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Why did rich Rajat Gupta turn to grubby business of insider trading?

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By Bennett Voyles

NEW YORK: I saw Rajat Gupta once, at a Wharton School conference, moving through the crowd like a well-mannered panther. He had a nice laugh, and the kind of sleekness I tend to associate with actors, politicians, and TV evangelists.

Presumably he’s still like that now, perhaps minus the laugh. Facing as much as 105 years in prison for alleged insider trading can’t be good for the mood, especially when you’re almost 63. After a long and successful career as a corporate adviser, the former CEO of McKinsey, one of the world’s most successful consultancies, has landed in about as bad a strategic position as you could imagine.

Federal prosecutors claim that Gupta, as a director of Goldman Sachs and of Procter & Gamble, leaked information to his friend and business associate Raj Rajaratnam, the CEO of the Galleon Group of hedge funds, about key corporate developments right after he learned of them in his board meetings.

The Feds have phone records, and the inconvenient fact that Galleon bought or sold huge blocks of stock in these companies right after these calls. All in all, it doesn’t look good.

The Wise Man
What makes this scandal more disturbing in some respects than other recent corporate scandals is that Gupta made his name as a professional wise man. Unlike say a George Soros who had a few decades of sharp-elbowed trading before he graduated to a statesman, Gupta seems to have sprung full grown from the brow of the Harvard Business School, becoming a partner in the world’s most famous business consultancy by age 32, by 46, the first Indian-born CEO of a multinational corporation.

Most of the time, it’s easy to spot fatal flaws that lead to a final unraveling, especially in retrospect. Think of Dominique Strauss-Kahn or Bill Clinton and their womanising, or the countless politicos undone by liquor. Greed too is usually apparent.

But Gupta – friend, father, philanthropist – seems in his public image to look as if he should be above a career as a corporate spy.

The charges seem odd. The story prosecutors tell isn’t just that he dropped an imprudent word in someone’s ear at a party or gave a relative a stock tip but that he would call up immediately after the end of a series of board meetings in 2008 and 2009. In fact, he filed the news of his corporate board meetings with the speed and diligence of a Reuter’s reporter out to scoop Bloomberg, once just 16 seconds after the meeting broke up.

So why did Gupta do it, if he did it? Why would a man with four houses and a $100 million risk everything by sending in all these dispatches?

I start with a bit of web research on his rapid and unlikely rise – the Calcutta boy orphaned at 18, who helped keep his siblings together, who excelled at the Indian Institute of Technology at Delhi, who wowed them all at Harvard Business School, and cracked the glass ceiling at McKinsey, the most elite management consultancy. No one has a bad word to say about him.

Then I fire off emails to everyone I can think of who might have an opinion. One economist answers – sorry, he says, I don’t know anything about this situation beyond what I read in the papers. As if that ever stopped an academic, I think. And a law professor I can usually rely on for a quote in time of need? Vanished.

Friends, Family
The only person I can find is a source I’ll call Old Faithful. One of those professors who’s so busy writing and consulting he’s almost a mini-McKinsey on his own, one of those Indian-American business school professors who spend half their time shuttling between their campus and Noida and Bangalore. Yet he always makes time for a call when his plane touches down. This time, though, he’ll only meet me halfway, preferring not to be quoted by name because of the sensitivity of the issue.

The professor thinks Gupta’s sterling image by itself may have helped lead to trouble. Being a celebrity CEO “gets to you. You feel you are above the law,” he says. This adoration doesn’t do good things to people It’s like with some of the popular religious leaders back in India, he adds, “most of the gurus typically have a dark side to their lives”.

But I think that only explains why he thought he could get away with it, not why he did it. Certainly self-interest played a role – any way you slice it, it’s hard to argue that tipping off Galleon, a firm where he was an investor, wasn’t a good thing for Gupta – but that doesn’t seem sufficient in this case. Opportunities to make buckets of money legally aren’t in short supply for someone in Gupta’s position.

Celebrity CEOs can make money easily, speaking, advising, and bending the ear of powerful friends. Like the girl in the fairy tale who spits out jewels every time she opens her mouth, the celebrity CEO usually doesn’t have to do a whole lot to “create value”.

Maybe he actually was a bit worried about money, the professor adds. Often, he’s noticed, when honest government officials back home hit their 40s, they start worrying about providing for their families, particularly their daughters’ marriages, and turn corrupt. And yes, it’s true that he has four daughters, but how could he feel short? Even today, most people find it possible to get by with $100 million.

Wildest Dreams
I test out another theory on my professor, something I found in Gupta’s 2010 commencement speech to the Indian School of Business, one of a number of institutions he helped found. He gave graduates a talk that included three points of advice: first, don’t worry so much about the trajectory of a career as what each job can teach you. Second, keep asking yourself what you can do to become a better professional. And third: “…try to make other people successful. You will work in businesses, you will work with lots of people. Try to make them successful.

The reason for that is simple. You know, no matter how good you are, how brilliant, how fantastic, by your own efforts you can only achieve so much. But if you work on making other people successful, they will in turn make you successful beyond your dreams.”

Of course, Gupta then suggested that graduates should be guided by a set of values, not expediency. It’s easy to snicker at that now that this scam has been exposed in the press but maybe Gupta was actually too intelligent and too serious a person not to be guided by some set of values. Perhaps not the values taught in business ethics class but the kind someone might learn as an orphan in Calcutta: you take care of your friends, you take care of your family. This gets me partial credit with the professor. Insider trading is common all over South Asia, motivated largely by friendship, the professor says. “It’s part of the culture.”

Now some of these South Asian executives and traders have moved their old insider-trading habits to a new world, and he predicts that the US government will continue to crack down to get them to change their old habits, the same as they’ve done with every new group that came in. “Just like Italians who became mafia in America, who just kept doing things in a way that didn’t fit in this new context,” he says.

Playing Catch Up
So did Gupta do it for friendship, the same reason that Rajaratnam reportedly gave when he refused to testify against him last year, even though it would have meant years off his jail sentence? I think of the Godfather movies, Omerta, “the code of silence” and all that honour-among-thieves stuff.

No, that’s not quite it, the professor says. His theory about Rajaratnam is that his refusal to talk had less to do with his friendship with Gupta than with other friends – the sources of ‘hot money’ from Sri Lanka that allegedly ended up in his fund. This makes sense – after all, I think, sleeping in a Butler, North Carolina federal prison beats sleeping with the fishes.

The professor says the main theory he’s heard in a dozen conversations with people who know Gupta better than he does is that Gupta’s spying had less to do with friendship and more to do with trying to catch up with his old peers from IIT. Unlike the guys who went into the corporate world and did all right for themselves, his school buddies who went out to Silicon Valley as engineers became not millionaires but billionaires as entrepreneurs and venture capitalists, and it gnawed at him.

Gupta might have done well as a corporate leader – global respect, the ear of CEOs and UN secretaries, even a seat at President Obama’s very first state dinner – but compared to his former school pals at the Indian Institute of Technology, he was strictly small potatoes. He wanted to catch up.

(Bennett Voyles, formerly with the Economist Intelligence Unit, is a frequent contributor to Knowledge@Wharton and the ParisTech Review )

(sourced from economic times)

(URL: http://economictimes.indiatimes.com/news/international-business/why-did-rich-rajat-gupta-turn-to-grubby-business-of-insider-trading/articleshow/10534160.cms?curpg=3)

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Posted by on Oct 30 2011. Filed under Latest News. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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