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Rajat Kumar Gupta

Rajat Gupta at the Annual Meeting of the World Economic

Forum in Davos, 2010

Native name রজত গুপ্ত

Born

Rajat Kumar Gupta

2 December 1948 (age 63)

Kolkata, West Bengal, India

Residence

Westport, CT, USA

New York, NY, USA

Colorado, USA

Palm Island, FL, USA

Ethnicity Indian American

Citizenship United States

Alma materIIT Delhi

Harvard Business School

Occupation Consultant, Management expert

Years active 1973-2007

Employer McKinsey & Company, Inc.

Net worth $120 million+ [1]

TitleSenior Partner Emeritus and former

Worldwide Managing Director

Term 1994-2003 (Managing director)

Predecessor Fred Gluck

Successor Ian Davis

Religion Hindu [2]

Criminal chargeconspiracy (one count)

securities fraud (three counts)

Criminal penalty sentencing pending (Oct 17, 2012)

Criminal status convicted (appeal pending)

Spouse Anita Mattoo Gupta

Children 4

Rajat Kumar Gupta (RA-jat ku-MAAR GUP-ta; Bengali: রজত গুপ্ত; born 2 December

1948) is an Indian American businessman who was the managing director (chief executive) of management consultancy McKinsey & Company from 1994 to 2003 and a business leader in India and the United States. He was convicted in June 2012 on insider trading charges stemming from the Raj Rajaratnam Galleon Group case on four criminal felony counts of conspiracy and securities fraud. He is expected to appeal and awaits sentencing in October 2012.[3]

In his capacity at McKinsey, Gupta was recognized as the first Indian-born CEO of a global Western company. After becoming a senior partner emeritus at McKinsey, Gupta served as corporate chairman, board director or strategic advisor to a variety of large and notable organizations: corporations including Goldman Sachs, Procter and Gamble and American

Airlines, and non-profits including The Gates Foundation, The Global Fund and the International Chamber of Commerce.

Rajat Gupta is additionally the co-founder of four different organizations: the Indian School of Business with Anil Kumar, the American India Foundation with Victor Menezes and Lata Krishnan, New Silk Route with Parag Saxena and Victor Menezes, and Scandent with Ramesh Vangal.

Contents

[hide]

1 Early life and education 2 Career

o 2.1 McKinsey & Company o 2.2 Outside McKinsey & Company

3 Philanthropy 4 Insider trading trial 5 Personal life 6 See also 7 References 8 External links

[edit] Early life and education

Rajat Gupta was born in Kolkata, India to Pran Kumari Gupta and Ashwini Kumar Gupta. His father was a journalist for Ananda Publishers. His father was a prominent freedom fighter and had been jailed by the British for his efforts. His mother taught at a Montessori school. Gupta has three siblings.

When Gupta was five the family moved to New Delhi, where his father went to start the newspaper Hindustan Standard. Gupta's father died when Gupta was sixteen; Gupta's mother died two years later. Now an orphan, Gupta and his siblings "decided to live by ourselves. It was pretty unusual in those days."[4]

He was a student at Modern School in New Delhi. After high school, Gupta ranked 15th in the nation in the entrance exam for the Indian Institutes of Technology, IIT JEE. He received a Bachelor of Technology degree in Mechanical Engineering from the Indian Institute of Technology, Delhi (IIT-D) in 1971. Declining a job from the prestigious domestic firm ITC Limited, he received an MBA from Harvard Business School (HBS) in 1973, where he was named a Baker Scholar.[5] Gupta remarked that the first time he saw an airplane was when he flew to ITC to inform them he would be attending HBS.[4]

[edit] Career

[edit] McKinsey & Company

Gupta joined McKinsey & Company in 1973 as one of the earliest Indian-Americans at the consultancy. He was initially rejected because of inadequate work experience, a decision that was overturned after his Harvard Business School professor Walter J. Salmon called Ron Daniel, then head of the New York office and later also the managing director of McKinsey, on Gupta's behalf.[4]

Gupta began his career in New York before moving to Scandinavia to become the head of McKinsey offices in 1981. He did well in what was then considered a "backwater" area; this is where he first made his mark.[6] Elected senior partner in 1984, he became head of the Chicago office in 1990. In 1994 he was elected the firm's first managing director (chief executive) born outside of the US, and re-elected twice in 1997 and 2000. In this capacity, he was considered the first Indian-born CEO of a multinational organization.

During Gupta's time as head of McKinsey, the firm opened offices in 23 new countries and doubled its consultant base.[7] His successor Ian Davis was elected by "emphasizing the need for a return to the McKinsey heritage".[8] This was seen as a reaction against Gupta's aggressive firm expansion. It was also a time of perceived shifting of standards. Enron, closely identified with McKinsey, collapsed during Gupta's tenure. During the dot-com bubble he and Anil Kumar created a program for McKinsey to accept payment from its clients in stock. Gupta's accountability for the shifting of standards was weighed differently by different observers.[9]

After completing three full terms (the maximum allowed, by a rule he had himself initiated) and nearly a decade as head of the firm, Gupta became senior partner again in 2003 and senior partner emeritus in 2007.[10] Gupta is widely regarded as one of the first Indians to successfully break through the glass ceiling, as the first Indian-born CEO of a multinational corporation (not just a consultancy).[4]

Gupta's mentors at McKinsey included Ron Daniel, the former managing director who as senior partner first hired Gupta into the New York office, and Anupam (Tino) Puri, the first Indian at the Firm and eventual senior partner.[4] He, in turn, mentored Anil Kumar as another early Indian-American at the consultancy. Gupta and Kumar "were the face of McKinsey in India."[11] According to The Financial Times, "the two operated as a forceful double-act to secure business for McKinsey, win access in Washington and build a brotherhood of donors around the Hyderabad-based ISB and a handful of social initiatives." [11]

Gupta maintained an office, executive assistant, email and phone at McKinsey and Company after 2007,[12] and maintains the title "senior partner emeritus" of the firm.[13] He also continued to receive a salary from McKinsey as senior partner emeritus, totaling $6 million in 2008 and $2.5 million for each of the following three years.[14] However, in the wake of subsequent scandals a McKinsey spokesperson was quoted as saying, "Our firm no longer has a professional relationship with Rajat Gupta."[15] According to NDTV, "sources tell us that the firm dropped Mr Gupta from its alumni database, and called clients worldwide to say that they would have nothing to do with him going forward." The manner in which the firm severed ties with its former head attracted some controversy.[16]

[edit] Outside McKinsey & Company

In 1997 Gupta co-founded the Indian School of Business (ISB) with friend and fellow senior partner Anil Kumar. The school was ranked number 13 in the world by The Financial Times

in its "Global MBA Rankings 2011".[17] Gupta and Kumar have both since resigned as chairman and executive board director respectively.[18][19]

Before stepping down as managing director he co-founded Scandent Solutions with Ramesh Vangal and the American India Foundation with Victor Menezes and Lata Krishnan. After McKinsey Gupta co-founded and chaired the private equity firm New Silk Route, formerly named Taj Capital Partners, with Parag Saxena and Victor Menezes.

Gupta has served on many corporate boards during his career. He became a member of the Procter & Gamble board of directors in 2007, and held that post until March of 2011.[20] He was also a director for investment firm Goldman Sachs from 2006 until the expiration of his term in 2010.[21] Gupta was also the non-executive chairman of Genpact from 2007 until March 2011. He also served on the board of AMR, the parent company of American Airlines, from 2008 until 2011, and on the board of Harman International from 2009 to 2011.[22] Gupta has also served on the board of Russian bank Sberbank, and as a managing advisor to Symphony Technology Group.[23]

Gupta has also served as a director of various financial groups. In addition to his work at Goldman Sachs, Gupta served as an advisory partner with Fjord Capital Parners[24] and as chairman of the advisory board for Clutch Group. Gupta was also a member of the advisory board for OmniCapital Group.[25]

[edit] Philanthropy

Gupta’s philanthropic, charitable, and volunteer efforts mainly focus on the areas of education, global health, and global business.

In the past, Gupta has been involved with a number of universities and other educational institutions, volunteering and serving as chairman and member of several boards and councils. As of 2011, he has either resigned or taken leaves of absence from the boards on which he served as director or chairman.[26]

In June, 1995, Gupta was elected to the University of Chicago’s Board of Trustees.[27] He also served as a member of the Yale President’s Council.[28]

Gupta co-founded the Indian Institute of Technology Alumni Association. He also chaired the Board of Directors and served on the Advisory Board.[29]

With Anil Kumar, Gupta co-founded the Indian School of Business, and under his chairmanship of the governing and executive boards the school became one of the leading business schools in the world.[30]

Gupta served as Chairman of the Board of Associates of the Harvard Business School,[31] and was a member of the Board of Governors for the Lauder Institute of Management & International Studies at The Wharton School, University of Pennsylvania. Additionally he served on the Dean's Advisory Council at the MIT Sloan School of Management and on the advisory board of Northwestern University's Kellogg School of Management.[32]

Gupta was a Member of the Dean’s Advisory Board of Tsinghua University School of Economics and Management, and served on the board of Skolkovo.[33][34] Gupta also was on the boards of Millennium Promise and the Pratham India Education Initiative.[35]

In 2009, he was elected as a Member of the American Academy of Arts and Sciences.[36] In 2011, he became a Founding Member of the Young India Fellowship.[37] He is the former Co-Chairman of the United Nations Association of America.[38]

Gupta’s activities in global health include serving as a founding Board member and then Chairman of the Board for The Global Fund to Fight AIDS, Tuberculosis and Malaria. He served from April 2007 to March 2011, and was succeeded in September 2011 by Simon Bland.[39] He also was the co-founder and founding Chairman of the Public Health Foundation of India.[40] He was on the board of the Emergency Management and Research Institute, Health Management Research Institute, and International Partnership for Microbicides. He was also chairman of the advisory board and the India AIDS initiative of the The Gates Foundation as well as its Global Health Initiative until 2011.[41] He is a former board member of the Emergency Management and Research Institute,[42] a former Member of the Board for the Global Health Council,[43] a former member of the United Nations Commission on the Private Sector and Development,[44] a former Member of the Board for the Health Management Research Institute,[42] and a former Member of the Board for the International Partnership for Microbicides (or IPM).[45] He was a member of the board of the Global Health Council and the Harvard School of Public Health, as well as the Weill Cornell Medical College. In March 2006, he was named the founding Chairman for the Public Health Foundation of India (or PHFI). He remained in that position until resigning in March of 2011.[46][47][48]

In addition, he was the Co-Founder and Co-Chairman of the Board for the American India Foundation (or AIF), the largest diaspora philanthropy organization focused on India and based out of the United States.[49] He began the organization in response to an earthquake that struck India in 2001,with its initial goal to help victims of the tragedy.[50] From 2006-2011, he served as a Trustee for the Rockefeller Foundation.[33][51]

Throughout his career, Gupta has been a part of various global business initiatives. He was previously the chairman of the International Chamber of Commerce,[52] and was appointed as Special Assistant to the Secretary General for Management Reform for UN Secretary General Kofi Anan in 2005.[53] From 2008 to 2010, Gupta was a member of the Foundation Board for the World Economic Forum.[54] Gupta also served as the chairman of the U.S.-India Business Council from 2002 to 2005.[55] [56] He also served on Indian Prime Minister Manmohan Singh's global advisory council from its inception until early 2012.[57]

[edit] Insider trading trial

Main article: Raj Rajaratnam/Galleon Group, Anil Kumar, and Rajat Gupta insider trading cases

Rajat Gupta and Raj Rajaratnam

FBI wiretap on July 28, 2008 of McKinsey senior partner emeritus Rajat Gupta speaking to Galleon Group founder Raj Rajaratnam about Goldman Sachs, senior

partner Anil Kumar, Galleon International and Kohlberg Kravis Roberts

Problems listening to this file? See media help.

On March 1, 2011, the SEC filed an administrative civil complaint against Gupta for insider trading with billionaire and Galleon Group founder Raj Rajaratnam. Coverage of the event noted that Anil Kumar — who, like Gupta, had graduated from IIT, was a highly regarded senior partner at McKinsey, and had also co-founded the Indian School of Business — had already pleaded guilty to charges in the same case.[58] Gupta, Kumar, and Rajaratnam were all close friends and business partners. Gupta countersued and both sides eventually dropped.

