EDITION 3

WeeklyAugusT 10, 2012

The Sentencing of Rajat Gupta: Why It Matters

Pfizer Chooses Its Battles Wisely

Just Say No? Canada’s Rona Does

Your Company Has Social Media Nailed. Now What?

2119131536/shutterstock.com

Twenty-five years later, we have hedge fund

bigwig Raj Rajaratnam setting a new record

as he serves an 11-year sentence for similar

misdeeds.

Maybe the lesson is that you’re better off get-

ting caught committing financial crimes in

prosperous times. Maybe it’s that persistent

violations over decades wear down public

patience, accelerating demand for ever more

severe punishments that, it’s fancied, will bet-

ter deter future wrongdoers.

In any event, the conviction of Rajat Gupta for

leaking insider information to Rajaratnam has

naturally generated much discussion about how

the retired head of McKinsey & Company and

former Goldman Sachs board member will fare

when Judge Jed Rakoff of the Federal District

Court in Manhattan passes sentence in October.

(Gupta was convicted on one count of conspira-

cy and three counts of securities fraud.)

Yet the discussion is more than just an odds-

maker’s game. Gupta’s ultimate fate raises

substantive issues that speak to public percep-

tion as well as the narrower considerations

that drive judges, influence the future actions

of enforcement officials, and impact markets.

Nor is the dynamic by any means simple; there

are conflicting sentiments at play that touch

on some of our deepest-seated cultural predi-

lections. Based just on what we heard from

the jurors after the trial, it does indeed seem

clear that Mr. Gupta inspires more complex

feeling than has ever been true of a Wall Street

defendant.

First, the jury…

Mr. Gupta’s peers spent less than two days—

under 10 hours, by some accounts—to reach

its verdict. By contrast, the jury took over

two weeks to convict Rajaratnam, despite the

fact that Rajaratnam was found to have prof-

ited financially from his crimes, which Gupta

did not.

Moreover, the evidence against Gupta was

almost all circumstantial. True, it was over-

WHY IT MATTERsTHE sENTENcINg Of RAjAT gupTA:

Richard s. Levick, Esq.Originally Published on Forbes.com

Farsh/shutterstock.com

Here’s a quaint news item from 1987 about how a certain Ivan F. Boesky, one of the world’s most powerful speculators and symbol de jour of Wall Street greed, was sentenced to three years in prison for insider trading-related violations. It was one of the longest jail terms ever imposed in such a case and, apparently, a source of satisfaction to then—U.S. Attorney Rudolph Giuliani.

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Rakoff’s impatience with the sentencing guide-

lines—he has called them “the mirage of some-

thing that can be obtained with arithmetic

certainty”—and a proven tendency to impose

lesser sentences.

It would seem as if Gupta has further reason to

be optimistic as the federal sentencing guide-

lines do differentiate between those who profit

from insider trading and those who don’t. On

the other hand, the prosecution will likely ar-

gue that Gupta is responsible for all the trading

cited in the indictment (an aggregate $16 mil-

lion in profit for Rajaratnam’s Galleon Group),

and that he likewise “abused a position of

trust.” As such, Gupta could be looking at eight

to 10 years, according to the guidelines.

Yet prosecutors won’t want the judge to per-

ceive them as vindictive as Rakoff has a history

of bristling at that. For example, in sentencing

lawyer Marc Dreier to 20 years for his notori-

ous Ponzi scheme, Rakoff summarily rejected

the government’s request for 145 years. Last

September, he gave Winifrid Jiau, convicted of

selling confidential information, less than half

the 10 years recommended by the government.

Law professor Peter Henning thinks Gupta

will do even a little bit better than Jiau; he

anticipates three years as the likely outcome.

There will be some irony in that if, after three

decades and so much accelerated demand for

harsher deterrence, Gupta winds up serving

the exact term as Ivan Boesky.

Henning observes that Gupta has a significant

history of charitable giving, which “seems to be

persuasive to judges.” It’s no doubt an estab-

lished take-away for businesses, to build up

reputational equity against the day when they

may face trial in a court or law or the Court of

Public Opinion.

