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McKinsey Rajat Gupta Case

McKinsey Rajat Gupta Case

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Published by Sahil Chhabra

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Published by: Sahil Chhabra on Dec 08, 2012
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Rajat Gupta, the former head of consulting firm McKinsey and board member of Goldman Sachs and Procter

& Gamble, was convicted on June 15 on three counts of passing inside information to Galleon Group founder Raj Rajaratnam. He was also convicted of one conspiracy charge but found not guilty on two other counts of securities fraud. - Gupta, 63, was accused of leaking details of P&G and Goldman board meetings to Rajaratnam, including confidential word of Berkshire Hathaway's $5 billion investment in the bank in 2008. The U.S. Securities and Exchange Commission also filed civil insider-trading charges against Gupta.

The recent conviction and sentencing ofRajat Gupta in the United States has led to a renewed focus on the problem of insider trading in securities markets. Unlike in other cases, the reportage on the case has tended to devote considerable attention to the admittedly outstanding work Gupta has done in empowering the disadvantaged by interventions in the areas of education and health. All this should not divert our attention from the seriousness of insider trading, which is a continuing challenge for regulators of the securities market. While lavishing praise on a jurisdiction that quickly and effectively addressed the issue in this case, we must not lose sight of the fact that it was not the US's regulatory body,Securities and Exchange Commission , but the prosecutors in New York that accomplished the task. Asymmetry of information is a major issue that strikes at the root of fairness of the securities market. A safe and sound market is one in which all information that is relevant to existing and potential investors is in the public domain through disclosures that are correct, complete and contemporaneous. Every insider, whether she or he is a director, a promoter or an employee, is privy to some information before the rest of the world is. If that information is passed onto someone who trades on that basis, the offence of insider trading is complete, whether or not the person who passed on the information or the one who acted on it made money in the process.
A safe and sound market is one in which all information that is relevant to investors is in the public domain through disclosures that are correct, complete and contemporaneous.

In that view of the matter, the jury held Gupta guilty on some of the charges brought against him. The claim, on which evidence was not allowed to be led, that Raj Rajaratnam, the recipient of information had other sources, is neither here nor there. What lessons, if any, are there for India in dealing with insider trading, which is allegedly rampant here? The first is to successfully conclude a few high profile cases in as short a time as possible. This alone will help address the perception that insider trading invariably goes unpunished in India. Matters might have been significantly different if the Bombay High Court had quickly decided a case involving senior officials of two MNCs who were found guilty by the then SEBI Chairman in 1998 and had the orders reversed by an appellate body shortly thereafter. If it is decided in SEBI's favour, even after the passage of so many years, it will give a fillip to SEBI's efforts at curbing insider trading. While SEBI has had a few successes, it is, as is often the case, the failures that have attracted attention and led to adverse conclusions and comments. Surveillance, investigation and enforcement are keys to effective regulation. SEBI has had, for some years now, a surveillance system that has thrown up a large number of alerts in real time. Acting on one of these, some years ago, SEBI officials had cracked the Nissan Copper case in less than two days. However, SEBI's manpower is inadequate, considering the large number of regulated entities, the very large number of transactions in the market, the increasing complexity of instruments and the innovative

