DOWNFALL OFAN ICON
His lawyer says the criminal case against Rajat Gupta is backed by weak evidence. But an anti-wall Street mood may see him get convicted for insider trading.
Diwali brought little joy for the once iconic Rajat Gupta, 62, who in 1994 became the first person born outside the US to head Mckinsey, a prestigious management consulting firm. In that capacity, he was also the first person of Indian origin to head a major global firm. On the morning of October 26, Gupta surrendered to the FBI, which arrested him in New York, on charges of insider trading. He was later released on bail on a surety of $10 million (Rs 50 crore).
Gupta has been charged with five counts of securities fraud and one count of conspiracy to commit securities fraud. The charges, if proved, carry a maximum term of 105 years in prison. His trial begins on April 9. The US authorities are determined to nail Gupta, the most prominent non-wall Street face among those caught in the Raj Rajaratnam insider trading case. Rajaratnam was convicted of making millions by trading stocks on the basis of illegal tip-offs in May and was sentenced to 11 years in prison in October. Gupta’s conviction will send out a strong message on corporate wrongdoing to boardrooms across America, and not just in Wall Street.
Gupta’s downfall is almost as remarkable as his rise. Born in Kolkata, he lost both his parents before he was 18. He earned a scholarship to study mechanical engineering at IIT, Delhi, and boarded a plane for the first time en route to Harvard Business School to do an MBA. He joined Mckinsey after Harvard and rose rapidly through the ranks to become its chief executive. During his nine-year stint as head of Mckinsey, the smooth and articulate Gupta, who likes to quote from the Gita in conversation, came to know most of the leading CEOS of America on a first-name basis.
He also became considerably wealthy. He owns a ranch in Colorado, a five-acre estate in Westport, Connecticut, which is now the collateral for his bail surety, and a multi-million dollar waterfront home in Florida. He did a lot of philanthropic work: he helped set up the Indian School of Business in Hyderabad and the Public Health Foundation of India. In 2005, he was appointed special advisor to then UN secretary general Kofi Annan on management reform.
But Gupta wanted more. Done with Mckinsey, he wanted to move into the world of private equity and hedge funds, from where the newest and richest poster boys of corporate America were emerging in the boom years between 2000 and 2008. The billionaires club attracted him. Rajaratnam was one of them. Rajaratnam said of Gupta, “He’s enamoured with (Henry) Kravis (boss of a big private equity firm), and I think he wants to be in that circle. That’s a billionaires circle...i think he sees an opportunity to make $100 million (Rs 500 crore) over the next five-10 years without doing a lot of work.” That desire locked him into a cosy relationship with Rajaratnam.
Still, six months ago, Gupta was off the hook from the prospect of going to prison when US authorities decided not to press criminal charges against him in the Rajaratnam case. On March 1, 2011, the US Securities and Exchange Commission ( SEC), America’s stock market regulator, filed a civil case against Gupta in a SECdesignated court. Under US law, it is easier to secure a conviction in civil administrative proceedings than in a criminal case: conviction in the former is guided by the principle of ‘preponderance of evidence’ while conviction in the latter depends on ‘proof beyond reasonable doubt.’
Gupta’s lawyer, Gary Naftalis, always wanted the case to be tried in a federal court. On April 12, Naftalis told the SEC court, “Gupta is the only Galleon-related defendant faced with
the denial of the right to a jury and important protections available only in federal court.” Gupta’s defence team was of the view that the case wasn’t strong enough to secure conviction based on proof beyond reasonable doubt. The SEC dropped the civil case in August. Two months later, buoyed by the conviction and sentencing of Rajaratnam, the US Attorney of New York’s southern district, the Ferozepur-born Preet Bharara, 43, decided to press criminal charges. Soon after Gupta’s arrest, the feisty Bharara, on a crusade to clean up Wall Street, said that Gupta was the “illegal eyes and ears” of Rajaratnam.
The case against Gupta is backed by strong circumstantial evidence but is not watertight. Prosecutors are relying on Gupta’s phone records which, on more than one occasion, reveal that he called Rajaratnam almost immediately after conference calls with the board of directors of Goldman Sachs. Gupta was a member of the board at the time (2008). On one of these occasions, it is alleged that Gupta passed on information about Warren Buffet’s $5 billion (Rs 25,000 crore) investment in Goldman Sachs to his friend Rajaratnam who instantly bought a significant number of Goldman Sachs shares only to sell them at a handsome profit after the Buffet investment was made public. FBI Assistant Director-inCharge Janice Fedarcyk said in a statement: “His eagerness to pass along inside information to Rajaratnam is nowhere more starkly evident than in the two instances where a total of 39 seconds elapsed between his learning of crucial Goldman Sachs information and lavishing it on his good friend.”
In Gupta’s favour is the fact that the conversation about Buffet’s investment was not wiretapped. The prosecutor’s argument is based on an inference from phone records and Rajaratnam’s trading activities. That may not be enough to convince a jury. Another piece of evidence is a wiretapped conversation in October 2008 in which Rajaratnam tells an employee that “he was told by a Goldman Sachs board member that the investment bank was losing $2 (Rs 100) a share”. Gupta is not named in the conversation and it is unlikely to be allowed as evidence on the grounds that it is hearsay. The prosecution has not revealed so far whether it has any evidence of Gupta benefiting financially from the tip-offs he gave Rajaratnam.
That the authorities were looking for more evidence against Gupta beyond the amount they had used in the Galleon case was revealed by Rajaratnam in a recent interview to
Newsweek. According to Rajaratnam, the prosecutors tried to strike a bargain with him till as recently as two weeks before his sentencing. He could provide proof against Gupta and earn a reduced sentence, possibly as little as 5 years, against the 11 years he ultimately got. “They wanted me to plea-bargain. They want to get Rajat. I am not going to do what people did to me. Rajat has four daughters,” said Rajaratnam in the interview.
Rajaratnam’s conviction was secured with the help of three people, all friends who turned approvers and testified against him: former employee Roomy Khan, former Mckinsey partner Anil Kumar and former Intel executive Rajiv Goel. For now, Rajaratnam, pained by what he views as their betrayal, has ruled out doing something similar to his friend Gupta.
Gupta’s lawyer Naftalis has finally got the legal forum he always wanted. He exuded confidence after his client secured bail. “The facts in this case demonstrate that Gupta is innocent of any of these charges and that he has always acted with honesty and integrity,” Naftalis said in a statement. The real challenge for him will likely be to persuade a jury in a country that is angry with the shenanigans of Wall Street and sceptical about the integrity of top corporate czars in the aftermath of the global financial crisis as well as the deep recession that has followed it.
FORMER MCKINSEYCHIEF EXECUTIVE RAJAT GUPTA
EXITS THE MANHATTAN FEDERALCOURT IN NEWYORK ON OCTOBER 26