On October 26, 2011 the United States Attorney's Office filed criminal charges against Gupta. He was arrested in New York City by the FBI and pleaded not guilty. He was released on $10 million bail on the same day. Gupta's lawyer wrote, “Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless .... He did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo.”[59] The SEC alleged, "The tips generated 'illicit profits and loss avoidance' of more than $23 million." Manhattan U.S. Attorney Preet Bharara said, "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."[60]

In April 2012, another charge relating to passing P&G information was added by the prosecution. Gupta's lawyers countered that "newly added charges -- like the ones brought last year -- are not based on any direct evidence, but rely on supposed circumstantial evidence". More new charges based on new information may follow.[61] The defense has maintained that "the wrong person is on trial".[62]

In early May 2012, a pre-trial defense motion for access to SEC settlement-negotiation documents was denied by Judge Rakoff.[63] Also in early May, the prosecution made a motion to play in trial three FBI wiretaps of two Rajaratnam "conversations with his principal trader and another with Galleon's then portfolio manager" related to the Goldman Sachs information.[64] As well, details of wiretap recordings and trading activity related to the charges were analyzed at length in the media, assessing the strengths and weaknesses of the prosecution's and defense's cases.[65][66][67]

The current case is focusing on the relationship between Raj Rajaratnam, Anil Kumar and Gupta.[68] Gupta, Rajaratnam, and Kumar were all involved to varying degrees as founding partners of private-equity firms Taj Capital and New Silk Route, though Rajaratnam and Kumar left before they began operation. Gupta remained as chairman of New Silk Route, and Rajaratnam eventually invested $50 million in the fund.[69]

Rajat Gupta's trial began on May 21, 2012.[70] On June 15, 2012, Gupta was found guilty on three counts of securities fraud and one count of conspiracy. He was found not guilty on two other securities fraud charges. At the time, his lawyer told reporters, "We will be moving to set aside the verdict and will, if necessary, appeal the conviction." Sentencing is scheduled for October 2012. The maximum sentence for securities fraud is 20 years and the maximum sentence for conspiracy is five years.[71]

[edit] Personal life

Rajat Gupta married Anita Mattoo, two years his junior, in 1973 after they had met at IIT. She was an electrical engineer, and according to him "a much smarter student" than himself. The couple met at college debates and plays.[72] Mattoo came from Srinagar, Kashmir, India.

Gupta owns several properties that he uses for both work and pleasure:

His primary residence is a two-acre estate in Westport, Connecticut that formerly belonged to JC Penney and his family, which was valued at $13 million as per town records of October 2011.[60]

He owns a $4 million waterfront home on the Gulf of Mexico in Palm Island, Florida.[1]

He owns an apartment in Manhattan.[73]

He owns a ranch in Colorado.[4][74]

According to the Economic Times, "His big mansion in Connecticut is like a public dharamsala, where friends, professors and McKinsey colleagues are encouraged to come and live, often with their families. He is also known to ask colleagues to take a break at his Colorado ranch with their families - something unheard of in the McKinsey world at that time."[74]

Gupta has four daughters: Geetanjali Gupta-Nwanze, Megha, Aditi and Deepali. In 2008, Geetanjali Gupta married Chukwuemeka Nwanze, an Igbo from Asaba, Nigeria, son of Vincent Nwanze, former Deputy Consul-General at the Nigerian Consulate in New York. The wedding was held at Rajat Gupta's house in Westport, Connecticut. Geetanjali was reported to be a Harvard BA, MBA and JD as well as a manager of the Harvard endowment fund. [75]

[edit] See also

The scandal:Rajat Gupta on trial for securities fraud related to trading in Goldman Sachs stock by Raj Rajaratnam's Galleon Hedge Fund.

The benefit: The prosecutors did not have any witness who could testify to hearing the conversations between Gupta and Rajaratnam first-hand or could even say for sure that the two men were engaged in insider trading. But the case has still been built based on the phone records that show a 'pattern of calls' between the two. Depending on the outcome, it could give a new tool of investigation to regulators across the globe.

Rajat Gupta: Touched by scandalFORTUNE -- This is not the way the Rajat Gupta story is supposed to end. It's supposed to go

out on a high note, like the previous chapters. He is an Indian nationalist's son who made it to

Harvard Business School. He's the only non-Westerner to have served as managing director of

storied management consulting firm McKinsey & Co., adviser to CEOs the world over. The

ultimate behind-the-scenes business operator, Gupta over the years has whispered in the ear of

everyone from Lloyd Blankfein of Goldman Sachs to Bill George of Medtronic to A.G. Lafley of

Procter & Gamble. More recently he's become a global philanthropist who rubs shoulders with

Bono, Bill Clinton, and Bill Gates, tackling problems like malaria in Africa and AIDS in India.

And yet today, at 61 years of age -- a time when he should be taking victory laps -- his reputation

hangs in the balance because of news reports that have linked him to the biggest insider-trading

scandal in hedge fund history.

24

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In a front-page article on April 15, the Wall Street Journal reported that the government was

investigating whether Gupta had shared confidential information with his onetime friend and

business partner Raj Rajaratnam, the hedge fund heavyweight whose $3 billion Galleon fund

disintegrated in October 2009 after authorities announced sweeping charges of illegal trading.

The ongoing Galleon investigation includes an examination of trading in shares of Goldman

Sachs (GS, Fortune 500). The government's filings don't name names, but in a second front-

page story the Journal, citing an unnamed source, reported that Gupta -- a member of the

Goldman board since late 2006 -- had tipped off Rajaratnam about Warren Buffett's confidence-

boosting $5 billion investment in the teetering investment bank in September 2008, during the

depths of the market turmoil. Gupta left the Goldman board in May when his term expired rather

than stand for reelection. To date, no criminal charges have been filed against Gupta.

Gupta's defenders say that any suggestion of impropriety is absurd for a man whose exemplary

reputation has been built on the twin pillars of integrity and discretion. But Gupta's close

association with Rajaratnam invites scrutiny. Government filings for a private equity firm that the

two co-founded listed one of Gupta's homes as Rajaratnam's contact address as recently as

2008. They ran in the same social circles in New York, and, according to the Journal, Gupta was

a frequent visitor at the Galleon offices. Other connections also raise suspicion. In January,

Gupta's former protégé at McKinsey, Anil Kumar, pleaded guilty to providing Rajaratnam with

confidential information. Kumar admitted taking a total of $2.6 million in exchange for revealing

secrets about McKinsey clients, including chipmaker AMD (AMD, Fortune 500).

It bears repeating: The government, which has hardly been reluctant to sling criminal charges in

the Galleon case -- 21 people have been charged to date, and 12 have pleaded guilty to various

charges -- has yet to accuse Gupta of anything. But he remains in limbo nonetheless, counseled

to keep quiet by advisers while the legal process plods forward.

Through a spokesperson, Gupta declined repeated requests to speak with Fortune for this

article. But his lawyer offers a defiant statement of his client's innocence. "Rajat Gupta's record

of ethical conduct and integrity in his professional as well as personal life is beyond reproach,"

says attorney Gary Naftalis. "He also has served with distinction and selflessness many

philanthropic and civic causes around the world, including both the United States and India. Rajat

has not violated any laws or regulations, nor has he done anything improper."

Nevertheless, Gupta's limbo will probably persist at least until Rajaratnam goes to trial in

January. (Rajaratnam has pleaded not guilty to all charges.) The outcome of a hearing scheduled

for early October in which Rajaratnam's lawyers will challenge the admissibility of thousands of

wiretapped conversations -- including, possibly, tapes of Gupta and Rajaratnam -- could have a

significant bearing on the strength of the government's case. If evidence ultimately emerges that

shows that Gupta provided Rajaratnam with confidential information, his exemplary reputation

will be obliterated and his board positions at companies like P&G (PG, Fortune 500) will no

doubt vanish.

For now we are left with questions. Rajat Gupta spent his entire career at McKinsey, getting

access to the privileged information of the companies McKinsey consulted. His post- McKinsey

career has been built on utilizing the connections that he made during that time. Did he lose sight

of the line between the two?

American dream turned nightmare

Why the Rajat Gupta scandal won't hurt McKinseyBy Duff McDonald, Contributing EditorOctober 26, 2011: 11:27 AM ET

11

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Insider trading charges against the former Goldman Sachs board member and McKinsey managing director will put the spotlight on the reputations of

the two storied firms. But McKinsey -- and its clients -- have already moved on.

Rajat Gupta

FORTUNE -- The perp walks continue. This morning, 62-year old Rajat Gupta, the former managing director of consulting powerhouse McKinsey & Company, turned himself into the FBI to face insider trading charges. Specifically, the feds allege that Gupta, in his role as a board member of Goldman Sachs, illegally passed on inside information to Raj Rajaratnam, a former hedge fund manager who was sentenced to 11 years in prison earlier this month.

Also this morning, Preet Bharara, the U.S. Attorney for the Southern District of New York, announced a six-count indictment against the former consulting luminary, while the SEC reinstituted a civil case it had previously dropped. The charges against Gupta mean that the reputations of two of the most influential firms in the world—McKinsey and Goldman Sachs—are up for another of their periodic rakings over the coals.

The anti-banking contingent of the media has focused on the "involvement" of Goldman Sachs (GS) in this case, with the hope that somehow this news tarnishes the Wall Street titan. Sorry folks, but that's unlikely. As a non-executive board member, Gupta was nothing but an outside advisor to Goldman, and his possibly having sold their secrets to his Sri Lankan pal Rajaratnam says nothing whatsoever about the bankers, except that they clearly picked the wrong man for their board.

Then there are those enjoying a little schadenfreude at McKinsey's expense. If Goldman reeks of moneyed arrogance, McKinsey reeks of intellectual arrogance—the latter capable of producing just as visceral a response as the former. Those who have competed unsuccessfully against McKinsey or perhaps been a victim of its well-known downsizing advice have been licking their chops at just what this means for the fabled consultancy itself.

Short answer: Not much. While researching my upcoming book on McKinsey—to be published by Simon & Schuster in spring 2013—I have spoken to several dozen of the firm's current and former consultants over the past year-and-a-half about the whole Gupta mess. They're mortified, to be sure. But their most valuable asset—their client list—has been sympathetic. Business hasn't suffered at all.

McKinsey's psychological hold on its clients actually beggars belief. When consultant Anil Kumar—a Gupta protégé—pled guilty to actually selling McKinsey client information to Rajaratnam early last year, you might have expected the firm to lose a significant swath of their clientele. Not so. The firm still counts as clients a number of companies whose information Kumar was selling.

In a conversation I had with a McKinsey alum who is now a high-level executive at one of Wall Street's largest players, he suggested that the biggest fallout vis-à-vis McKinsey from the Gupta debacle would be to the firm's own psyche. And he's right—there are few firms that become as intertwined with their employees' self-image as McKinsey, and the fact that one of its former leaders has quite possibly repudiated every important value a McKinsey consultant holds dear has caused internal soul-searching. Ask a client's CEO, though, and he will likely tell you this: every CEO goes to bed at night worrying about a bad apple in their ranks—be it a rogue trader or a rogue consultant. As long as it's just a rogue, though, and not a systemic cultural issue, then the response is far more likely to be pity than anger.

(See also Rajat Gupta: Touched by scandal from Fortune magazine last year.)

News of this story first broke almost a year and a half ago, when Gupta abruptly stepped down from Goldman's board. (He also stepped down from his board seat at Procter & Gamble (PG) Many at McKinsey supported Gupta in that "he's innocent until proven guilty" kind of way—but the shock was still palpable. When actual wiretaps emerged this March, the firm decided to cut off relations with Gupta entirely. Current managing director Dominic Barton personally called Gupta to tell him he was now persona non grata at the firm. Needless to say, Gupta was not happy.

Which brings me to my final point. If this doesn't mean much for Goldman or McKinsey, despite the urgent wishes of some, what does it mean for Gupta himself? I'd say it's only going to get worse form here. The indictment against Gupta, released this morning, is pretty damning. The man could barely put the phone down after telephonic board meetings ended at Goldman before speed-dialing Rajaratnam to (allegedly) give him the news. In one instance, it took him 16 seconds. In another 23 seconds. (The man is 62. Give him a break if he loses a step or two as time passes.)