More significant in this case is Rakoff’s assess-

ment of how his own decision will affect the

marketplace; as former federal judge Richard

Holwell, who sentenced Rajaratnam to 11

years, puts it, the extent to which he thinks it

will “give a strong warning to portfolio manag-

ers on Wall Street.”

No doubt, the very fact that someone of

Gupta’s stature will go to jail sends a welcome

message, not just to those managers but to

investors who still pine for a marketplace not

gamed by a handful of insiders.

But the best argument for a relatively stiff sen-

tence takes us back to that issue of motive by

which Gupta supporters would seek to at least

partially excuse him. To the contrary, Gupta’s

motive ought to work against him. The very

fact that he was driven by those “intangible

benefits,” rather than money, proves that Wall

Street’s culture itself, and its whole mélange

of winks and nods, faces sentencing on

October 16.

Judge Rakoff knows that culture very well.

Perhaps he also knows that, if we don’t com-

pel the heedless behavior it encourages to

change, then we’ve achieved very little since

1987 when a mere three years for Boesky was

deemed by some to be draconian.

Richard S. Levick, Esq., President and CEO of LEVICK,

represents countries and companies in the highest-stakes

global communications matters — from the Wall Street

crisis and the Gulf oil spill to Guantanamo Bay and the

Catholic Church.

whelmingly circumstantial, yet such a fast

verdict is still noteworthy absent a smoking

gun. The prosecutors relied on phone and

transaction records without need of the wire-

taps that were decisive in Rajaratnam’s case.

The practicability of circumstantial evidence in

such cases was thus strategically validated and,

believe some observers, will only inspire the

government to be more aggressive in

the future.

One might conclude that Gupta must have

been a most unsympathetic defendant whose

position (and personality) made it easier for

the jury to reach their conclusion. In fact, the

opposite is true. The jury convicted someone

they actually found very sympathetic, and yet

they did so in a fraction of the time it took to

find his more flamboyant and purportedly

greedier cohort guilty as charged.

Gupta did not arouse sympathy simply because

he has a pleasant personality. Importantly, his

career embodies values that Americans hold

highest. He was an orphan. He went to Har-

vard Business School on a scholarship. He rose

to dizzying heights. The jury foreman called it

a “storybook life.”

“We were hoping he would walk out of this

courthouse,” said another juror. Apparently,

though, the jurors voted their heads, not their

hearts—no small feat when the defendant per-

sonifies everything you believe in. Some jurors

were crying when the verdict was read. (In this

context, the decision by the defense not to call

Gupta to the stand, and play on those sympa-

thies even harder, is rather interesting.)

Closely related to the issue of sympathy is

the issue of motive. Gary Naftalis, Gupta’s

superstar lawyer, argued that a 63 year-old

man would not risk everything for money he

neither made nor needed. Post-trial comments

suggest that jurors felt Gupta was manipulated

by Rajaratnam.

Rajat Gupta an unwitting dupe? That seems a

gross underestimation of a man who’s cir-

cumnavigated the financial markets as ably as

anyone in recent history.

Here the jurors may have missed the compel-

ling tie that bound Gupta to Rajaratnam but,

if so, it’s not the jurors’ fault. They just don’t

happen to live and work in a world like Wall

Street where favors are done and relation-

ships cultivated at any cost; where informal

conversations slip into illegality with amazing

nonchalance; where secrets are traded like

marbles; where insider trading is, as Gupta’s

prosecutor, U.S. Attorney Preet Bahara put it, a

“performance-enhancing drug.”

It’s called “intangible benefits.” Because he

sought and savored those benefits so avidly,

Rajat Gupta, for all his virtues, must do time.

The question is, how much time?—which

brings us to October 16, 2012 when Judge Ra-

koff will decide that very question.