In Mehta's case. might fall short of meeting the higher standard of the charge being proved beyond doubt. including information from Goldman Sachs. He will remain free on bail until sentencing on October 18. Rajaratnam's hedge fund. And this in a country which holds the record of trying and punishing the accused in a rape case in seven days time. Former Goldman Sachs director Rajat Gupta has been found guilty of leaking insider secrets to hedge-fund manager Raj Rajaratnam. Enforcement is an even bigger weakness than investigation. who was also managing partner of consulting firm McKinsey. bought $43m of Goldman stock in the final three minutes of the trading day and made nearly $1m on the trade. speed is of the essence. is the biggest conviction since Rajaratnam in a case that has sparked arrests from Wall Street to Silicon Valley. faces more than 20 years in jail. though not of insider trading. The 63-year-old was once one of the US's leading business figures. after putting in place the necessary safeguards based on experience. it would leave the investigation machinery and the enforcement officials in SEBI with the time and the bandwidth to effectively deal with the more important cases. effective and exemplary. Lloyd Blankfein. at least in cases that have systemic implications. Gupta was also accused of leaking information about Procter & Gamble. the latest player to be found guilty in the biggest insider dealing investigation in US history. at least in cases that have systemic implications. there will be no element of deterrence. a large number of which might be technical violations. Gupta. punished. Galleon. If this category can be dealt with by a system of consent orders. served his term. who served on the boards of the Rockefeller Foundation and the Bill & Melinda Gates Foundation. Blankfein was called to testify in the case. effective and exemplary. where he was also a director. Harshad Mehta and Nick Leeson committed their transgressions. The Indian-born executive. Many cases in which there is a high degree of probability that there has been wrongdoing. Leeson was tried. it is necessary to ensure that this system is not clogged with too many cases. Finally. Unless enforcement action is timely. To achieve this. In one incident Gupta called Rajaratnam a minute after taking part in a conference call with his Goldman Sachs colleagues at which the bank's boss. announced billionaire investor Warren Buffett planned to invest $5bn in it. The prosecution accused Gupta of using his privileged status to supply insider tips to Rajaratnam. wrote a book and lives happily or unhappily thereafter. . The jury in New York took two days to convict Gupta on charges of securities fraud and conspiracy. there will be no element of deterrence.malpractices that seemed to abound. Unless enforcement action is timely. around the same time. It is also necessary to ensure that securities market jurisprudence recognises that preponderance of probability is adequate to establish a case. there was only one conviction and that too in a cheque bouncing case before he passed away.

The street has them making $2. In calls Rajaratnam boasted to colleagues that he had heard "something good" about Goldman from a Goldman director. Lessons to be learnt The conviction of the Indian-American industry leader on charges of insider trading should serve as a wakeup call for the Indian Government to crack down on financial crimes here Convicted of insider trading. 63-year-old Indian-American industry captain Rajat Gupta’s professional journey has now led him to a US federal prison. Coffee said Gupta's legal team had mounted an "impressive" defence against a case that he said many prosecutors would have been reluctant to bring. . an investment firm he set up with Rajaratnam which invested in Galleon funds.So far 66 cases have been brought against people involved in the insider dealing associated with Galleon. talented. Gupta's lawyers had objected to the use of information gathered in wiretaps. he also met his future wife in the course of a one-act play in 1968. He is the 62nd person to be convicted or to have pleaded guilty out of 68 people charged since 2009. but the evidence against Gupta was far less compelling. Prosecutors argued that he called Rajaratnam time and again after learning of developments at companies where he served as a director. So far no-one charged has been found not guilty. Born into a middle class family in Kolkata. he did well academically. said: "Even in the Rajaratnam case where there was more of a 'smoking gun' the jury took 12 days.” and head of the college union. Gupta moved to New Delhi as a teenager after his parents passed away. where he was reportedly “a big man on campus. which failed. The defense argued that there was no evidence that Gupta profited. once a $7bn hedge fund. any alleged tip and said Gupta had considered suing Rajaratnam over Voyager. The jury appears to have been convinced by the pattern of Gupta's behavior. John Coffee. Adolf A Berle professor of law at Columbia law school." he said. after having paid a five million dollar fine." Much of the evidence brought against Gupta was circumstantial. The prosecution never accused Gupta of personally trading on inside information but argued he benefited from his stake in Voyager. bright. a technique more usually associated with mafia cases. popular. Rajaratnam was caught on dozens of wiretaps discussing inside information and trades he had made. The case brought by Manhattan US attorney Preet Bharara controversially used wiretaps to gather evidence. In another he told an employee: "I heard yesterday from somebody who's on the board of Goldman Sachs that they are gonna lose $2 per share. but district judge Jed Rakoff ruled that prosecutors could play three tapes for jurors. The prosecution offered only one substantive conversation between the two men. While at the IIT. He studied engineering at the prestigious Indian Institute of Technology in Delhi. But in spite of all handicaps.50. and legal experts said they were surprised at the speed of the jury's verdict. or traded on. and Rajaratnam did not trade on the information prosecutors alleged was shared. where he will serve a two-year long sentence.

