CASE ANALYSIS ASSIGNMENT

From Boardrooms to Prison Cell:

Insider Trading

(Ethical Issues in Management)

Faculty Name: Name: Saurabh Singh

Dr. Alaknanda Menon Roll No. E043
Date of Submission: 6th Oct 2020 SAP ID: 80511020547
Case Facts:

The case involves Rajat Gupta an IIT Delhi graduate who has done his B.Tech
in Mechanical Engineering and an MBA from Harvard Business School. He
then became the Senior Partner Emeritus of McKinsey & Company and served
as a director of Goldman Sachs, Proctor & Gamble, Genpact, and AMR
Corporation. He was also on the Board of Rockefeller Foundation, World
Economic Forum, and Millennium Promise. Apart from this, he also holds
many reputed positions at different universities in the world and at several
prominent NGOs. Another person is Raj Rajaratnam, a Sri Lankan, the co-
founder of the Galleon Group Hedge Fund LLC. One more important person in
the case is Anil Kumar, an alumnus of IIT Mumbai, a highly regarded Senior
Partner at McKinsey, and co-founder of the Indian School of Business with
Rajat Gupta.

Rajat Gupta was found guilty by the US Government for passing confidential
information about Goldman Sachs Group Inc. and Procter & Gamble Co., while
he was serving as a member of the Board of directors, to Raj Rajaratnam. On
September 23, 2008, he called Rajaratnam, and gave him some tip about the
Goldman Sachs’ stock and Rajaratnam bought $43 million worth of stocks of
Goldman Sachs. The United States Securities and Exchange Commission (SEC)
registered a civil complaint about insider trading against Rajat Gupta and Raja
Rajaratnam on March 1, 2011. Anil Kumar was also indicted in the same case.
Gupta, Kumar, and Rajaratnam were all close associates and business partners.
On October 6, 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 attorney argued that any accusation that Gupta is involved in is
completely unfounded. The lawyer opposed the SEC charge and said that Gupta
did not give any information to Rajaratnam on security trading and did not earn
any profits by showing any favor to anyone. Attorney also argued that Rajat
Gupta was given the responsibility by some of the leading corporate houses of
America to be on their board, along with the other executives and directors. He
was having access to confidential information so that he could give advice and
counsel them. In April 2012, another charge relating to passing the P&G
information was added by the trial court. Gupta’s lawyers said that there is no
direct evidence but were on the basis of supposed circumstantial evidence.

It was alleged that Gupta, Rajaratnam, and Kumar were all involved in different
ways, in launching two private equity firms- Taj Capital and New Silk Route, as
partners. Rajaratnam and Kumar left before they began the process. Gupta
continued as the Chairman of the Silk Route, and Rajaratnam ultimately
invested $50 million in the fund. In April 2010, Gupta was accused of insider
trading along with Rajaratnam. McKinsey was also worried about its reputation,
although, Gupta was not associated with the company since 2007. But, the same
could not be said about the misdeeds of Gupta’s old friend Anil Kumar, who
pleaded guilty. The charge against Gupta was that he passed on the confidential
information to his friend Rajaratnam, that Warren Buffett was going to invest
$5 billion in Goldman Sachs. On September 23, 2008, Gupta learned about this
price-sensitive information at a board meeting of Goldman Sachs. Before it
became public knowledge, Rajaratnam immediately bought stocks of Goldman
Sachs and made a huge profit of $840,000 from the information in less than 24
hours. 
Gupta had, in fact, given Rajaratnam information about what happened in the
board meeting. Information was undoubtedly “privileged” and non-public”.
Based on the calls recorded, Rajaratnam was convicted of multiple counts of
securities fraud and conspiracy in an insider trading trial. Rajaratnam got
punishment for the misdeed. He went to jail for 11 years. In the telephonic
conversation captured in the wiretap of the phone call between Rajaratnam and
Gupta, held on July 29, 2008. Gupta informed Rajaratnam that there was a big
discussion on whether to acquire a commercial bank. The board was not talking
in clear terms, but more people believed it is lower return business.
Subsequently, the wiretap details revealed that Rajaratnam had conversations
with Daniel Chiesi, securities analyst, Ian Horowitz, a Galleon trader, Galleon
employees, Anil Kumar and David Lau, again a Galleon trader which showed
that Rajaratnam was involved along with his other associates in the transaction
of shares, which points at insider trading. Later it was found that Rajaratnam
has a network of almost 50 people that were involved from the organization in
such wrongdoing. 
Gupta was found on the wrong side of the law and charged with insider trading
by a 12-member jury. The judge struggled with coming to a decision on the
sentence. He called the jury’s verdict “totally warranted” and labelled tips as
“disgusting”. He explained, that while no defendant should be made a martyr to
the pubic passion, meaningful punishment is still necessary to reaffirm society’s
deep-seated need to see justice triumphant. Finally, Gupta was depicted to be
ambitious not just to make speedy money, but also as a way of life, where tips
are the currency of friendships and elite business relationships. He was
convicted on three counts of securities fraud and one count of conspiracy, for
passing confidential boardroom information about Goldman to a hedge fund
that earned millions of dollars trading in his tips. He was acquitted of two
counts of securities fraud, including the only one relating to P&G. Goldman
Sachs filed a $6.90 million of legal fees as compensation for the expenditure
incurred because of the insider trading case. While helping friends is not
necessarily a crime, insider trading is. Many big corporate leaders were standing
behind Gupta urging people to recognize the good Gupta did for the world and
also how grounded and selfless kind of person he is.
Case Perspective: 