Specifically, the government has alleged that Gupta told Rajaratnam about Warren Buffett's $5 billion investment in Goldman in September 2008, after which Rajaratnam quickly bought Goldman shares. Second, that Gupta tipped Rajaratnam about Goldman's first-ever quarterly loss as a public company in October of that same year.

According to the Wall Street Journal, Gupta's lawyer Gary Naftalis has drawn a very clear line in the sand when it comes to his defense. Gupta "did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo," Mr. Naftalis said.

Here's where this kangaroo court comes out on those claims. One: he probably didn't trade in any securities. That's too bad for him. If he had, he might be using some of those profits to pay for his own defense. Two: he almost certainly did tell Rajaratnam things he shouldn't have. On October 24, 2008, for example, wiretaps had Rajaratnam telling a colleague "I heard yesterday from somebody who's on the board of Goldman Sachs that they are going to lose $2 per share. The Street has them making $2.50."

The most interesting part of Gupta's apparent defense revolves around what one means by the word "profit." Naftalis keeps repeating that because Gupta never received any money or direct benefits from Rajaratnam, he can't possibly be guilty of insider trading. Naftalis is being a lawyer here, and nothing more. Because he was technically an insider, Gupta will likely be charged in the "classical" definition of insider trading, where pecuniary benefit is a necessary prerequisite to guilt. But there's precedent in other kinds of insider trading cases—the so-called "misappropriation" type—in which "personal benefits" can mean much more than money.

Which brings me to the obvious fact about Gupta, and, by extension, McKinsey. Unlike the Wall Street trader who wants nothing but money, Gupta was a consultant. And the coin of consultants is influence, not cash. Unfortunately for Gupta, the man whose influence he was currying is now in jail. Perhaps Rajaratnam will be able to do him some favors if they find themselves on the same cellblock.

Rajat Gupta Convicted of Insider TradingRajat K. Gupta, the retired head of the consulting firm McKinsey & Company and a former Goldman Sachs board member, was found guilty on Friday of conspiracy and securities fraud for leaking boardroom secrets to a billionaire hedge fund manager.

He is the most prominent corporate executive convicted in the government’s sweeping investigation into insider trading.

The case, which caps a wave of successful insider trading prosecutions over the last three years, is a significant victory for the government, which has penetrated some of Wall Street’s most vaunted hedge funds and reached into America’s most prestigious corporate boardrooms.

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It also demonstrated that prosecutors could win an insider trading case largely built on circumstantial evidence like phone records and trading logs. Previous convictions, as in the trial of Raj Rajaratnam, the hedge fund manager on the receiving end of Mr. Gupta’s assumed tips, have relied more heavily on the use of incriminating wiretaps.

Mr. Gupta is one of the 66 Wall Street traders and corporate executives charged with insider trading crimes by Preet Bharara, the United States attorney in Manhattan, since 2009. Of those, 60 have either pleaded guilty or been found guilty. Juries have convicted all seven

defendants who have gone to trial.<br />

After a monthlong trial in Federal District Court in Manhattan, a jury took only two days to reach a verdict. It found Mr. Gupta guilty of leaking confidential information about Goldman to his former friend and business associate, Mr. Rajaratnam, on three different occasions in 2008. He was also convicted on a conspiracy charge.

The jury found Mr. Gupta not guilty of two charges of tipping Mr. Rajaratnam, including an allegation that he divulged secret news about Procter & Gamble, where he also served on the board.

“Having fallen from respected insider to convicted inside trader, Mr. Gupta has now exchanged the lofty boardroom for the prospect of a lowly jail cell,” Mr. Bharara said in a statement.

After the verdict was read in the courtroom, Mr. Gupta, 63, remained stoic. Just behind him, his wife, Anita, buried her head in her hands. His four daughters, who had squeezed into the front row of the spectators’ gallery each day during the trial, loudly sobbed and consoled one another. Several jurors cried as they left the courtroom.

Gary P. Naftalis, a lawyer for Mr. Gupta, said that his client would appeal the verdict. “This is only Round 1,” he said.

Judge Jed S. Rakoff, who presided over the case, set Mr. Gupta free on bail until his Oct. 18 sentencing. He faces a maximum sentence of 25 years in prison, but will probably serve less time. Mr. Rajaratnam is serving an 11-year jail term.

With its crackdown on insider trading, the government wants to protect investors, sending the message that the stock market is a level playing field and not a rigged game favoring Wall Street professionals. Insider trading, in the government’s view, also victimizes the companies whose information is stolen.

The criminal charges against Mr. Gupta, brought last October, stunned the global business world. Not since last decade’s corporate crime spree, when Jeffrey K. Skilling of Enron and Bernard J. Ebbers of WorldCom received lengthy prison terms, or the Wall Street scandals of the late 1980s that led to jail time for the financiers Michael R. Milken and Ivan F. Boesky, had a corporate executive fallen from such heights.

Mr. Gupta, a native of Kolkata, India, was orphaned as a teenager. After earning an engineering degree, he moved to the United States to attend Harvard Business School on a scholarship. He joined McKinsey in the early 1970s and in 1994 was elected global head, the first non-American-born executive to hold that post.

In 2007, Mr. Gupta retired from McKinsey and became a highly sought director at public companies, joining the boards of Goldman, Procter & Gamble and the parent company of American Airlines. In recent years, Mr. Gupta had also devoted his time to humanitarian causes, raising millions of dollars to combat AIDS, tuberculosis and malaria.

“Having lived a lifetime of honesty and integrity, he didn’t turn into a criminal in the seventh decade of an otherwise praiseworthy life,” said Mr. Naftalis, articulating one of Mr. Gupta’s defenses.

Yet the government, which was represented by federal prosecutors Reed Brodsky and Richard C. Tarlowe, countered with evidence that Mr. Gupta brazenly divulged confidential board discussions at both Goldman and Procter & Gamble.

“Here’s a man who came to this country and was a wonderful example of the American dream,” said the jury’s foreman, Richard Lepkowski, an executive for a nonprofit organization. “We wanted to believe that the allegations weren’t true, but at the end of the day the evidence was just overwhelming.”

Prosecutors built their case around phone records, trading logs, instant messages and e-mails. Mr. Gupta would participate in Goldman board calls, and afterward quickly call Mr. Rajaratnam, the founder of the Galleon Group. Mr. Rajaratnam would then trade shares in Goldman.

The government also presented three telephone conversations between Mr. Rajaratnam and Galleon colleagues that were secretly recorded by the F.B.I. On those calls, Mr. Rajaratnam boasted that he had a source inside Goldman.

“I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” Mr. Rajaratnam said on one call, in October 2008.

The defense repeatedly maligned Goldman, suggesting that the close ties between the bank and Galleon meant that there were numerous sources at the bank feeding Mr. Rajaratnam information.

“The wrong man is on trial,” Mr. Naftalis told the jury.

The case has been an embarrassment for the executives at McKinsey, which Mr. Gupta ran from 1994 to 2003. A trusted adviser to top companies, McKinsey counts Sheryl Sandberg, the chief operating officer of Facebook, and James P. Gorman, the chief executive of Morgan Stanley, among its alumni.

“McKinsey’s core business principle is to guard the confidential and private information of its clients,” said a former McKinsey executive, who spoke on the condition of anonymity. “It is mind-blowing that the guy who ran the firm for so many years could be going to jail for violating that principle.”

Mr. Gupta met Mr. Rajaratnam around 2007. Back then, Mr. Rajaratnam was at his peak, a billionaire hedge fund manager with a superior investment record. For Mr. Gupta, who wanted to raise his profile in the lucrative world of money management, Mr. Rajaratnam was a top-notch connection.

“Rajaratnam offered Gupta many benefits,” said the prosecutor, Mr. Tarlowe, in his summation. “What was good for Rajaratnam and Galleon was good for Gupta.”

Together, the men helped start a private equity firm focused on India. Mr. Gupta invested at least $13 million in Galleon hedge funds and took on a fund-raising role at the firm. He accepted a highly paid advisory post at the investment giant Kohlberg Kravis Roberts & Company.

During a telephone conversation between Mr. Rajaratnam and Anil Kumar, a former McKinsey executive who has pleaded guilty to insider trading, the two gossiped about Mr. Gupta’s ambitions to make more money, focusing on his job at Kohlberg Kravis.

“I think he wants to be in that circle,” said Mr. Rajaratnam, in August 2008. “That’s a billionaire circle, right?”

Mr. Gupta’s friends adamantly dispute the notion that he was driven by material gain. At the trial, his private banker at JPMorgan Chase pegged his family’s net worth at $130 million, in addition to his home in Westport, Conn., a waterfront mansion once owned by the retail executive J. C. Penney.

“I don’t know who came up with this business that Rajat had billionaire envy,” said Anil Sood, a childhood friend from India who now lives in Virginia. “He has always been quite content with his wealth.”

But one of the jurors, Ronnie Sesso, a youth advocate at the Administration for Children’s Services in Manhattan, had a different view.

“What did Mr. Gupta get by giving Raj this information?” said Ms. Sesso. “A need for greed.”

Rajat Gupta faces charges in Rajaratnam insider trading scandalIn the next phase of a Wall Street scandal that has been described as the largest case of insider trading in history, former Goldman Sachs director Rajat Gupta may play a big part.

Wednesday, Gupta pleaded not guilty to charges of leaking insider information to friend and Wharton 1983 MBA recipient Raj Rajaratnam, the Galleon Group co-founder who was sentenced to 11 years in prison for insider trading Oct. 13. Gupta has previously served on the board of governors for the Wharton School’s Lauder Institute, as well as the advisory board for the Kairos Society which started in Wharton.

Gupta has been charged with one count of conspiracy to commit securities fraud and five counts of securities fraud and faces up to 20 years in prison.

Preet Bharara, the United States attorney for Manhattan, said in a statement that Gupta “became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam,”

In another statement, Gupta’s lawyer Gary Naftalis countered that characterization. “The facts in this case demonstrate that Mr. Gupta is innocent of any of these charges and that he has always acted with honesty and integrity,” Naftalis said.

Gupta could receive a “lot of jail time” if convicted, believes William Brennan, a Philadelphia attorney unaffiliated with the case. “The sentence will be driven by the amount of money involved,” he added.

Gupta was named in a March 22, 2010, government letter filed in a New York federal court as part of the Rajaratnam case. Gupta and Rajaratnam were good friends who met through philanthropic activities, according to The New York Times. Together they started New Silk Route, a private equity firm. Gupta also allegedly invested in Rajaratnam’s hedge fund firm, Galleon Group.

“Oftentimes the motives [of insider trading] are to alert family and friends to a tip, resulting in an unfair advantage over the general public,” Brennan said.

Prosecutors believe Gupta leaked tips to Rajaratnam on Goldman Sachs and Proctor & Gamble Co. while Gupta was director at those firms.

In a conversation recorded in 2008 played at Rajaratnam’s trial, Rajaratnam confided to a colleague that Goldman’s stock prices might take a hit after the company reports a quarterly loss. In another recording from 2008, Gupta told Rajaratnam that Goldman was considering purchasing either Wachovia or American International Group.

Brennan stated that these kinds of fraud cases are not common. However, because of the recent economic downturn, the federal government has been cracking down on corporate investors. Since late 2009, 55 individuals have been charged with insider trading and all but four of them have either been convicted or pleaded guilty, according to The Wall Street Journal.

Gupta previously successfully fought the SEC’s decision to try him before an administrative judge, saying it was unconstitutional to deny him a jury trial, which was granted to the other Rajaratnam-related defendants.

Bail was set at $10 million, and Gupta was forced to surrender his passport. He will be facing trial at the U.S. District Court of the Southern District of New York this April.

Rajat Gupta: Corporate climb, insider info

Wall Street’s biggest scandal, the Galleon Group insider trading case, in recent times is creating ripples in the US as well as India. Though the central figure in the insider trading scandal involving the group, a large hedge fund based in the US, is its founder, Sri Lanka-born Raj Rajaratnam who was arrested by the FBI on October 16, 2009, the case has ensnared several India-born professionals, too, like former McKinsey chief Rajat Gupta, Intel Capital’s Rajiv Goel and McKinsey director Anil Kumar.