Here too complex issues are at play, including

the extent to which the judge may be affected

by, or at least in synch with, the palpable

sympathies of the jury. In Gupta’s favor, add

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monticello/shutterstock.com

Pfizer Chooses its Battles Wisely

Earlier this month, Pfizer Consumer Healthcare

announced that it had agreed to activist de-

mands that its Centrum brand amend its mar-

keting practices. With the prospect of a lawsuit

from the Center for Science in the Public Inter-

est (CSPI) looming, the company agreed to

discontinue claims that some Centrum prod-

ucts promote “colon health” and “breast

health.” The company also agreed to qualify

statements made on the Web and in traditional

advertising that certain supplements contrib-

ute to “heart health.” All of the changes, includ-

ing revised product labeling, will be in effect by

January 5, 2013.

The agreement represents one of those rare

instances in which a major corporation—they

don’t get any bigger than Pfizer in the pharma-

ceutical industry—quickly backs down in the

face of activist pressure. Some may wonder

why Pfizer would make such a move. But don’t

fault the company for capitulating just yet.

There are least three good reasons why Pfizer’s

decision made sense under the circumstances.

First, Pfizer put the issue in the rear view mir-

ror without much negative attention. And the

company probably earned a few points with

the consumer crusader crowd at the same time.

At the very least, it took a potentially trouble-

some weapon away from its antagonists. With

rumors swirling that the company may spin

off its consumer business before long, Pfizer

has every reason to want to take off the table

any lingering issues that could make the unit

less attractive to potential suitors.

Second, by voluntarily agreeing to change its

practices Pfizer took the regulators out of the

game. The U.S. Food and Drug Administration

(FDA) doesn’t have the sharpest teeth when it

comes to product labeling in the supplements

market. Why give the Agency any incentive

to get involved? Right now, regulatory agen-

cies are feeling emboldened. They are eager to

show activist supporters that they will go after

big business on even the shakiest pretext. That

kind of scrutiny is one factor that could lead

potential acquirers of Pfizer’s consumer unit to

offer a lower price.

And third, Pfizer has avoided a fight that

would not have been worth winning. If

you’re big company facing an issue like this,

and the product involved does not represent

a large percentage of your business, your

overall interests are probably better served by

flight than fight. Save your reputational and

political capital for more important battles

sure to come in an aggressive legal and regula-

tory environment.

David Bartlett is a Senior Vice President at LEVICK and a

contributing author to Levick Daily.

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David BartlettOriginally Published on LEVICK Daily

Rejecting an unsolicited bid by U.S. home improvement retailer Lowe’s, Canadian competitor Rona Inc. said that its board had determined the proposal wasn’t in the best interests of its shareholders.

Kathleen WailesOriginally Published on Seekingalpha.com

I. Pilon/shutterstock.com

Just say No?CaNada’s roNa does

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A hostile deal clearly will not succeed, so if

Lowe’s wants to prevail, it likely must increase

its offer, gain the support of the Rona board,

then get the Rona board to gain governmental

support. With a highly motivated buyer, that

may well happen. In the meantime, Lowe’s

credit was put on a credit watch with a nega-

tive outlook by S&P, although S&P acknowl-

edged that the potential acquisition might be

additive to Lowe’s operations. Lowe’s stock

took some pain today as a result.

Any acquirer must take into account institu-

tional attitudes toward a potential transaction.

Laying the proper groundwork with regula-

tory authorities, governmental bodies, union

officials and local opinion leaders is central to

success. Conversely, any company that wants

to escape a foreign acquirer can marshal these

forces to create a virtual poison pill.

Lowe’s can still win this fight, but it first must

win over Rona management. Investors also can

hope for a competing offer that might be more

acceptable both to the company and to Cana-

dian constituencies, or for a revised corporate

strategy involving greater speed and upside

potential. While that’s running its course, this

is a play for momentum investors willing to

take the risk that the deal will never happen.

Disclosure: I have no positions in any stocks mentioned, and

no plans to initiate any positions within the next 72 hours.

