Page |1 Kristie Rose A.

Liswid

BSA V

A CASE ANALYSIS ON THE RAJAT GUPTA TRADING CASE

1. What are the facts of the case?

Rajat Gupta, a most-respected corporate directors of America, was convicted by the US

government on three counts of securities fraud and one count of conspiracy, for allegedly
leaking boardroom secrets about Goldman Sachs and Procter and Gamble Co. to a
billionaire hedge fund manager, Mr. Rajratnam, co-founder of Galleon Group who in turn
earned millions of dollars trading in his tips. He was accused of giving Mr. Rajaratnam
inside information on two issues crucial to Goldman’s financial health: a $5 billion
investment by Warren.

Mr. Gupta was sentenced to 24 month’s imprisonment, concurrent on all accounts, to be

followed by one year of supervised release. The otherwise mandatory forfeiture was
waived by the Government, but Court imposed fine in the sum of $5,000,000.

2. What is/are the primary issue/s involved in the case?

The primary issues involved in the Gupta case is/are as follows:

 The insider trading issue wherein Gupta leaked confidential information
to Mr. Rajratnam.
 Three counts of securities fraud

3. What are the ethical standards/considerations violated?

The ethical standards which are violated by Gupta are the following:

Integrity. Rajat Gupta does not show integrity to his company. Instead gives
away insider information for personal benefits.

Insider trading per se, apart from its association with fraud or violation of
fiduciary duty, involves engaging in financial investments based on information
others do not know about. It is apparent that such actions should be
considered to be ethically immoral since they affect others unfairly.

Analyzing the Rajaratnam case uncovers negative consequences.  Proponents of

legalizing insider trading hold up the Rajaratnam trial as an example of the
inefficacies of insider trading charges. The four main arguments advanced in
favor of legalizing insider trading do not stand up under scrutiny. Raj
Rajaratnam did act unethically by trading shares of Goldman Sachs on
September 23 and 24, 2008, and demonstrated why insider trading ought to
continue to be illegal.

TRUST. Gupta broke the trust to other directors on Goldman’s board and to of
other people with whom he has done business. His actions affect the
relationship with McKinsey & Company.

Management Consultancy
MIDTERM EXAM
Page |2 Kristie Rose A. Liswid

BSA V

FAIRNESS. Gupta’s actions are not fair for two reasons. First, other investors
who do not have the information on Buffet’s deal are at a disadvantage. Second,
he uses the information entrusted to him to benefit himself and Rajatnam.

HONESTY.He was not honest with Goldman Sachs and his fellow board
members to whom he implicitly promised not to share inside information.

SELF-CONTROL. If Rajat Gupta had self-control he would not have leaked

inside information to Rajaratnam for personal gain.

4. What are some mechanisms that you may suggest to develop moral character
amongst practitioners to avoid such case?

There are various mechanisms which can be used to develop moral character
amongst practitioners and avoid ethical lapses as in the Rajat Gupta case.
These suggestions include tighter government regulations, better systems and
processes in financial institutions, enhanced corporate governance, and
increasing the awareness of customers. Yet, a root of the problem is not
addressed: not teaching financial ethics in business schools, where moral
decision making should be the core lesson. If business schools provide future
financial managers with a proper ethical education, there is a chance that
situations like “Rajat Gupta and Insider Trading” may occur less frequently.

Management Consultancy
MIDTERM EXAM