Man at the centre

Raj Rajaratnam and 25 others have been charged in a sweeping insider-trading case that has allegedly led to $45-85 million in illicit profits. Rajaratnam and others — including Gupta, Goel and Kumar—- were accused of conspiring with others to trade based on insider information involving 35 companies, mostly the who’s who of technology companies including Intel Corp, Google Inc, Advanced Micro Devices Inc, Clearwire Corp and Akamai Technologies Inc.

With the alleged inside help from these people and others, Rajaratnam built a hedge fund that managed $7-8 billion at its peak in 2008. The US Securities and Exchange Commission has said success was achieved more by guile than by genius.

Forbes magazine had described Sri Lanka-born Rajaratnam as the 236th richest American in 2009 with an estimated net worth of $1.8 billion. He was the richest Sri Lankan-born person in the world till 2009.

The others

Rajaratnam allegedly profited from information they got from Robert Moffat, an IBM senior vice president who allegedly provided data about a possible IBM merger with Sun Microsystems that led to a $1 million windfall for Rajaratnam’s New Castle Funds. Rajaratnam has also been accused of conspiring with Intel Capital treasury department managing director Rajiv Goel, and Anil Kumar, a director of McKinsey & Co. The alleged offences took place over three years starting in January 2006. Rajaratnam, Goel and Kumar were all of class of 1983 from Wharton business school.

Crackdown

Rajaratnam, 53, was arrested in October 2009. The US agencies charged more than two dozen former hedge fund managers, traders and executives in a probe dating back at least three years. The investigation has been expanded in recent months to include charges against researchers who provide hedge funds with company information. Rajaratnam and five other investors allegedly secured inside information regarding firms including Google, Advanced Micro Devices, and Hilton Hotels.

The US Securities and Exchange Commission said it has filed an insider trading complaint against Rajat K Gupta for tipping Rajaratnam with inside information about the earnings at Goldman Sachs and Procter & Gamble as well as an impending $5 billion investment by Berkshire Hathaway in Goldman. Rajaratnam used the information to trade on behalf of some of Galleon's hedge funds, or shared the information with others at his firm who then traded on it, the commission said.

The Fallout

Pressure is now mounting. Former Galleon Group portfolio managers have already pleaded guilty to trading ahead of corporate takeovers based on inside information and agreed to co-operate with the government in its case against Rajaratnam. Galleon’s former portfolio manager Adam Smith pleaded guilty to securities fraud and conspiracy to commit securities fraud in a federal court in New York on Wednesday. Prosecutors alleged his trades resulted in $1.3 million in profits. Former trader Michael Cardillo also pleaded guilty to having received and traded on inside information in stocks such as JM Smucker and Procter & Gamble.

Not just Wall Street but the Indian corporate world is watching the unfolding drama in the US courts.

First India-born global CEO

When Rajat Kumar Gupta became the managing director (worldwide) of global consulting and management firm McKinsey in 1994, it made him the first India-born professional to gatecrash into the privileged club of CEOs in the United States.

After joining the firm’s New York office in 1973, Kolkata-born Gupta never looked back while climbing the corporate ladder and steered McKinsey till 2003. Gupta now faces allegations of giving the Galleon Group founder insider information on two companies.

Gupta, 63, had his initial education in India. His studied at Modern School, New Delhi, and later got his Bachelor of Technology degree in mechanical engineering from IIT-Delhi. Later, he went to the US for an MBA from Harvard Business School.

In his 34-year career in consulting, Gupta served many leading companies on a broad set of topics related to strategy, organisation and operations. He has played a thought leadership role in organisational thinking throughout his career, and led the organisation practice for McKinsey. After leaving the firm, he became a founding partner and the chairman of New Silk Route Partners, a leading Asia-focused growth capital firm founded in 2006 with $1.4 billion under management, focused on the Indian subcontinent, as well as other rapidly growing economies in Asia.

Gupta, who is the chairman of Pan IIT Alumni Board, is very active in many non-profit institutions focused on education, health and development. He took a pivotal role in setting up the Indian School of Business in Hyderabad and continues as the chairman of the executive board and the governing board of ISB. India Inc veterans give much of the credit for the success of ISB to Gupta.

Gupta served on the board of many multinational companies like American Airlines Inc, Genpact Limited, Procter & Gamble and Sberbank. Tapping Gupta’s expertise, UN Secretary-General Kofi Annan appointed him special adviser on management reform. US investment firm Goldman Sachs brought him as an independent director in November 2006 and he continued on its board till March 2010. He left the boards of Goldman Sachs and Procter & Gamble as the insider-trading case surfaced by that time.

The US media reported in April 2010 that federal prosecutors were investigating Gupta’s involvement in providing inside information to Galleon hedge fund founder Raj Rajaratnam during the financial crisis, specifically about the $5 billion Berkshire Hathaway investment in Goldman Sachs at the height of the financial crisis in 2008.

This week, the Securities and Exchanges Commission (SEC) of the United States filed a complaint against Gupta for tipping Rajaratnam with insider information about the earnings at Goldman Sachs Group and Procter & Gamble. The SEC’s division of enforcement said Gupta had learned this confidential information during board calls and in other aspects of his duties on the boards of the two multinationals. Gupta has already denied the charges.

Gupta currently lives in Connecticut, United States, with his wife and four daughters.

Rajat Gupta charged in insider case, freed on $10-million bail

New York: Rajat Gupta, an iconic figure in the US corporate sector who was arrested on charges of passing insider information to his friend Raj Rajaratnam, was released on Thursday on bail on a $10-million bond after he pleaded not guilty to offences that could keep him in jail for life.

The 62-year-old Indian-American, who has sat on the board of some of the top US companies like Goldman Sachs and Procter and Gamble, was indicted in the massive insider trading scandal that rocked Wall Street. He entered not guilty plea at his arraignment at a US District court in New York.

He is charged with one count of conspiracy to commit securities fraud and five counts of securities fraud. He faces a maximum penalty of five years in prison on the conspiracy charge and 20 years in prison on each of the securities fraud charges. If found guilty, Gupta faces a cumulative jail term of 105 years.

Gupta surrendered before the FBI on Wednesday. He was accused of sharing confidential information about investments at Goldman Sachs with billionaire hedge fund manager Rajaratnam, the Sri Lanka born founder of Galleon Group, who is already in jail for 11 years for insider trading scam, America’s biggest.

US prosecutor Preet Bharara said Gupta broke the trust of some of the top public companies in the US and “became the illegal eyes and ears in the boardroom for his friend and business associate, Raj Rajaratnam, who reaped enormous profits from Gupta’s breach of duty.”

“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 Gupta’s breach of duty,” 43-year-old Bharara, an Indian-American who became US Attorney for the Southern District of New York in 2009, said.

Gupta’s lawyer Gary Naftalis said that his client was innocent. Naftalis, said in a statement that there were legitimate reasons for communications between his client and Rajaratnam, including a $10-million investment that Gupta had in a fund managed by the Galleon founder. Gupta lost the entire amount, Naftalis said.

“We are confident that these accusations — which are based entirely on circumstantial evidence — cannot withstand scrutiny and that Gupta will be completely exonerated of any wrongdoing,” Naftalis said.

'Evidence against Gupta devastating'New York: The prosecutors have told a US jury that there is "overwhelming" and "devastating" evidence of insider trading against former Goldman Sachs director Rajat Gupta but the defense argued there is no "beef in the case" as the hearing in one of the Wall Street's biggest scandal wrapped up.

The prosecution and defense presented their closing arguments in the high-profile insider trading trial of Gupta in Manhattan federal court yesterday and the case will now go to the jury, which will get instructions on the law from presiding judge Jed Rakoff.

The group of eight women and four men will then begin its deliberations later today on the fate of Gupta, one of corporate America's most successful Indian-Americans and the most high-profile Wall Street executive fighting criminal charges in the government's crackdown on insider trading.

Using graphics, emails, phone records and wiretaps, federal prosecutor Richard Tarlowe summarised for the jury charges and evidence that 63-year-old Gupta "violated his duty" as a Goldman and Proctor and Gamble board member to tip now-jailed hedge fund founder Raj Rajaratnam.

"Gupta abused his position as a corporate insider by providing secret company information to his longtime business partner and friend Raj Rajaratnam, so Rajaratnam could use that information to buy and sell stocks before the investing public," Tarlowe said in an aggressive tone.

"By doing so, Gupta enabled Rajaratnam to make millions of dollars," he said.

"Time and time again Gupta betrayed that trust and violated that duty by using the secret information to help Rajaratnam cash in on it," Tarlowe said. "The evidence against Gupta is overwhelming and devastating."

Tarlowe said in his summation that Gupta was a "secret pipeline" to Rajaratnam, and "evidence shows that Gupta tipped (off) Rajaratnam periodically in anticipation of receiving multiple benefits in return."

Gupta has pleaded not guilty to one count of conspiracy and five counts of securities fraud. He faces up to 25 years in prison if convicted.

Gupta's lawyer Gary Naftalis, speaking softly and slowly, blamed the government of presenting to the jury an "illusion" even though it had no direct evidence against his client.

"With all the power and majesty of the United States government, they found no real, hard, direct evidence," Naftalis said.

"They didn't find any because it didn't happen... As they say in that old commercial, where's the beef in this case?

"We have had no real first-hand knowledge of the crimes alleged to have been committed here."

Naftalis said the government in its desperation to build its case presented stacks of documents and "parade of meaningless witnesses" but it is "indisputable" that Gupta did not buy or sell even a single share of Goldman Sachs and Proctor and Gamble.

"No cash changed hands here. No dishonest dimes ended up in Gupta's pocket," Naftalis said during his nearly three hours of closing arguments.

"If you put in a lot of paper, you give the illusion that you might have something more than you actually have an illusion of making something out of nothing," Naftalis argued.

"That is a gambit that can bamboozle people into thinking something was proven when it wasn't," Naftalis added.

Naftalis urged the jury to give Gupta a not-guilty verdict if they have even the slightest doubt that he

committed any crime.

"For Gupta, this is the case in which whatever you decide here will mark whatever future he has left," Naftalis said in a low tone.

"The stakes are much too high here for that kind of shabby information to suffice to take away something from somebody that matters more than anything else in the world," Naftalis said, referring to Gupta's freedom and reputation.

"You need real evidence, not speculation and guesswork."

Concluding his summation, Naftalis recalled going to one of the oldest courthouses in England, where he had read the words "In this hallowed place of justice, the Crown never loses because when the liberty of an Englishman is preserved against false witness, the Crown wins."

"The United States always wins when justice is done," Naftalis said.

As Naftalis finished his summations, Gupta choked up and had tears in his eyes and went up to hug his lawyer. Gupta's wife and four daughters sitting behind him fought back tears.

Gupta has pleaded not guilty to charges of one count of conspiracy and five counts of securities fraud for leaking boardroom secrets from Goldman and P&G to Rajaratnam on eight occasions from 2007 to 2009.

Rajaratnam was convicted of insider trading last year and is serving an 11-year prison sentence in Massachusetts.

Naftalis said Gupta's professional dealings with Rajaratnam were "legitimate" and he was unaware of the insider trading conspiracy that was being run by Rajaratnam.

"There was a secret world of Raj Rajaratnam that was unknown to Rajat Gupta," Naftalis said. "Our law does not make people criminals based on guilt by association."

The prosecution countered that saying the two men had a public side of success "but hidden, concealed from the public, was a different side, a side that committed crimes."

Tarlowe said the timing of the calls from Gupta's numbers to Rajaratnam's offices, just seconds after he got off from Goldman and P&G board meetings, the subsequent trades made by the Sri Lankan co-founder of the Galleon hedge fund before the market close and the millions of dollars of profit made or

losses avoided show a "pattern" of insider trading.

"It's not another coincidence," he said.

In his rebuttal following Naftalis's summations, US prosecutor Reed Brodsky said, "to believe the arguments of the defense team, you'd have to believe that Gupta is one of the unluckiest people in the world. He is not the victim of unlucky coincidences."

Among the tips the government has accused Gupta of passing to Rajaratnam is Warren Buffett's five billion dollar investment in Goldman Sachs on September 23, 2008.

Naftalis said Gupta had had a falling out with Rajaratnam by then and had no motive to tip him.

Gupta had lost USD 10 million of his investment in the Voyager fund managed by Rajaratnam.

He was "frustrated" with Rajaratnam, whom he believed had taken the money behind his back.