Kathleen Wailes, Senior Vice President & Chair, Financial

Communications Practice

As Jerry Seinfeld always said, “Really?” The

stock price says this story isn’t over. This

contest is a perfect example of the battle be-

tween investor desire for a short-term catalyst

and corporate management’s desire to build

long-term shareholder value and maintain its

independence.

The bid of $14.50 valued RON at C$1.76 billion,

representing a premium of about 22% over

Monday’s close and was 37% of the price ahead

of the offer. RON has traded in a 52-week range

of C$8.64 to C$11.92.

The Quebec provincial government also stated

today that a takeover of Rona is not in the

province or Canada’s interest, which will make

it very difficult for a higher offer to succeed

unless Quebec relents. The Quebec finance

minister indicated that his government will

support Rona management in a takeover fight.

In addition, a foreign acquisition of Rona must

be cleared by the federal government, which

last year blocked the high-profile, $40 billion

attempt by Australian BHP Billiton (BHP) to

acquire Canadian company Potash Corp (POT).

The federal government in Canada can block

takeovers using the Investment Canada Act,

just as the U.S. government has the power to do

in the case of U.S. interests. Coming September

elections could result in a change of regime in

Canada, in turn reversing potential opposition.

According to The Wall Street Journal, the CEOs

of the two companies met last summer at

Rona’s request, which was followed by Lowe’s

first offer in December. That offer was rejected

by the board. Despite today’s latest rejection,

Lowe’s clearly hasn’t given up. Is it just a mat-

ter of price, and can a higher offer succeed?

Certainly, Rona’s institutional shareholders

might welcome the opportunity to cash in.

Lowe’s asserts that shareholders representing

15% of Rona’s shares support its offer for the

company. Lowe’s further states that it plans to

leave Rona’s Canadian operations alone, main-

taining its headquarters in Quebec and its cur-

rent mix of stores. Lowe’s has to overcome the

issue of Canada’s desire to maintain its inde-

pendent business base, persuade the Canadian

public that jobs and investments won’t decline,

and overcome management’s desire to remain

in place and pursue its own business plan.

06photo/shutterstock.com

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“ This contest is a perfect example of the battle between investor desire for a short-term catalyst and corporate management’s desire to build long-term shareholder value and maintain its independence.”

Benchmarks are met. Milestones are reached.

Pats on the back abound. But now what? Smart

executives know that contentment can devolve

into complacency in a flash—and that it’s up

to managers to ensure that their people are

continually motivated to meet new challenges.

To that end, here are five questions to ask the

next time you are presented with even the

most glowing digital engagement report. Not

only will they keep your digital team on its

toes, they will take your engagement strategies

to new heights.

When your digital team says: “We own top

placement on Google for searches on our

organization…”

Ask them: “Who owns top placement for nega-

tive terms we may be associated with?”

Search engine optimization (SEO) and market-

ing (SEM) are about more than advertising-

-they are risk functions that can help your

organization control its narrative when it

matters most. In the digital age, you don’t

have to wait to defend specific positions when

business crises materialize. Rather, you can

proactively identify risks and dominate the

web with branding messages in a positive,

non-defensive way. For a pipeline operator,

it’s about safety and reducing environmental

impacts. For a consumer-products company,

it’s about supply-chain diligence and consumer

well-being. For a bank, it’s about being an

economic engine and a driver of economic re-

covery. The most important point is that search

engine campaigns that move these messages to

the top of the rankings include risk terms such

as “explosion,” “mortgage abuse,” “recall,” or

“litigation”—as these are the terms consumers,

investors, regulators, and potential plaintiffs

will be using to gain a better understanding of

your next big problem.

Right about now, your digital team is feeling pretty darn good about itself. It’s amassed a strong social media following for your organization. Enter your company’s name on Google, and your website is the top result. You’ve got a blog, and people are actually reading it. Your monitoring capabilities ensure that you’re alerted the moment anyone mentions your company or its leadership in the digital space.

your ComPaNy has soCial media Nailed.

Richard s. Levick, Esq.Originally Published on Fastcompany.com

violetkaipa/shutterstock.com

83163073/shutterstock.com

NOW WHAT?

