“Your competence is only as good as you know how to judge the people around you”.
Rajat (Kumar) Gupta did not seem to have given hid to this simple and old proven fact. Once a revered guy, now became a fallen guy after he started trusting a unscrupulous person named Rajratnam .
A remarkable journey of a middle class Indian immigrant, whom any aspiring student would want to emulate, was disgraced by insider trading charges. The IIT rank-holder (ranked 15), who became an orphan at the early age of 16, went on to become the first Indian CEO of any multi-national corporation (Was at the helm of affairs of McKinsey for more than a decade).
A son of a freedom fighter (his father, who later become journalist) and a teacher (his mom), has been convicted by US prosecutors on 4 counts (out of 6) of conspiracy and securities fraud. The guy, who boasts a director seat on the board of — Goldman Sachs, P&G and American Airlines, is waiting for his sentence to be announced later this OCT where he may get jail term of upto 25yrs.
After sleeping for many yrs, US regulator and justice system is finally waking up to clean up the cases related to insider trading and other wall-street frauds. But in doing so, they resorted to some never-seen-before tactics named wire-tapes. This way of interrogation raises two basic questions:
- Should the investigating agency hack the privacy of any individual in the name of investigations of any nature? Using it for some cases of grave nature is justified but is it fair to use it for insider trading or capital market frauds?
- How much reliance should they put on the circumstantial nature of the conversations recorded in such tapes? Is putting 100% reliance on such peripheral nature of evidence is justified?
Rajat’s indisputable commitment and integrity has been testified during his trial by many of dignified people. Barring blankfien, everyone else has accepted the fact that he has been the man of utmost commitment and integrity for last 3 decades. Blankfein’s (the GS boss) testimony made the jury to conclude that Rajat has indeed breached his fiduciary duty by not keeping price-sensitive, non-public info confidential. In US and everywhere, people know how easy it’s to leak GS board’s under-discussed agenda.
A Counter questions to blankfein, you were discussing the proposal to bring in the equity capital from warren buffet into GS, which was alleged to be leaked by Rajat. Everyone knows the importance of liquidity for any firm. GS had a liquidty crunch and this proposal was like a life-line to GS (Without it they would have met with same fate as Lehman). So, Tell me What made you to reach to such a dire strait. You had bought some complex mortage bonds (by disregarding underlying nature of its risk) and then bought protection(CDS) for it from AIG. Didn’t you breach your fiduciary duty by not disclosing all the facts to board related to your transactions? You escaped unscathed just because your friend Henry Paulson was the US secretary of treasury.Now you, stupid, are alleging Rajat for leaking that info about getting a life-line .
His testimony for Gupta’s insider trading trial seems to be a case where a serial-killer is doing testimony against the person on trial for a petty thievery.
Yes, it was price sensitive info but for person of Rajat’s stature, it seems highly implausible that he would have tried to use it for his personal gain. The conversations, which he had with Rajratnam (just after the board meeting), could have been categorised as informal nature of discussions. Though, Rajat should not have discussed it but in those times lehman bankruptcy and AIG bailout talk were the only topic on everyone’s minds. So, Rajat would have slipped a bit and made some reference of GS board discussion to Rajratnam. This felony just warrants a censure not more than that. Financial markets were already abuzz with so many hearsay. So, markets were already irrational. It was a clear case of making some one scapegoat. So, US agencies picked Rajratnam and then Rajat.
Rajratnam was a clever man who used Rajat for his own favours. While Rajat thought Rajratnam is reliable person and he kept on sharing his experiences and his views about capital markets and in some cases some secrets as well. Rajranam had even convinced Rajat to invest his money in his hedge fund(Galleon) . The wire-tapes did not capture the instances where Rajat got to know the real motive of Rajratnam’s association with Rajat. This explains that rajat did not participated in sharing the info knowingly (The Law says person should not knowingly participate in sharing price-sensitive info). Though he knew he price-sensitiveness nature of the info, But he did it all unknowingly. So it should not be categorised as abuse of the positions or insider trading.
If he wanted to make money, he already had other smart ways of doing it. This is so because he had never been lack of ideas. During his long corporate career, he had established relationships with so many investors. US agencies who are calling him greedy should have realised that so far he used such relationships only for helping several NGOs and educational trusts in raising the money. With such huge list of contacts, he would have easily floated a private equity and picked up a right man to run the fund. This would have earned him millions.
Preet bharara, the US attorney (a person of Indian origin himself) took a little more interest in his case (seems to be an ego-clash between two Indian big-wiz). This guy cherry-picked only those wire-tapes which were making the Rajat’s defence weak. While other non-chosen tapes could have countermanded such allegations.
From the entire episodes, it has become evident that these cases were premeditated(by US agencies) and racial in nature. Nobody in the wall-street is a saint. It is just that some are less corrupt and some are more. US agencies seem to be fine with this corruption as long as these are done by their own white races. This is the reason that even after 4 yrs of Lehman bankruptcy, AIG bailouts, Citibank bailouts, GS bailouts etc, the root cause of these incidents are still unaddressed. Though, they are ensuring that they keep on doing clean-up exercise of small petty issues by using circumstantial evidences and publicizing it so much so that nobody may raise questions on their incompetence in handling the real issues.