Naftalis said in a September 20, 2008 conversation with his daughter, Gupta was "upset" and "stressed" about his loss.

He had been unsuccessful in getting information from Rajaratnam about what had happened to his money and so was calling him incessantly.

Naftalis said the calls made from Gupta's number to Rajaratnam on September 23 and later were to ask him about his money and not to tip him about Buffett's investment in Goldman.

The defense has argued that Rajaratnam received tips from other sources at Goldman and P&G and some of the information he got was already in the public domain.

Naftalis also sought to discredit testimony of some of the government witnesses, including that of Goldman Sachs CEO Lloyd Blankfein and ex-Galleon trader Michael Cardillo, who has pleaded guilty to criminal charges and is cooperating with the government.

Naftalis described Cardillo as a person who had agreed to wear a concealed wiretap to a friend's wedding to extract information and who had admitted in court that he did not want to spend even a day in jail.

Blankfein had testified that he regularly informed the board members about the company's financial health.

Naftalis said Blankfein "was less than candid" when he said in court he could not recall that on October 23, 2008, the Goldman CEO had sent a voice mail to all his staff informing them about a 10 per cent layoff.

Prosecutors allege Gupta had participated in a Goldman board meeting on that October day during when the banking giant had discussed a quarterly loss of two dollars, its first as a public company.

Gupta had then passed that information to Rajaratnam, the government alleges.

Naftalis said the board meeting was to inform directors about the layoffs of 3250 Goldman employees and not about the quarterly loss, which had already been discussed 10 days ago in a separate meeting.

He said Gupta had known about the loss for several days and had not spoken a word about it to Rajaratnam.

Blankfein "falsely claims he can't even remember firing 3,000 people, as if he does it every day of the week," Naftalis said, adding that Blankfein is a "man who has no memory of anything."

Banks behave badly redux: Is it killing confidence?New Delhi: It wasn’t supposed to be like this. After the worst financial crisis since the Great Depression almost took the global economy over a cliff, tough new regulations and stronger internal controls at the world’s major banks were meant to help restore confidence in the financial system.

But recent headlines have some top investors and strategists questioning whether there has been any progress at all.

The horror stories include the deepening scandal that big banks rigged Libor, the benchmark international lending rate; JPMorgan Chase’s mounting losses from disastrous credit bets and a possible cover-up attempt; and the disappearance of customer funds from Iowa futures broker PFGBest, discovered after its founder tried to commit suicide and left a note outlining a 20-year fraud.

Add in the problems surrounding the botched trading debut by Facebook as well as the insider trading scandal that led to the conviction of hedge fund managers and big name businessmen such as former Goldman Sachs director Rajat Gupta — and the picture isn’t pretty.

The signs of a falloff in investor confidence are not hard to spot. US Treasuries, the traditional safe-haven for risk-averse investors, are drawing big demand even though they offer only the slimmest of returns, while US equity mutual funds have racked up big outflows.

And even though some of that investment trend may reflect the fragility of the US economic recovery, the real problem lies elsewhere, said Larry Jeddeloh, founder and chief investment officer of the TIS Group, an institutional research firm that also manages client money.

“The bigger problem, which I think investors are focusing on, is confidence in the financial system is eroding,” he said. “There have been a litany of failures and confidence-reducing events recently which should cause anyone with a stock certificate and a heartbeat to think hard about what to do with their stocks,” he said. For many small and even some big investors, the recent headline events create a perception that the system can be gamed — and that they could lose money because those who are able to manipulate a rate or a stock price or have inside information wield a big advantage, investors and strategists say.

At worst, in cases like the failed brokerages MF Global and PFGBest — with the echoes of the Bernie Madoff and Allen Stanford Ponzi scams also ringing in investors’ ears — it means that someone could simply raid their account and take their money.

It all feeds into a wider political backdrop. The speed with which the Occupy Wall Street movement gathered pace last year was seen by some economists and major investors as a growing symbol of the distrust of banks and the inability or unwillingness of the authorities to crack down on corporate malfeasance and greed.

Almost all of the scandals lead to allegations that regulators are asleep at the wheel or simply lack the firepower to keep up with the misbehavior.

In the scandal over the rigging of Libor – the London interbank offered rate that influences interest rates around the world – documents released last week showed that regulators on both sides of the Atlantic knew years ago that there was something very wrong with the system but they have done very little to try to fix it.

Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said the Libor scandal is fueling public anger toward the banks. "The revelations broadly are another episode that is damaging to people’s confidence in the financial services industry, and that’s a shame," he said in an interview with Reuters last week. In the case of PFGBest, its founder and sole owner, Russell Wasendorf Sr., confessed in a signed statement that he duped the National Futures Association, which had first-line responsibility for overseeing non-clearing brokers such as PFGBest, for up to two decades by forging bank documents.

The FBI arrested Wasendorf on Friday and accused him of stealing more than $100 million from clients.

Even so, investors sometimes still shake off fears and plunge back into risky assets.

On Friday, after JPMorgan revealed its trading losses could be as high as $7.5 billion and Reuters reported that federal criminal investigators are investigating whether JPMorgan employees in London hid the problem, its shares rose 6 percent and the US stock market rallied. Among the reasons given by traders and investors: The worst of the scandal may be behind the bank.

"I am always surprised at the resiliency of the American investor and how people have become comfortably numb with each new scandal," said Frank Partnoy, a former derivatives trader who has written books on the instruments and a law professor at the University of San Diego.

The lack of confidence may not always be apparent in day-to-day trading but it is showing up in financial markets in a number of other ways.

Investors are mostly shying away from assets that carry high or even modest levels of risk and parking their money in US Treasuries and other places that pay very low interest rates. The yield on the benchmark 10-year Treasury yield on Friday was at 1.49 percent, just a hair away from the record low of 1.46 percent touched in early June.

Cash balances at major companies remain at very high levels. Those trends are occurring even though the world’s major central banks, led by the Fed, have found innovative ways to create easy monetary policies in an attempt to get companies and consumers to spend.

According to Jeff Tjornehoj, head of Lipper Americas Research, US equity mutual funds have had net inflows just once in the past five years, in 2010. Investors have pulled a net $305 billion from such funds since the end of 2007.

Taxable bond funds, on the other hand, last had annual net outflows in 2000 and since the end of 2007 have taken in a total of $834 billion, Tjornehoj said.

On the corporate side, a number of initial public offerings have been pulled or delayed in the wake of Facebook’s fumbled IPO. While Facebook’s $16 billion offering made the second quarter the strongest period on record for dollars raised, the number of deals fell by 50 percent to 11 in the quarter versus the same period last year, according to data from the National Venture Capital Association and Thomson Reuters.

Major technical problems on the Nasdaq exchange that messed up the first day of Facebook trading were not the only issue to sting investor confidence. Analysts at Morgan Stanley and other underwriters cut their earnings and revenue forecasts on Facebook only days before the IPO – but they only told select clients, inflaming concerns that retail investors are saddled with a big handicap.

"The investor needs to be confident that he has a fair shot, that the deck is not stacked against him, or he will pull his capital out, unless something happens to convince him he should stay in," said Jeddeloh, of the TIS Group.

McKinsey counts the cost of ‘embarrassing’ Galleon scandal

McKinsey & Co will not know for 20 years what damage the Galleon insider trading scandal has done to its brand, the head of the management consultancy has said, describing the case - in which two of its senior executives were caught up - as “incredibly distressing and embarrassing”.

Clients had been very supportive, Dominic Barton, McKinsey’s global managing director, said in his fullest public comments on the affair, pledging to make the organisation stronger.

“I feel like some turpentine was thrown on the hood of the car,” Mr Barton told the Financial Times when asked about the state of a brand that has stood for trusted high-level advice and strict client confidentiality. “I wish I could say it changed next week or in six months . . . I really think it will be in the 10 to 20-year time frame we’ll know.”

Anil Kumar, a former McKinsey partner, has pleaded guilty to charges of providing confidential information to Raj Rajaratnam, the ex-head of the Galleon Group hedge fund who was found guilty in May in a landmark insider trading case.

Rajat Gupta, a former head of McKinsey, has been charged with civil violations by the Securities and Exchange Commission but denies wrongdoing.

The case had prompted deep reflection about what went awry and dented the pride of an institution that had sometimes been “arrogant”, Mr Barton said. He added, however, that “it hasn’t affected our work at all”.

McKinsey had instituted a rigorous external review of its values and practices, prompting changes to policies, compliance and training, he said, but now “felt good about where our standards are” in comparison to other professional firms.

“We’re looking at what people will say in McKinsey 20 years from now about how this generation responded,” he said.

Mr Barton said there was a wider drop in trust in business since the global financial crisis, which would require capitalism to adopt a longer-term perspective, freeing executives from running their companies to hit quarterly earnings targets.

McKinsey was looking at how to change asset managers’ incentives and methods of measuring performance to encourage a longer-term approach from investors, he said.

Regulator should hasten insider trading cases

Rajat Gupta, former global head of Mckinsey’s case has brought the focus back on insider trading. Rajaratnam, who benefited from Gupta's information, had already been sentenced to 11 years in prison.

In Gupta's case, the details of telephone conversations and e-mails were used to establish links between the two people.

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Insider trading is rampant even in India and perhaps, more than just information flow. People like lawyer of a company, a printer, a merchant banker, an auditor, a supplier, a news channel or maybe even a PR/IR agency. However, the market regulator is yet to set a stern example for offenders.

Cases need to be investigated and taken to lawful conclusion by bringing the culprits to book. This must be irrespective of the stature of the person being investigated. Once exemplary punishment is awarded, it would act as a deterrent to others.

Gupta was a man of great stature and the US's Securities and Exchange Commission (SEC) needs to be complimented for bringing an important case to a stage of completion in less than eight months.

In India, we have a case involving India's largest private sector company over the merger of two of its companies where insider trading was allegedly done. This occurred in November 2007 and is hanging fire four-and-a-half years later. Time and again one hears of the case being settled, but to no avail. Justice delayed is justice denied and this seems to be the norm in the country.

There is another example in which a company involved in the business of ship building announced on November 22, 2011, they would be inducting a strategic investor on board. The investor was to buy 81.9 million shares of the company at Rs 110 each against the current price of Rs 58 on that day. It’s about seven months since and no such placement has happened and one has not heard any further from the company. Is it fair to allow company promoters and management to get away with fooling investors and other stakeholders by simply making a statement without any accountability? The one thing that was achieved was that, post this announcement the share price began to rise and is currently at Rs 83.

Let us take the more recent and well-known case. A large oil marketing company’s shares were bought an insurance major all through the December-March quarter of 2011-12. The famous offer for sale happened at a price range of Rs 290-305. The rise in share price was helped by the insurer’s purchase at Rs 245-303. If this would have happened in a private company, the promoters and associates would be charged with insider trading. Would the same apply to these two government-controlled companies?

While there is no answer to whether these companies will every face the regulator’s wrath or not, everyone in the business of stock market or even investors understand insider trading in some form or the other is taking place. Since the consent order mechanism, which has been used to settle insider trading cases in the past, is likely not to be used in the future, the regulator needs to look at other mechanisms to resolve insider trading cases.

The fact is, ultimately no retail or institutional investor, will feel comfortable in a situation where share prices can be manipulated due to insider information or trading. After all, it is their money at stake as well

Truth about Indian insider trading law

Indian business icon Rajat Gupta has been convicted of insider trading in the United States of America. Being a role model for any Indian corporate career aspirant, the criminal conviction of the first Indian to head global consulting major McKinsey has drawn the expected comparison between the legal systems in his nation of origin and his chosen nation for doing business.

The lay perception in India is that the Indian legal system is sorely lacking and backward in insider trading law while the US is sophisticated in this department. Many Indian commentators will be quick to blame Indian laws for being inadequate. Others will clamour for even greater enforcement powers – the Securities Exchange Board of India (SEBI), under different chairmen, has consistently been lobbying for more powers to raid premises, seize records, and even to effect arrests. However, a dispassionate look at the factual position is warranted.

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In reality, Indian law, and the attitude of SEBI and the judiciary towards insider trading is far more stringent than in the US – and in some instances, unjustifiably so. The excessive stringency leads to missing the woods for the trees, and therefore the perception that Indian laws are worse off has gathered steam. The consistent introduction of greater stringency to deal with the perception has increased the skewed nature of Indian law, and expectedly, has failed to address the issues that have led to the perception.