The major issue in the case was that why did Rajat Gupta convey the inside
information to his friend Rajaratnam? Why Gupta did not have enough
motivation to act on the principles? Is it because of unrestrained craving for
money? The radicals were of the view that harsh punishment should be given to
Gupta. The corporate world has been divided on the issue of severity of
punishment. From the perspective of ethics, the question is, whether the human
being possesses genuine freedom of action, and in case of offense, it raises
serious worries about individual liberty.
This scenario can be associated with Personal values and Professional
responsibilities. In the ideal world, leaders should strongly believe in the
missions and values of their organizations and be deeply committed to meeting
their professional responsibilities. Leadership is not about privilege, rank, or
money but it is about responsibility. Rajat Gupta was stumbled by almost all the
obstacles that can keep leaders from sticking to their personal values. Because
of the nature of the work and culture of the trading industry, he could not
sustain his commitment to his work and the organization. Another is unbridled
self-interest under which in the wealth of nations, sometimes self-interest
distorts or overwhelms leaders’ decisions. They ignore their roles as members
of the organizations and society. This is what exactly happened with Rajat
Gupta where he did not think of the consequence even once before sharing the
tips with his friend Rajaratnam. This case comes under the “Right versus Wrong
situations” where either there is pressure from the superior to do something
unethical which was not the case with Gupta or no one asks anyone to do
anything but he himself felt to carry on with passing the information regardless
of ethics or legality. There was an option of raising the voice against what was
happening in Galleon Group by the employees and finding ways to caution,
warn, and persuade and offering alternatives to dubious propositions. 

Another angle to look at the case is that an insight into holding someone
responsible shows, that an individual is accountable for his action only when the
act is within the agent’s power, within absolute internal freedom of the person,
absence of external control, and other overpowering conditions. In this case,
whether Gupta’s indulgence in the act of insider trading was inadvertent or
sheer negligence or he did with full knowledge of the consequences.

I believe that what he did was with full knowledge of the consequences and if I
would have been at Rajat Gupta’s place, I would not have moved ahead with
providing information to my friend Rajaratnam as I would have been well aware
of the consequences and also being in the industry for such a long time I would
be well aware of the industry norms and what all information is sensitive and
which information needs to be shared and which should not. Being at the top
positions of many organizations, I would have been well aware of my image in
the industry as well as the organization I am part of so any mistake intentional
or unintentional would harm my organization image. Keeping myself at Rajat
Gupta’s position assure me of power, network, money, and reputation which
any person would dream of and I would not be doing anything silly to lose any
of those things. So Rajat should also have been more careful about the doings as
Rajaratnam was making him a partner in crime to make free money for his
hedge funds by using the network which he has built through friendship. I
would have said no to Rajaratnam for such information sharing and had also
explained him the position of responsibility which I carry and if he still insists
on it then there is no point in having such friendship where the other person is
not able to understand your position and forcing you to behave unethically. It is
individual’s personal values that help them in choosing the direction in which
they want to go so I would have taken into consideration my personal value
based on which I would have made my rationale to not involve myself in such
happening as one incident has impacted poorly many stakeholders involved like
organization’s reputation, Rajaratnam going to jail, Gupta losing his reputation
in the market, Goldman Sachs and P&G facing losses and the lack of trust from
participants in the trading industry. Avoiding one such incident would not have
impacted anyone and it was not such a difficult ethical dilemma where you are
being forced to do something so there was no external pressure which was a big
relief and the choice was totally Rajat’s whether to call the shots or not. If he
would have analyzed the situation and had not fallen for money or self-interest
would have saved so many careers and their reputation.

Although many people couldn’t believe that Gupta has been convicted for
sharing information with his associate based on the logic that if this is the
scenario then more than half of India would have been behind the bars. My
opinion is that the law is different in different countries and you have to follow
the law of the country where you are living and doing your work so it doesn’t
matter how the law is in any other country whether it is strict or lenient. The
definition of insider trading is very broad and cannot be explicitly defined based
on each scenario but the person who is anyway related to the organization in
any way and has some inside information will be considered as doing insider
trading if sharing with other people and making money by using that
information. But on the other hand, if a person who has no relationship with the
organization in any form and has overheard the conversation and then use the
information to make profits will not be accused of insider trading. It is not easy
to convict any person of insider trading.
 Now I would like to explain my decision using the framework of ethical
reasoning which will give a clear idea about all the stakeholders that would
have impacted both in the short and long run based on my decision.
Decision: Rajat Gupta should not have shared any non-public/secret information
discussed in the board of directors meeting with his friend Rajaratnam whether
that was any way related to insider trading or not.

Stakeholders Short Term Impact Long Term Impact

Rajat Gupta Would not have been Would have continued leading
convicted with insider big organizations and
trading and maintained appreciated his personal values.
his reputation.
Raj Rajaratnam Would not have given Still would be leading the hedge
such big profits to his fund and doing well in the
hedge fund but also business.
would not have been
charged with 11years
sentence.
Anil Kumar Would not have been There would have been no
involved in insider major changes in his life.
trading and maintained
his reputation.
Goldman Sachs Would not have faced The Warren Buffet investment
the losses and not have would have led to profit for the
been betrayed by an ex- organization and greater growth
employee. Also need not perspective for the future.
have asked for
compensation.
Galleon Group Would not have earned It would have existed in the
such big profits in such future as well and might still be
short time so growth one of the top hedge funds in the
could have been slow. US.

 Am I comfortable with the likely consequences of this action?

Yes, I am comfortable with the consequences as in this case there will be
no negative consequences if Rajat chose not to disclose the information.
 Am I meeting my duties and respecting other’s rights?
Yes, I am meeting my duties of being a responsible employee of the
organization and not harming other rights by not disclosing the
information.
 Am I respecting the communities and its norms?
Yes, I am respecting the communities and its norm as Rajat is not giving
information to his friend, Rajaratnam who then cannot take unfair
advantage and everyone in the market has fair chance of making the
profit.