a former Sebi chief said that the legal provisions in India and the US are entirely different. The Supreme Court.existent in India. even though we live in the 21st century. has only 26 judges. Even otherwise.634 are still vacant. as per the recommendations of the Law Commission made in 1988. Indeed. he even worked as newspaper delivery boy to support himself. India needs 50 judges per million people for the country to offer effective delivery of justice. His success inspired many Indians within corporate America and outside. in 1994. The market watchdog here. In the Indian system.000 judges with . of the 895 posts for High Court judges. That translates to approximately 80. There is still a provision for prosecution in India too. which has a sanctioned strength of 31 judges including the CJI. When asked about cases like the one against Gupta. Not only are Indian laws antique. Gupta became the first Indian-born chief of a top US international corporation. Even when Ramalinga Raju of Satyam admitted to his guilt. it is worthwhile to consider what would happen with cases of insider trading in India. What he did not say clearly was that the laws are almost as good as non. In some cases.008 posts. the onus still lies on the prosecution to prove the defendant’s guilt. For instance. he joined America’s top consultancy firm. but also the entire criminal justice system is weak. when he went to the US in 1971. In the lower courts. “We can only observe that our legal system has made life too easy for criminals and too difficult for law abiding citizens. By dint of sheer hard work.374 have been filled while 3. the former Sebi chief added that in the US. Instead. Donald Longueuil. It is apt to reproduce here what the Supreme Court said in August. out of the 18. For instance. Against this backdrop. But let us be clear that Gupta was neither the first nor will he be the last person to be convicted for trading insider information in the US. Michael Kimelman and Danielle Chiesi.” The former watchdog chief believes that such is the case because “we do not have earmarked judges. I admit that. until of course he was convicted for shocking corporate wrongdoing. In fact. Emanuel Goffer. However. as the former head of Sebi says. In fact. there are several others who have been recently punished for similar crimes. the investigators have more power and hence better chances of building a stronger case which can lead to prosecution and actual punishment. Two years later. We need special courts. 275 were lying vacant as of January 1 this year. If we want our prosecutions to succeed. we still cling to laws formulated in 1863. we have tried but found that litigation goes on for years together. as per the Union Law Ministry. He served as Managing Director of McKinsey & Company till 2003. at the age of 45. the emphasis is more on monetary penalty. These include the likes of Raj Rajaratnam. Zvi Goffer.It is said that Gupta wrote his application to Harvard Business School at the IIT coffee shop. only 14. the penalty is now much higher in cases like insider trading than it was before. we need earmarked judges.” Sebi of course has already sent proposals to the Government in this regard. in New York. McKinsey & Co. If that happens. the legal system required that a trial take place and he be given the opportunity to defend himself. the Securities and Exchange Board of India. there will be a marked improvement on this front. “Our prosecution is not succeeding to that level.” Indeed. has already requested the Union Government to set up special fast-track courts so as to bring the guilty to book.

But the Government has remained silent or non-responsive on this issue. it is the duty of any good Government to protect its citizens from the risk of being done out of his life and property. If we don’t act now.a proportionate increase in the number of investigators and prosecutors as well. simply because a bunch of greedy persons have resorted to financial trickery. it will be too late for the country to make amends. neither the Government nor the people of this country consider financial wrongdoing as a serious crime. Besides. There is no stigma attached to cheating or fraud in the stock market. . even though the Supreme Court has observed more than once that the criminal justice system has collapsed. Yet. The punishment given to Rajat Gupta is a wake-up call for our Government.

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