First, in India, we legislate for almost everything – therefore, we have specific language defining the specific types of conduct that would violate regulations prohibiting insider trading. Communicating unpublished price sensitive information is illegal in India. No further fact is required – whether the person who received it, traded on the basis of the tip received is irrelevant. Compare that with the US. The judge in the Gupta trial had to ask both sides to present to him their versions of the standard that a person communicating such information would have to fail, in order to be convicted. It was open to Gupta to show that the trades in securities that took place were not motivated by the information disclosed by him. The law in the US is judge-made. Our law is stipulated in black and white.

Second, SEBI is accused of not being strict in bringing regulatory action. However, when it does so, fighting it is an uphill task. Judicial attitude to insider trading is akin to judicial attitude to murder and rape. Gupta, on the other hand, may never see the insides of jail. The judge has scheduled, extraordinarily, the sentencing for four months later. An appeal court could stay the conviction before he gets sentenced, and it is likely the appeal court would decide that the jury was wrong in believing that the case against Gupta (applying the lighter US standard of default) was not proven beyond reasonable doubt.

Third, a substantial majority of insider trading cases in the US get settled. The SEC extracts the allegedly ill-gotten money and adds some more injury and life moves on. It is only those who protest too much that get penalised. In sharp contrast, SEBI has recently issued guidelines stating that it would ordinarily never settle any charge of insider trading.

Fourth, in India, SEBI can simply sit back and write an order under Sections 11 and 11B of the SEBI Act, stating that it is satisfied that regulations prohibiting insider trading have been violated. It can put a man out of the securities market, freeze almost his entire wealth, and render his economically crippled. The officer who passes such orders freely engages with the prosecuting team, and even strategizes with the lawyer purporting to represent the regulator in the quasi-judicial proceedings before him, without the presence of the accused. In short, the roles of the prosecutor and the judge are inextricably intertwined, with no serious check. Therefore, SEBI hardly needs to undergo the pain and effort of having to convince a criminal court to inflict statutory injury on a person.

On the other hand, the enforcement team in the US Securities Exchange Commission (SEC) would have to convince an administrative law judge who is segregated and removed from the enforcement team that such an intervention is warranted. Such a judge would have to conduct proceedings in a truly formal quasi-judicial manner.

In fact, Gupta insisted on his case being taken to the criminal justice system, where the case against him would have to be proven “beyond reasonable doubt”, rather than being tried before an administrative law judge for a civil penalty (where the standard of proof required is lower). He alleged discrimination against him for being singled out for civil proceedings by an SEC that was unsure of the strength of its case – the SEC, successful at this stage, was clearly a reluctant criminal prosecutor of Gupta.

Finally, the trial in the court of public opinion in India is by an uninformed news reporting system, hungry for sensational news. Greater technology has only led to amplification of an uninformed majority viewpoint rather than airing the views of the other side of the story. But that is not a story about law, it is about society.

Regulator seeks more teeth to curb insider trading offences

To bring to book those suspected of insider trading, the Securities and Exchange Board of India (Sebi) has sought more teeth for its investigation capabilities, similar to those in the United States.

In the background of the conviction of Indian-origin ex-Goldman Sachs director, Rajat Gupta, on charges of insider trading, Sebi has felt the need to have access to call records to nail those involved in such grave offences.

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When questioned on why those suspected of insider trading are not brought to book in India, unlike in the US, Chairman U K Sinha said, “US regulations allow wiretapping. The evidence in a majority of insider trading cases in US have been obtained by way of wiretapping. In India, Sebi has no such powers.”

Wiretapping, or telephone tapping, is the process of monitoring telephone conversations by a third party, mostly an enforcement agency.

In the US, prosecutors used details of telephone conversations and emails to convince jurors that Gupta had leaked boardroom secrets to his former friend, hedge fund manager Raj Rajaratnam, currently serving an 11-year sentence for insider trading.

Sinha said the legal situation in India was different from the US. He said insider trading offences can be curbed with the use of technology. Though insider trading is believed to be rampant in India, there has been little effective action against it, due to lack of analytical tools in the hands of the regulator.

For several years, Sebi has been requesting the government for access to call records. But this request has not yet been accepted.

“Sebi is not asking for wiretapping. The limited thing we are asking (the government) is to allow us to have call data records,” Sinha said on the sidelines of an event today. He went on to explain: Suppose, A has indulged in insider trading with B, but insists he does not know B. Using call data records, if Sebi can show that A has spoken to B, say, 10 times a day, that could be a major evidence. According to Sebi’s annual report for 2010-11, the equity market regulator took up investigations in 28 insider trading cases and completed 15 during the year.

Sinha said Sebi has left out serious offences like insider trading in the recently introduced consent process. “There will be an adjudication process and punishment for insider trading. Won’t let insider traders be guilt-free under consent mechanism,” he said.

Inside out

Rajat Gupta has gone down, but insider trading may not. The guilty verdicts against the former McKinsey boss and Goldman Sachs and Procter & Gamble director should scare the bejeezus out of corporate America and Wall Street. But until the rules against passing privileged information are clearly defined and miscreants truly fear getting caught, the case’s deterrence value will be limited.

A jury convicted Gupta of leaking boardroom information to Galleon Group founder Raj Rajaratnam, who himself is due to spend over a decade in prison for securities fraud. The speed of the verdict — less than two days of deliberations — suggests the case wasn’t so tough, after all. Unlike Rajaratnam and other insider traders, Gupta wasn’t caught on tape discussing wrongdoing. And though he bought into a Galleon fund, the evidence that he gained financially from his tips was thin. Yet prosecutors made the most of their circumstantial case, including phone records of Gupta calling Rajaratnam seconds before the hedgie traded Goldman shares.

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It shows prosecutors can win without a smoking gun. Although that should give every would-be tip giver or user pause, it doesn’t mean it’ll stop them from taking the risk. For one, it’s still not obvious when an insider crosses the line. Divulging information is only illegal if the divulger means to profit. Gupta didn’t clearly benefit. That the jury convicted him anyway suggests a mere desire to help his friend may have been enough. Such a fuzzy legal standard, however, makes compliance complex.

And while the case against Gupta may look easy in hindsight, it took years of costly preparation. The government doesn’t have the resources to bring more than a few prosecutions like it. High-profile wins send stern warnings, but occur too rarely to dissuade wrongdoers. A more effective approach might be to file a greater number of easier-to-prove cases alleging, say, financial negligence rather than criminal fraud. Penalties would be smaller, but punishment — and perhaps deterrence — more powerful.

Gupta will probably appeal and a reversal isn’t far-fetched. US District Judge Jed Rakoff was arguably on shaky terrain when he excluded certain evidence favouring Gupta. Whatever ultimately happens, there will undoubtedly be some sort of chilling effect in US boardrooms. It will take far more work, however, to reduce the menace of insider trading.

Goldman pays large chunk of $30 mn legal fee for Gupta

Financial services firm Goldman Sachs has paid a large chunk of the nearly $30 million legal fees for its former board member Rajat Gupta's defence, a media report said.

"Goldman Sachs has paid for the bulk of Gupta's legal defence, which has cost nearly $30 million," the New York Times reported, citing a source familiar with the matter.

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Proctor & Gamble paid the remaining balance, NYT said.

Gupta who was a board member at Goldman Sachs and Proctor & Gamble was found guilty last week of passing confidential boardroom discussions at Goldman to the former founder of hedge fund Galleon, Raj Rajaratnam.

As per a deal reached between Goldman and Gupta before the trial, the latter would have to reimburse the bank for the legal fees advanced to him if found guilty, the report noted.

In addition, Goldman must continue to pay Gupta's bills until a final resolution of Gupta's appeal, a process that could take a couple of years.

"Goldman has been advancing Gupta money to pay his lawyer's bills because the bank's by laws require it to pay the legal fees of its top officers and directors for conduct that occurred while acting on behalf of the company," the NYT said.

"And Delaware, where Goldman is incorporated, has generous laws regarding indemnifying executives to protect them from incurring personal liability for their work while doing their jobs," it added.

The publication noted that Gupta's lawyer fees does not only include his month-long trial, but also two-and-a-half- year legal odyssey that led to the charges against him, including a pitched battle with the Securities and Exchange Commission in a related civil case.

Insider trading trial pitted one Indian bigwig against other

The high-profile insider trading trial of former McKinsey head Rajat Gupta pitted him against another Indian-American New York’s top federal prosecutor Preet Bharara, who in the end walked away winning his battle against corporate America’s poster boy.

Gupta, 63, is one of most prominent Wall Street executives in a list of 66 traders against whom Bharara has led a legal battle. Of these 66 people who were charged with insider trading crimes by Bharara since 2009, 60 have either pleaded guilty or have been found guilty.

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The insider trading trial, which began on May 21, had set the stage for a courtroom showdown between the two India-born and Harvard educated US citizens who are prominent figures in the South Asian community in New York.

Ferozepur-born Bharara was named by TIME magazine earlier this year as one of the 100 most influential people in the world.

Kolkata-born Gupta’s rise in corporate America had been stellar and enviable. Orphaned at 18, Gupta received an engineering degree from the elite Indian Institute of Technology. He earned a scholarship to Harvard Business School, graduating top of his class and securing a coveted posting at McKinsey.

He went on to being elected at age 45 to run McKinsey, becoming the first non-American-born executive to head the consulting giant.

“I know consensus says McKinsey is white and traditional, but I am testimony to the fact that image isn’t true,” Gupta had said in a 1994 profile in The Chicago Tribune.

“If anything, it’s a meritocracy.”

Bharara, the US attorney for the Southern District of New York had not minced words last October when the charges were filed against Gupta and said the top Wall Street executive was “entrusted” by some of the premier institutions of American business to sit inside their boardrooms 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 Gupta’s breach of duty,” Bharara had said.

After the guilty verdict was announced against Gupta yesterday, Bharara said Gupta achieved remarkable success and stature, but he threw it all away. “Having fallen from respected insider to convicted inside trader, Gupta has now exchanged the lofty board room for the prospect of a lowly jail cell. Violating clear and sacrosanct duties of confidentiality, Gupta illegally provided a virtual open line into the board room for his benefactor and business partner, Raj Rajaratnam,” Bharara said.

Bharara, nominated to become US Attorney by President Barack Obama on May 15, 2009, has prosecuted organised crime, narcotics and securities fraud. He has shown himself to be a hard worker who has a self-deprecating wit and stays cool under pressure, Bharara’s former associates say. Bharara grew up in New Jersey’s Monmouth County and earned degrees from Harvard and Columbia Law School.

During Rajaratnam’s trial, Bharara would quietly enter the courtroom and take a seat in the last row of the gallery like he did in Gupta’s trial. “His consistent presence at the largest insider trading case in a generation — and the office’s resounding victory — signaled that the chief federal prosecutor in Manhattan was back as the sheriff of Wall Street,” the New York Times had said.

American dream turned nightmare

GIVEN the tortured and time-consuming deliberations that can accompany white-collar

criminal charges, the jury in the Rajat Gupta case moved with breathtaking speed. Only a

day after receiving instructions from the judge, they convicted Mr Gupta on four out of

six counts of conspiracy and securities fraud, all linked to information gleaned from his

position as a board member of Goldman Sachs that was passed on to Raj Rajaratnam, a

hedge-fund manager found guilty last year of insider trading in a separate trial.

The jury's verdict provides a stunning denouement to Mr Gupta's career. After

immigrating from Kolkata as a young man, he joined McKinsey & Company, a consulting

firm. He would go on to become the firm's managing director, and serve on the boards

and advisory panels of many of America's most prestigious investment firms,

corporations, universities and philanthropies.

Underlying the convictions were two key events in 2008. The first concerned Goldman's

receipt of a $5 billion life-line from Warren Buffett's Berkshire Hathaway during the heat

of the financial crisis. The other involved the jarring losses Goldman would endure in

subsequent months. Mr Gupta was found to have tipped Mr Rajaratnam to both pieces of

confidential information. But the jury dismissed charges tied to two other events, related

to positive earnings by Goldman in 2007, and a deterioration in results for Procter &

Gamble, on whose board Mr Gupta also sat, in 2009. According to comments by one of

two jurors who agreed to discuss the case, there was credible evidence to support at

least one of the dismissed charges, but not enough to convict.