Highly frustrating world….. !!
This entire drama has a potential to inspire many Bollywood producer to make a masaala movie out of it . Though, i’m sure that Obama would not let any Hollywood producer to fund a movie made on such storyline (which depicts US in bad lights) …… 🙂
Exclusively AmitGaurav..... 
extremely excellent article
As a person of Indian origin, I would like to share my views on this case. What brought down poor Mr. Gupta from his pinnacle of glory is neither his greed nor his desire to conquer new heights, but his Indian background. In the Indian society, if someone says ‘Ignorance of Law is no excuse’ most people will think that person is absolutely crazy. That accounts for the widespread corruption in India AT ALL LEVELS, so much so, that to get your five year old kid admitted into an English medium school in India you have to bribe, and this capitation fees, as they call it, gets worse and worse, to get into medical and engineering Schools. The society is not interested in getting rid of this practice.
Another sad aspect is the ignorance of most Indian students coming to US to study, about the US law and the moral ethics in business world. In my college days in America, I knew one very sharp grad student in Engineering, who knew nothing about the Rules of Take Home Tests in Colleges. He was utterly ignorant about the Rules and naïvely shared his test answers with his class buddies, and paid his price by flunking the course ! I won’t be surprised if Mr. Gupta had some of the old Indian naïveté and artlessness buried underneath under polished exterior with which he moved around in high society.
Granted, the financial rewards and opportunities are greater in the latter field, it clearly indicates that such engineers, who jump the band wagon, have no professional commitment in them since they are driven by the desire to acquire wealth, notwithstanding their past empty braggadocio about their engineering prowess from their IITs. I suppose they have to pay the price one day for such callous and naked greed.
Thanks for sharing your views Joseph.
In the Rajat case, i would not term it a negligence of laws because his Indian background. As you would be knowing, A Middle-class family in India is raised by inculcating so many good values in the child(what is good and what is bad). Like don’t do this, have fear with God, etc. Especially when you lose your parents at early age , you would try not to malign their soul by any of your bad acts.
coming to his knowledge of prevailing US laws … He has been in US since last 30 yrs. Even he has been at helm of one of the largest consultancy firm. Also he had won the trust of many dignitaries during this period. You can’t be hollow from your core and keep getting accepted by the society for 30 long years.
It was case of behaving as a common human being when you ideally should not have. You tell me what were your topics of the discussions for you post-lehman bankruptcy days. The likely developments which may take place in market, Right?. So, he was not different from us either. Since he had been privy to so many undisclosed info so he was not expected to go in much great length while discussing the likely developments with his close friends. Some of his friends used his info and made the trade.
“Rajratnam was a clever man who used Rajat for his own favours”
You are actually insulting Rajat Gupta’s intelligence by that comment. Do you think he was stupid to not realize what was going on ?
Additionally, US judicial system is much better when it comes to fairness. Do you think Rajat Gupta wouldn’t have hired the best defense attorneys ? He did and still the jury found him guilty. He might have done some altruism during his successful career stint of 30 years, but he didn’t play fair. Because of people like him, retail investors don’t trust the stock market. They either don’t go in or are slaughtered if they do.
2 years of sentence is laughable for such a heinous crime.
Denny, it was nice that you raised some flaws in my viewpoints.
I wish we must visualize the situations during the 2008 (when the bubble of credit derivatives got bust). It was a mayhem like situations in market. Market had already lost the retail investors’ trust. I had mentioned that “market was already behaving irrationally” because of the systemic risks associated with ill-financial health of counter-parties. In such situation, Rajat like many others, would have discussed with his close friends the prevailing market situations and the likely development which may happen. As i had mentioned everyone was talking about these stuffs only with each other. He too did similar stuffs and in doing so he seemed to have slipped by a great length. Rajratnam used those info meaningfully and did the trade(that’s why i said he was clever). Had it happened during normal market conditions then i would have agreed with your views that his act was done knowingly and this had indeed alienated the retail investors. Also, if i even accept your views that he indeed did it knowingly then do you think such things do not happen on regular basis. There are so much scope of doing it so if US judiciary are really serious about it then why we are not catching all such monsters irrespective their races.
Also, do you see that insider trading affect the market more than the systemic risks created by market participants(by introducing exotic financial instruments and hiding its actual exposure). What US Govt has done to address these. Punish those idiots first who did it (if we are really concerned about retail investor’s trust). Dodd-frank acts has been passed in 2010 but it is still to take its effect. But it may not be the panacea of all ills. market participants know it well how to obey the law in letters and but not in spirit.
We let the bank holding companies to acquire the broker-dealer firms. It has created more systemic risks for the good banks now because its newly acquired broker-dealer divisions can take more risks thanks to availability of great amount of capital. This has even made them a Too-Big-To-fail entity.
All obama wanted is to reduce the employment rate for short term at any costs to increase his chance of re-election. So, FED has come up with QE3 . Thus cheap money has come in the markets which would again create a bubble in the economy. Nobody is concerned about long term health of the economy.
It is frustrating and we are talking about Rajat –the small fish.