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When your digital team says: “We are ac-

tively monitoring for any mentions of our

company in the digital space…”

Ask them: “Are we monitoring for intelligence

about tomorrow’s issues, as well as today’s?”

By entering the terms associated with your

top-line risks into search engines, companies

can glean a great deal of intelligence about

the source of their next reputational, legal, or

regulatory problem. In other words, they can

see around corners. Do regulators, NGOs, or

plaintiffs’ firms own the marquee results? If

so, what are they saying about the risks and

your industry’s relationship to them? Know-

ing what’s coming next enables companies to

address potential problems before they evolve

into recalls, litigation, shareholder revolts, or

something worse. As such, this needs to be

a daily exercise—and a report on the results

should be submitted to communications and

risk managers each week.

When your digital team says: “Our blog

doubled its readership over the last year…”

Ask them: “What are we doing to build rela-

tionships with other influential bloggers in our

industry?”

Bloggers have evolved into the traditional

media’s assignment editors. They serve as

pollsters for legislators, regulators, and other

governmental bodies. Industry analysts moni-

tor their reports like hawks. That’s why it is ab-

solutely essential that every company identify

the “high authority” bloggers in their industry

and build positive working relationships with

them. That means reaching out directly—with

offers for exclusive interviews, invitations to

conference and earnings calls, and even al-

lowing them to craft guest posts for your own

blog. It also means that blogger queries should

be treated with all the reverence normally

reserved for 60 Minutes or The Wall Street

Journal. The key here is to personally know the

bloggers who influence your audience before

you need them, so that they can be enlisted to

understand company messages when it mat-

ters most.

When your digital team says: “We just

reached our goals for Facebook fans and

Twitter followers…”

Ask them: “What are we doing to transform

those connections into lasting brand loyalty?”

Amassing hundreds of thousands of social

media fans and followers is about more than

erecting a symbol of brand strength; it’s about

strengthening consumer and stakeholder rela-

tionships. In this context, social media strategy

is far more than a numbers game. Rather, it is

the most effective way to forge lasting connec-

tions based on the ways that your products and

services enrich and empower people’s lives.

Look at the way American Express is reward-

ing cardholders who tweet company hashtags

with special discounts and savings; or the way

Huggies, with its “High Chair Critics” blog, is

speaking directly to mothers via babies’ voices;

or the way Target is simplifying gift-giving with

a mobile app that sorts and highlights certain

products based on the recipient’s demographic

information. These strategies (and myriad

others like them) leverage social media connec-

tions to not just create awareness, but engage-

ment opportunities that strengthen the audi-

ence’s ties to the brand. At the end of the day,

that’s what social media is really all about.

When your digital team says: “We are at-

tracting more unique visitors to our website

than ever before…”

Ask them: “What are we doing to keep them

engaged once they arrive?”

There was a time when the Internet was

dominated by the written word. Those days

are over. Today, powerful images, engaging

videos, and informative podcasts are what

keep web users’ eyes from glazing over when

they reach your primary web presence. Why

tell stakeholders about new product features,

your commitment to safety, or a new Corporate

Social Responsibility initiative when you can

show them? The average visitor to your homep-

age likely spends about 30 seconds there before

clicking elsewhere. That means you have about

half that time to grab visitors’ attention and

ensure that click steers them further into your

own website.

Your digital team knows Information Age

tactics backwards and forwards—but they are

looking to you to provide the strategic vision

that their tactics ultimately support. By push-

ing your digital team to take on new challenges

each time benchmarks are reached, you will

not only keep them motivated, you will keep

them keenly aware of the overall mission their

work supports.

Richard S. Levick, Esq., President and CEO of LEVICK,

represents countries and companies in the highest-stakes

global communications matters — from the Wall Street

crisis and the Gulf oil spill to Guantanamo Bay and the

Catholic Church.

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“ Your digital team knows Information Age tactics backwards and forwards--but they are looking to you to provide the strategic vision that their tactics ultimately support. ”

the urGeNCyof NoW.