Mr Gupta, as has been his manner throughout the case, was stoic after hearing the

verdict. His four daughters and wife, however, wept and surrounded him in a collective

embrace.

Sentencing will be October 18th. Mr Gupta faces potential prison terms of up to 20 years

on three counts of securities fraud and five years for a single count of conspiracy, but the

legal battle is far from over. “This is only round one,” said Gary Naftalis, Mr Gupta's

attorney, adding that his client "didn't receive a dishonest dime". Motions will be

submitted to set aside the verdict with an appeal to follow if those fail. Of particular

importance will be the admission into testimony of three wire taps of Mr Rajaratnam that

had inferential value but were not directly demonstrative of the actions at the heart of

the case.

In one of the wire taps, Mr Rajaratnam says he had heard “something good” about

Goldman from one of its directors. In another, he says “somebody who's on the board” of

Goldman provided information about upcoming earnings. Mr Naftalis's comments

indicated he will try to have both thrown out on the basis that they are hearsay. Another

of the wire taps, recorded on July 29th, 2008, appeared to show Mr Gupta providing Mr

Rajaratnam with non-public information, in this case a possible acquisition of AIG. But no

subsequent action was taken, and there was no allegation that Mr Rajaratnam traded on

the information. This disclosure, said a juror, "didn't tip the balance, but it was an

important part" of the evidence that was heard.

Much of the trial featured mind-numbing recitations of phone and trading records.

Various executives explained that information heard by boards was indeed confidential,

and should not be shared with the public. To this dry factual base, the prosecutors added

descriptions of discussions between Mr Gupta and Mr Rajaratnam, followed by frantic,

lucrative trading at Galleon. “It was too coincidental,” said a juror.

Still, even with these sentiments, the jurors said reaching a verdict was not easy. There

were questions about what motive a man as successful as Mr Gupta might have, given

his position and wealth. Ultimately, there was a sense that there were benefits to be had,

notably for the creation of a new business venture in which Mr Rajaratnam was to play an

important role.

In coming to their verdict, the jurors said they had to surmount strong feelings of warmth

for Mr Gutpa, due in no small part to his wife and daughters who sat behind the

defendant. “He's a man who came to this country and became a wonderful example of

the American dream, a story-book life, with a family whose support looked to be based

on respect, love and honour,” said one. His colleague added, “We wanted him to walk.”

Rajat Gupta's fallout may not make dent in NRI success story but may trace his conduct to India

When Rajat Gupta walked out of a New York courtroom on June 15 a convicted felon, India Inc didn't want to believe it. Perhaps more than any other single executive, the former McKinsey & Co managing director had offered a vision of what a modern Indian might achieve

From Calcutta orphan to CEO of one of the world's most admired companies to a philanthropist of unusual effectiveness, Gupta's unlikely ascent had shown Indian business that it could be possible to be both a modern businessman who could beat the West at its own game while preserving the best of India's philanthropic tradition.

The loss of a hero always rattles, particularly when he represented an ideal version of what you would like to be. "As you get older, it is harder to have heroes," Ernest Hemingway once noted, "but they are still sort of necessary."

The Polish Writer

I think of a writer I admired—a fine Polish travel writer named Ryszard Kapuscinski, who had a certain fearlessness and a rare ability to look beyond the easy divisions of east and west, developed and undeveloped worlds, toward humanity itself — and how sad I was when I learnt recently that he had compromised himself in all sorts of ways, from serving as a spy for the communists to fudging facts to make a good story perfect. It wasn't that I thought I could be him or even wanted to be him, but to realise that he couldn't quite live up to himself either was a disappointment.

I think something similar may be happening with the Gupta case. Mathematically, everyone knows very few people can reach the heights of a Rajat Gupta, particularly by their own wits,

but at the same time, it may be hard to look on his fall without a sense of diminished possibility. A personal tragedy. But the failure of this hero should not be too discouraging.

No Prejudice

"My view is that there will be neither short-term nor long-term effects on the Indian diaspora in general and specifically the Indian diaspora that is involved in the business aspects," says Jagdish Sheth, a corporate strategist and professor of marketing at Emory University's Goizueta Business School, and a member of the board of Wipro.

Joel Koblentz, president of the Koblentz Group, an Atlanta-based executive search firm that specialises in senior executive and board member searches, says that the Gupta scandal isn't making it any harder for people of Indian origin to be named to corporate boards, any more than Bernie Madoff's arrest made it more difficult for Jews. The only prejudice on executives boards he says is "a prejudice towards value". There are two reasons Gupta's conviction may not matter that much to Indian-American prospects.

For one thing, Gupta meant something very different to the West, to whom he was just one more poster child for meritocracy, a kind of corporate Jackie Robinson, the first black baseball player in the desegregated big leagues.

The fact that Gupta struck out doesn't mean that other Indians won't be allowed to play. For another, Gupta's example is not as unique anymore. Gupta was just the first generation of what in some ways is a much more extraordinary story: the rise of Indians in the US. While Gupta's rise may have mattered earlier as an example of Indian potential, his fall has come at a time when NRIs are on the verge of winning an unprecedented place in US society.

Three Million Heroes

To me, as a kid growing up in the western US in the 1970s, Indians were the guys in the moccasins who tried to sneak up behind John Wayne. We learnt in geography class that there were people we called Indian Indians, but India remained very far away (I don't think, for example, that I ever had a chance to try Indian food until well into college).

I wasn't alone in my provincialism. Prasad Kaipa, an adviser to CEOs and executives who divides his time between Campbell, California, and the Indian School of Business in Hyderabad, remembers when he first came to the US 32 years ago as a post-doctoral student in Salt Lake City, people thought of him as Mowgli, the boy in Disney's Jungle Book.

Later, when the movie Gandhi came out in the '80s, they started thinking of him as Gandhi. In the '90s, they thought, "if you are from India, that must mean you are an engineer."

To an extent, our myopia was understandable. Even in 1990, there were only 50,000 Indians living in the US. But that's all changed: now, there are more than 2.8 million people of Indian origin in the United States, according to the US Census.

Most unusually, most of these new arrivals have not had to work their way up from the bottom, in the traditional way —the hard-scrabble journey that tends to begin the way one Italian immigrant summed up his experience around the turn of the century: when he got off

the boat, he was disappointed to find first, that the streets were not paved with gold. Second, that they were not paved at all. And third, that he was expected to pave them.

Indians, by contrast, have found themselves skipping up a yellow brick road, by and large. No immigrant group has achieved so much so quickly. Indians now enjoy the highest income of any ethnic group in the US — more than $90,000 a year per household, according to US Census figures. By comparison, the average household takes home about $50,000. In a number of skilled professions, Indians have excelled.

The fact that Gupta was prosecuted by attorneys serving in the office of an Indian immigrant, US district attorney Preet Bharara, is itself a sign of how far and how fast Indians in America have come. Today there are close to 35,000 Indian physicians, according to the American Association of Physicians of Indian Origin. There are hundreds of thousands of engineers as well — many of Silicon Valley's programmers are Indian: in all, 300,000-plus Indians work in IT.

Indian entrepreneurs abound as well, and not only in Silicon Valley. Almost half the country's 47,000 hotels are now owned by Indians, and were worth nearly $129 billion in 2010, according to the Asian American Hotel Owners Association.

By comparison, the National Association of Black Hotel Owners and Developers estimates that roughly 500 hotels are owned by African Americans. Even the business of educating people about business is increasingly Indian. The largest single ethnic group in business schools today are Indians: the deans of Harvard Business School, the University of Chicago's Booth School of Business, Cornell University Business School, are all of Indian origin.

Brand NRI in Politics

Not surprisingly, perhaps, in a political system where money talks clearly and distinctly, Brand NRI is now coming on strong in politics as well. Two of America's 50 governors are Indian. Twelve Asians are running for Congress in this election cycle, and some are regarded as potential stars. One candidate, Tulsi Gabbard, a Hawaii Democrat, was at 21 the youngest woman ever elected to her state legislature in 2002.

If all 12 win, it means that of the 435 seats of Congress, 2.7% will be held by people of south Asian origin —not too bad given that they will wield far more power they should have by demographic right, given that Indians make up less than 1% of the population of 315 million. All in all, the perception of Indian-Americans is now a long way from Mowgli the Man-Cub. Today, Kaipa says there is a kind of "grudging admiration of Indian accomplishments...a certain sense of acceptance in western society, much more than there was before".

The Home Team

But the Gupta case may still have consequences — not for Indian Americans, but for India itself. Media coverage of Indian corruption has been growing over the past year, and the Gupta conviction might be seen as one more data point in the picture. Some of the commentary noted what they felt to be a surprisingly muted response in India regarding the moral side of the case.

Kaipa had a different perception of the Eastern and Western reactions than the newspapers. The Indian businessmen he spoke to thought Gupta had been corrupted by the West. The Americans talked about the importance of being careful: "'Hey, I better watch out'," he recalls.

However, for the general Western public, the scandal may end up reinforcing a sense of corruption as an Indian export, particularly in the US. Perhaps even more than people of other countries, Americans tend to be quick to claim credit for their immigrant neighbours' virtues and disclaim the rest. There are real questions about whether Gupta's conduct is his own failing or common to the Indian corporate class.

Yes, insider trading is a problem in India, Sheth says, but it's a problem in other parts of as well, not to mention the US. "I think we often presume that just because we have laws that people will be behave, but we have seen it's not true with brokerage companies, definitely not true with the hedge fund guys."

Product of US?

Given that Gupta is nearing the end of his fourth decade in the West, even thinking of Gupta as more a product of India than the US may be unfair, in the last analysis, and we might with more justice ask the same questions of what he learned in Harvard Business School, at McKinsey, and various corporate boards.

If this trading scandal seems to be playing out a bit like publicity around organised crime, Americans at least tend to reflexively link the criminal back to his home country — Sicilian mafia, Russian mobsters, Mexican drug dealers — people unlike us. If the immigrants make good, chalk up another win for the Land of Opportunity. The bad is always somehow the Old Country's fault. Unfortunately for India, Gupta's case may prove no exception.

(The author, a Paris-based business writer, is a columnist for ET Magazine)

Goldman Sachs, Warren Buffett, and the 'ultimate insider' scandal

Rajat Gupta, a high-powered former Goldman Sachs director, has been accused of outrageously shady dealing by the SEC. Here's an instant guide

POSTED ON MARCH 2, 2011, AT 3:06 PM

Former Goldman Sachs director Rajat Gupta, one of the most well-connected men on Wall Street, is being accused of carrying out a major insider trading scheme. Photo: CorbisSEE ALL 23 PHOTOS

It sounds like a plotline straight out of Oliver Stone's Wall Street: On March 1, the SEC charged Rajat Gupta, a former Goldman Sachs director described as the "ultimate corporate insider," with illegally handing confidential investor information over to a hedge fund. Here, a guide to how the alleged dealing went down, who stands to win and lose, and how Warren Buffett got involved:

First things first. What is insider trading?The term refers to any instance when a financial trader takes advantage of confidential insider knowledge to make money from the impact of that information on the market.

And what is Gupta accused of?Gupta is accused of providing hedge fund manager Raj Rajaratnam with privileged information gleaned from Goldman Sachs board meetings — information that allowed Rajaratnam to make huge trades in Goldman stock before it was announced to the market. For instance, Gupta clued Rajaratnam into the news that Warren Buffett's Berkshire Hathaway was making a $5 billion investment in the bank just moments after Goldman's board received word. The illicit dealing, says Felix Salmon at Seeking Alpha , "seems to have been pretty blatant."

How much money did Gupta make?The SEC alleges that the insider trading generated more than $18 million in profits and loss avoidance — though it's unclear exactly how much, if any, went into Gupta's pockets. But the Goldman Sachs director was an investor in Rajaratnam's hedge fund, and had "other potentially lucrative business interests" with him, says the SEC.

And this guy's a real Wall Street big shot, right?He's "one of the most connected people in corporate America that you've never heard of," says John Carney at CNBC . He spent 34 years at consultant powerhouse

McKinsey, rising to become head of the firm. In 2001, he left to sit on the board of five well-known companies, including Goldman Sachs, Procter & Gamble, and American Airlines parent AMR. He is chairman of the International Chamber of Commerce, and sits on the boards of Wharton, Harvard and MIT's business schools. "Never before in the history of US securities laws has anyone this established, this well-connected, this close to the central core of American capitalism faced such charges."

