuing business relationship with
Rajaratnam.
What must have also been crucial to the jury's conclusions
is the role of protégé Anil Kumar, a McKinsey
partner and Gupta's collaborator in the creation of
the Indian School of Business. Taped conversations indicate
that Gupta knew that Kumar was being paid $1 million
a year for leaking information to Rajaratnam. Kumar,
who had pleaded guilty to providing inside information
to Rajaratnam, talked in his testimony of a number of
occasions prior to 2008 when he had engaged in joint
business discussions with Gupta and Rajaratnam. As Gupta's
junior collaborator in the creation of the Indian School
of Business, Kumar reportedly collected a donation of
$1 million from Rajaratnam (Kara Scannell, The Financial
Times, June 1, 2012). Gupta was too intertwined with
the two individuals who had either been held guilty
or had pleaded guilty to be considered completely in
the clear because of his reputation.
Finally, according to foreman Rick Lepkowski, the jury
found the evidence "overwhelming". If right,
that leaves those who raised the question "Why?"
still searching for an answer. Perhaps it is not too
difficult to find. Gupta must have fought his way up
on the ladder in the rough and tumble of American corporate
competition to get to the top and stay there as long
as he did. There is too much evidence to indicate that
in such battles rules and ethics are often violated.
To expect Gupta to be all saint is not to misunderstand
him, but to misrepresent the character of the corporate
world.
In fact, there is evidence that he was perhaps a bit
too aggressive even for the corporate world. In a Bloomberg
report dated May 17, 2011, John Helyar, Carol Hymowitz
and Mehul Srivastava, had the following to say once
investigations against Gupta had begun: "At McKinsey,
a firm known for keeping secrets, Gupta harboured a
few of his own. As the managing director and then as
senior partner of McKinsey for four more years before
he retired, he ran his own consulting business on the
side -- a violation of McKinsey rules. He and Anil Kumar,
a former McKinsey partner who last year pleaded guilty
to passing confidential information to Rajaratnam, set
up their own consulting company. Gupta also independently
advised Genpact Ltd. (G), a Gurgaon, India-based firm
that manages business processes for other companies.
That work, too, broke McKinsey's rules." According
to them, "McKinsey conducted an internal investigation
of Gupta and Kumar, and has cooperated with prosecutors
and the SEC."
The point to note is that till the investigations by
the SEC and the Justice Department began none of these
accusations were voiced publicly. But things change
when the law takes its course. Saints and sages turn
inexplicable villains. But underlying all this is the
view that when it comes to corporate culture what matters
is winning, even if that involves violation of norms.
What is appropriate is seen as definable when it comes
to government officials, doctors and such others, but
not to business leaders. Unless the law catches up with
them.
In this case, the outcome has been particularly depressing
for a section of India's post-liberalisation elite.
Rajat Gupta was one of India's non-resident icons, representing
the ability of the home grown to sit atop the global
corporate establishment. He walked with ease in and
out of India's corridors of power and its corporate
circles. He also made it a point to show that he wants
to give back to India, feeding a peculiar nationalism.
The Indian School of Business was almost shaped as an
incubator for future Gupta clones. His conviction is
therefore a great disappointment. Not surprisingly,
it has been given far less attention than other less
sensational news events would attract.
*
This article was originally published in the Frontline
Volume 29 - Issue 13 : Jun.
30-Jul. 13, 2012.
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