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Wednesday, March 2, 2011

Fall of a legend: Indian-American corporate icon Rajat Gupta faces insider trading charges

Rajat Gupta
  In the growing pantheon of high-flying Indian internationalists, few have scaled the corporate heights Rajat Gupta achieved. IIT titan, Harvard Business School alum, top honcho at consulting giant McKinsey, and board member of Goldman Sachs, Proctor & Gamble, and American Airlines among other blue chip firms, he has epitomized Indian-American success in the United States. His storied reputation as a management maestro saw even the United Nations turn to him for advice on reforms.
But in a stunning turn of events, the US Securities and Exchange Commission on Tuesday accused Gupta of insider trading in an ongoing case that threatens to demolish the fabled career of the 62-year old corporate maven, who counts Bill Gates and Bill Clinton among his pals (he has been an adviser to both). Such is Gupta's stature and such is the gravity of the charge that some market analysts reckoned that he may be the most important businessman ever to be charged with a serious violation of securities laws.
According to the SEC, Gupta used his corporate board positions to supply confidential information to his friend Raj Rajaratnam, a Sri Lanka-born hedge fund manager who is set to go on trial next week on insider trading allegations. In one instance, the SEC charged, Gupta tipped off Rajaratnam minutes after the board of Goldman Sachs Group approved a $5-billion investment by Warren Buffett in the Wall Street firm at the height of the financial crisis, enabling Rajaratnam's Galleon hedge funds to rake in a quick $900,000 profit. In all, Gupta's tips generated more than $ 18 million in illicit gains for Rajratnam, SEC said.
The SEC backed it charges with citations of telephone records and calendar entries that showed Gupta and Rajratnam exchanging phone calls minutes after key board meeting decisions, which were followed by big stock purchases and sales by the latter, enabling quick profits. It also said Gupta was at the time of the exchanges a direct or indirect investor in at least some Galleon hedge funds, and had "other potentially lucrative business interests with Rajaratnam."
Gupta has denied through his lawyers any wrong doing even as Rajratnam, who was arrested by the FBI in October 2009 and subsequently secured bail, is fighting the charges against him. Both Gupta and Rajratnam are politically active in Democratic circles, counting friends among the high and mighty.
In fact, Rajaratnam has also been accused of conspiring with two other corporate executives of Indian origin, Intel Capital treasury department managing director Rajiv Goel, and Anil Kumar, a director of McKinsey & Co (both his classmates from Wharton '83), in the insider trading case already underway. But they were seen as relatively minor, mid-level managers.
The charge against Gupta takes the case to a whole new level, reaching into the most elite boardrooms of corporate America that welcomed the Indian immigrant into a tight club. Gupta, is also on the advisory boards of various top-line business schools (Harvard, Kellogg among them), was seen by many as the first Indian to break the glass ceiling in corporate America. More recently, he is the co-founder, along with former President Clinton and Citibank executive Victor Menezes, of the American India Foundation.
"Mr. Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets," said Robert Khuzami, the SEC's director of enforcement, in a statement. "Directors who violate the sanctity of boardroom confidences for private gain will be held to account for their illegal actions."
While Gupta and at least two other managers of Indian origin are under the gun, it turns out that the investigation and prosecution of the case is also in the hands of Indian-Americans. The SEC probe is being handled, among others, by Sanjay Wadhwa, of the Commission's Market Abuse Unit in New York. Rajratnam, meanwhile, is being prosecuted by Preet Bharara, who is the Justice Department's Attorney for Manhattan.

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