Has corporate America turned its back on him now?Not yet. Gupta resigned from Goldman Sachs' board last year when the investigation began, and stood down voluntarily from P&G's board when these charges were announced. But he remains on the board of two public companies, and serves as non-executive chairman of a third.

Why'd he do it?It's a mystery, says Carney at CNBC . Gupta was already a top dog on Wall Street. "He doesn't need money, access, prestige or any favors at all." Maybe it was just hubris, says Evan Newmark at The Wall Street Journal . "It's hard not to think it was Gupta's own success that is in fact now bringing him down." Having risen to the pinnacle of the American corporate world, he was arrogant enough to think the rules didn't apply to him.

What does Gupta say about all this?He calls the allegations "totally baseless," and says he is confident he will be found not guilty. He also claims to have lost $10 million from Rajaratnam's hedge fund at the time the events took place. He will face trial on March 8.

LIBOR in crisis

Right on the margins of media coverage of business you'll see frequent

analysis of an esoteric corner of finance: the Libor crisis. Or Libor scandal?

Are we ready to term what has happened and what has surfaced an outright

scandal?

As much as ethics are studied in courses in business school and debated in

op-ed columns and books, we turn the page and find yet another scandal,

accusation of fraud, or sleight of hand by bankers or traders to manipulate

markets. Libor, this month. In previous months, we watched the insider-

trading convictions involving hedge-fund manager Raj Rajaratnam and

former Goldman Sachs board member Rajat Gupta. Years after the scandals

of Enron and Worldcom (and decades after Drexel Burnham and Ivan

Boesky), there continues to be the periodic crisis of ethics in finance.

For those not familiar with the nuances and mechanics of debt finance and

interest-rate swaps, "Libor" refers to the London Interbank Offering Rate, a

base cost of funding among top financial institutions, calculated in part based

on the margin cost of funding at major global banks. Banks that are members

of what is called the BBA (British Bankers' Association), including Citi,

Barclays, JPMorgan Chase and others, calculate internally their respective

marginal interest-rate costs of funding banking transactions and report those

figures to the BBA.

The figures from each bank ultimately contribute to the calculation of one

Libor rate. A bank's marginal cost is based, in part, on its access to funding

(deposits, borrowing from other banks, long-term borrowings, commercial-

paper investors, capital, etc.) and the weighted-average costs of its

borrowing structure. The reported Libor base rate is a calculation based on

the submitted rates of each bank.

Libor, through the years, has become a standard rate used as a basis to set

the interest rates on billions of dollars in loans and bonds and, reportedly,

trillions in interest-rate-related derivatives. A standard base rate makes it

easier for banks, traders, lenders, underwriters and trading-counter-parties to

negotiate and agree on interest rates in finance transactions. The BBA

supervised the regular, routine calculating and reporting of Libor, and the

rate was used as a standard in transactions all around the world.

When a group of banks (in syndication) and a large corporate borrower

negotiate a large floating-rate loan, for example, they don't need to squabble

over what floating rate. Libor is a convenient, fair, realistic base rate. (The

banks, of course, will add an appropriate "spread" above the three-month

Libor base rate.)

Some, especially those who know U.S. commercial banking, are familiar with

a bank's "prime rate," which for many years was a bank's base rate offering

for commercial and consumer loans. It, too, was calculated based on a bank's

marginal cost of funding. Libor is more expansive, more global, and tended to

be assigned to the largest of bank transactions (the billion-dollar syndicated

loan to IBM or the billion-dollar floating-rate bond issue from Pepsico).

If you glanced at the headlines, you would have seen recent announcements

of Barclays admitting to manipulating the calculation it does when it reports

to the BBA. And you would have seen the settlement it agreed to pay

regulators and the subsequent resignation of its chairman and CEO Robert

Diamond. Regulators in the U.S. and in the U.K. concluded Barclays submitted

lower rates than it should have to give the impression its funding costs are

low because of its strong financial health. Barclays, they claimed, didn't want

to alert investors or trading counter-parties that it might have had to pay

more to fund its balance sheet because of apparent financial difficulty.

As anyone who followed the collapse of both Lehman Brothers and Bear

Stearns knows, financial institutions, even those capitalized in the tens of

billions, cannot hint to markets they have difficulty funding the balance

sheet. The mere suggestion of trouble can spawn a "run on the bank" (short-

term investors demand payment immediately) or a demand by investors,

depositors, or lenders to pay higher, onerous funding rates.

Barclays is cooperating, and regulators and others have moved on to

investigate whether other banks did the same.

The calculation and pegging of Libor is, by no means, an idle, unimportant

exercise. Libor is used as the base rate in just about every significant

syndicated-finance loan, just about all corporate bonds of substantial size to

major corporations, and just about all interest-rate and currency swaps

traded in the derivatives sphere. It's also the base rate for just about all

structured-finance activities, from mortgage-backed securities to the

securitization of car loans and credit cars. To those deeply immersed in

finance, funding, and trading, you don't escape Libor.

The calculation, updating and reporting of Libor had been so routine that

many may have perceived it as a dull, perfunctory task, repeated day to day,

a process managed by systems and computer algorithms until a senior bank

official routinely blessed what that bank reported to the BBA. Few, if

anybody, across the world thought about the process of updating and

reporting Libor.

In fact, the process had likely become so routine and so taken for granted

that someone somewhere might have thought little of fudging the updates by

tinkering with a few basis points in the report to the BBA or thought that a

smidgen of fudging by one bank would have insignificant impact on the final,

reported Libor figure.

So while regulators explore whether the apparent scandal is more

widespread than we thought, what happens next?

As one research analyst reported this week, Barclays settled, and if other

banks are involved, they may elect to settle relative to the nominal Barclays

total ($450 million). But as with any crisis, after regulators are done, civil

lawsuits ensue. Because Libor determines the value (and, therefore, profits

and losses) in interest-rate swaps transactions, some traders will argue that

they should be compensated for certain losses or lower-than-expected

profits.

Barclays admits it under-stated its reported Libor contribution. That implies

borrowers paid a few basis points less in interest than they should have on

some deals. But that means investors will argue they should have been

entitled to more interest earned. Interest-rate swap traders will argue that

certain derivatives should have been valued more before they off-load them.

And, yes, regulators, after investigations and settlements, will step back to

decide how governments can ensure such manipulations and deceit will

never occur again. They may recommend government-supervised Libor

committees oversee the determinations of collective base rates or merely do

the calculations. It's too early to perceive where lawmakers will go from here.

The issue occupies a corner of the business press; it will certainly remain in

headlines for the rest of the year.

Lessons from Rajat Gupta’s Downfall

When I started my career, Rajat Gupta was an icon. Indian Gen X wanted to achieve his heights. He made us realize that Indian professionals can compete in the global arena and win. Now with his name tarnished with insider trading charges, every professional would be thinking – we don’t want to follow his path. The fall is always the hardest from the top floor of the building, not the ground floor. Whatever he built in his lifetime, today lies in shambles. His family is going to pay a heavy price for his wrong-doing. He has from being a case study on “what to do to fulfill your career dream” has become a study for “what not to do in your career”. I feel sad to say this, but here are some lessons all of us can learn from his downfall.

1. Poverty is in the mind and not in the bank balance - JP Morgan Chase estimated Gupta’s net-worth as US $ 130 million but as Rajaratnam joked – “Gupta wanted to be in the billionaires club“. Gupta’s greed got him down as he was unable to draw the line for his wants.

2. Don’t break the rules to get ahead - Gupta as ex-head of McKinsey knew he was duty bound to maintain confidentiality of boardroom information. He traded confidential information to meet his own personal targets. A McKinsey executive said - “It is mind-blowing that the guy who ran the firm for so many years could be going to jail for violating that principle.”

3. Choose friends carefully - That’s what parents say to kids but we forget it in our adult life. Gupta befriended Rajaratnam, and though one cannot say he lacked judgment, he did manage to rationalize wrong-doing to keep the friendship alive. He got enamored by the Rajaratnam’s lifestyle. Relationship with Rajaratnam, who had a dubious reputation, led him astray.

4. Keep feet firmly on the ground – Ideas of invincibility and grandiosity lead to delusional thinking. Rajat Gupta was fined by SEC for insider trading. Instead of paying the fine, he chose to pursue the case legally. With the indictment, he is facing over 10 years of prison sentence. He took the decision to challenge SEC due to over-confidence and arrogance.

5. Correct wrong-doing immediately – A person walking an unethical path rationalizes that s/he will get away with it, if they aren’t caught the first time. Gupta after doing insider trading for a few times got comfortable in his role. Mr. Naftalis said -“Having lived a lifetime of honesty and integrity, he didn’t turn into a criminal in the seventh decade of an otherwise praiseworthy life.” Gupta lost his principles over a time. He didn’t stop when he should have and didn’t take any corrective actions.

6. No one is above law – With the well-known figures in India and international arena facing trails and convictions, it is apparent that no one can escape the hands of justice. Sooner or later, the path will lead to a prison sentence. Being ethical pays in the long-run by keeping a person safe.

7. Protect your legacy – Rajat Gupta had an impeccable reputation of a world-class professional and a great humanitarian. His list of good deeds is long and was known as an exemplary citizen of the world. With these charges, he leaves a legacy of a criminal. A journey from the boardrooms to a prison cell. There can’t be a greater tragedy on the professional field.

Closing thoughts

It is heartbreaking to find that our heroes have feet of clay. Gupta traded a comfortable old age with a prison cell for satisfying his insatiable hunger for power and money. An extremely intelligent

man, an alumni of IIT and Harvard, failed to make the right ethical choices. In the end, Robert Gilbert’s quote comes to mind -

“Conquer your bad habits or they will conquer you.”

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McKinsey: life after Rajat Gupta

June 18, 2012 5:55 pm by Andrew Hill

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It was “values” day in many McKinsey offices on Friday – the annual occasion when

staff take a break from client work to reflect on the principles underpinning the

management consultancy. Rarely can they have had before them a case study as

timely and as dramatic as that of their former head, Rajat Gupta, who was convicted

that day of conspiracy and three counts of securities fraud related to trading in

Goldman Sachs’ stock by Raj Rajaratnam’s Galleon hedge fund.

At “the Firm”, the impact of Gupta’s decline and fall is still felt deeply. As I wrote last

year in my analysis of how McKinsey was handling the scandal, “what shocks staff

and alumni is that Rajat Gupta should stand accused of precisely [the] sins of self-

enrichment and self-aggrandisement” that its legendary former chief Marvin Bower

abhorred.

One former partner told me on Friday that “the most aggrieved groups are alumni

and senior partners who knew Rajat Gupta and continue to be somewhat baffled by

what led him to do this”. Another ex-McKinseyite, Roger Parry, now chairman of UK

pollster YouGov, admitted to feeling “a little bit devalued and diminished” by the

scandal.

But my sense is that while the trial brought punishment and humiliation for Gupta

(who will appeal against the verdict), it did not add much to McKinsey’s

embarrassment. The firm will not comment but no doubt it hopes the trial has drawn

a line under the affair.

As every member of the McKinsey network will tell you, the insider dealing offences

took place long after Gupta had ended his third term as global managing director in

2003 and after he retired from the firm in 2007. A concerted effort to reinforce

McKinsey’s principles started long before his trial and continues now, with Dominic

Barton, the current global MD, underlining, for instance, that the firm will be swift to

terminate staff who breach the Bower values.

If there was a day when McKinsey decided to abandon any lingering support for the

former boss, Friday was not it. That happened more than a year earlier, during the

Rajaratnam trial, when the court heard tapes of a 2008 call between Gupta and the

hedge fund manager. To McKinsey partners, the recording appeared to show Gupta

had known that Rajaratnam was paying Anil Kumar, still a McKinsey partner at the

time, for information.

The question of how someone with Gupta’s flaws made it to the top of the world’s

best-known consultancy remains. Whether the affair has inflicted lasting damage on

McKinsey’s client relations may not become clear for years.

But Friday’s conviction merely confirmed the firm’s worst fears. Most senior people at

McKinsey had judged Gupta long before – and found him wanting. A “not guilty”

verdict would not have brought him back into the fold.