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25 October 2012, Gateway House

The fall of Rajat Gupta

Rajat Gupta, former chief of McKinsey & Co., was sentenced to two years in jail for insider trading and a fine of $5 million. Whether that will send a deterrent message to corporate boardrooms, which prosecutors claim, is unclear.

Editorial Advisor, Gateway House

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Other executives have amassed more wealth over a career than Rajat K. Gupta, but few carried more prestige in the business world. As the head of McKinsey & Co., the premier U.S. consulting firm, Gupta wore the mantle of an international corporate statesman, someone who could be trusted to give advice and counsel beyond mere commercial interest. Political leaders, CEO’s, academicians and journalists all sought his opinion.

It was an extraordinary honour for any leader. For a native from India to rise to the position was doubly remarkable, demonstrating to his admirers the meritocracy and global reach of the U.S. economy.

But in the end, Gupta went down for a crime as tawdry as that of any Wall Street schlepper—insider trading. Gupta didn’t trade on the information for his own stock account, but rushed from board room meetings at Goldman Sachs to phone in secret deals so that his colleague Raj Rajaratnam of the top-performing Galleon Fund could buy ahead of the news. It wasn’t just a favor either. Gupta was seeking to set up his own fund with Rajaratnam.

On October 24 Gupta was sentenced to two years in jail and a fine of $5 million for his crimes, far less than the 11 years given to Rajaratnam but significant in that Gupta ran a full bore campaign before the sentencing to convince the judge he be relieved of jail time in return for doing public service work. Demonstrating the sweep of his former network, figures from Bill Gates to Kofi Annan wrote Judge Jed Rakoff testifying to Gupta’s contribution in humanitarian and charity endeavors and asking for leniency.

The prestige testimonial campaign didn’t work. If it had, ordinary Americans would have seen one more example of privilege winning out over a justice system which is supposed to treat all equally. In an election year where privilege for political and Wall Street elites is an embedded theme, it would have been yet another blow to public trust. Even so, Gupta’s sentence was light, compared to the eight years prosecutors had requested. Barring a successful appeal, it is likely to be spent in a “country club” prison, where minimum security and access to outside material is standard fare.

So why did Gupta do it? Days before his conviction by a New York jury, his financial adviser testified that he had a net worth, with his Westport Connecticut house included, of about $100 million plus some $5 million in pension income. By any normal standard, Gupta was a very rich man with the standing to raise significant funds from others for the humanitarian efforts his lawyers said he championed.

He will now go down as the highest profile executive convicted in a series of insider cases that have brought 70 convictions. Whether that will send a deterrent message to corporate boardrooms, which prosecutors claim, is unclear. To the U.S. government, insider trading is a serious violation of the securities.

But its cost to society, estimated at a few billion dollars a year, is a rounding error compared to the damage done by Wall Street executives to U.S. citizens and the world in the subprime crisis, where estimates range from a conservative $10 trillion to $49 trillion loss at the depth of the crash. Insider trading harms few Americans directly, but it does damage those Wall Streeters not ‘in’ on the deals. The subprime crisis, in which no leading U.S. banker has been indicted on criminal charges by the Obama administration, has cost the nation dearly, with $1 trillion deficits and a central bank printing $1 trillion in surplus money that has brought interest rates on savings for retirees to zero.

Those bailout actions have also hurt the re-election campaign of President Barack Obama, who his challenger Mitt Romney has depicted as a massive spender with little to show for it. Like Gupta who threw away his crown for a pittance, why Obama never took on the banks may now be a question only historians can answer.

Bob Dowling is the Editorial Advisor at Gateway House: Indian Council on Global Relations.

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