On Corporate Secret Service

What The Scam Is About

• Rajat Gupta is accused of passing information about Warren Buffet’s $ 5 billion investment in Goldman Sachs to Galleon Group’s Raj Rajaratnam, who used them to make a killing in the stockmarket
• Also, on June 10, 2008 Goldman CEO tells board of firm’s improved earnings
• Flurry of calls between Gupta and Rajaratnam; latter buys 350,000 Goldman shares 
• Six days later, Goldman announces quarterly earnings
• Rajaratnam sells shares, earns illicit profits of $ 13.6 million

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Marginalised social groups worldwide tend to embrace the astonishing feats of their achievers as their very own. And Gupta truly represented the acme of the Indian success story. A brilliant graduate from IIT Delhi, he did his MBA from Harvard Business School and joined global consultancy giant McKinsey in 1973. He was elected the company’s managing director 21 years later, becoming the first non-American to bag the coveted post. In 2000, he was ranked among the top 10 consultants globally, and was brought on the board of several blue-chip companies. He rubbed shoulders with Bill Clinton and Manmohan Singh, Microsoft’s Bill Gates and GE’s Jeff Immelt.

No wonder, the middle-class Indian is astonished to discover such avarice in Gupta. Says Kailash Joshi, who along with Gupta was one of the co-founders of the American India Foundation, “The diaspora placed a lot of confidence and esteem in people like Gupta. There is now a sense of disgust. It does bring down the model community image we have built over the years.”

Gupta’s fall from grace is particularly tragic because the charges against him haven’t yet been proved. He’s accused, among other things, of passing confidential information about an impending $5 billion investment by philanthropist Warren Buffett’s firm Berkshire Hathaway in Goldman Sachs to Raj Rajaratnam, who then made a killing in the stockmarket. The Securities and Exchange Commission (SEC) details several other incriminating communications between Gupta and Rajaratnam. For instance, when Goldman Sachs CEO Lloyd Blankfein discussed the firm’s improved earnings with its directors on June 10, 2008, there was a flurry of calls between Gupta and Rajaratnam between June 10 night and June 11 morning. The last of these calls was followed by Rajaratnam moving Galleon funds to purchase Goldman shares. The SEC notes, “Rajaratnam liquidated these positions on or around June 17, when Goldman made its quarterly earnings announcement. These transactions generated illicit profits of more than $13.6 million for the Galleon funds.” Gupta is said to have been a direct or indirect investor in at least some of these Galleon hedge funds.

In a statement provided to Outlook, Gupta’s lawyer, Gary Naftalis, said, “There is no allegation that Gupta traded in any of these securities or shared in any profits as part of any quid pro quo.” He further pointed out that Gupta had lost his entire $10 million investment in the GB Voyager Fund managed by Rajaratnam at the time of these events, “negating any motive to deviate from a lifetime of honesty and integrity”.

Gupta and Rajaratnam, a Sri Lankan by origin, have known each other for almost a decade, meeting for the first time through their work for the Indian School of Business (ISB), Hyderabad. Rajaratnam was a big donor to the ISB, which Gupta co-founded. ISB’s Sriram Gopalakrishnan, in a statement to Outlook, expressed the institute’s confidence in Gupta’s vindication. But such unstinted support has not come from those companies on whose board of directors Gupta served. His resignation has been accepted from AMR Corporation and its subsidiary American Airlines, Genpact and Harman Industries. And Procter & Gamble, whose secrets also he allegedly let out.

The diaspora is crestfallen because Gupta isn’t the only Indian to have been accused of passing inside information to Rajaratnam. For instance, Anil Kumar, a senior McKinsey executive, has already pleaded guilty and is expected to testify against Rajaratnam. Ditto Rajiv Goel of Intel Capital. Similarly, Deep Shah, a former analyst at Moody’s Investors Service, was criminally charged on November 4, 2009, for tipping Rajaratnam about Blackstone Group LP’s imminent takeover of Hilton Hotels Corp.

A Silicon Valley entrepreneur told Outlook on the condition of anonymity: “We are surprised because these are people working in blue-chip companies, extremely successful and should be role models for all of us. It is an embarrassment because these icons from the Indian American community are now caught in this web.” Adds Joshi, who finds the accusation against Gupta shocking, “It would be tragic for the Indian community if it is established that these individuals were part of unlawful activities for personal gains.”

Nadadur Vardhan, a senior tax consultant based in California, has a socio-psychological explanation for the violations of Gupta and friends. “For the first time, Indians have started making money. There is a sense of greed; in the process we have violated some rules and ethics. It was like an addiction, people got carried away.” Vardhan also blames the media for portraying Indians negatively. “The media never says a Jewish American was caught, but if it is an Indian American they always say a person of Indian origin was nabbed,” he points out.

The Silicon Valley entrepreneur dismisses talk of such media bias against Indians, saying the US is a country where even President Obama’s origins are discussed. Indians have come under the scanner, he argues, because of community dynamics. “The Indian American community has been growing; a lot of people have come from different backgrounds. It’s debatable whether all of them have the right moral grounding.” In other words, the bigger the diaspora, the greater the chances of a bad fish popping up. Anupam Govil, a member of The Indus Entrepreneurs Board, says as much, “You’re seeing more such things because Indian Americans have reached a level of mainstream integration.” The problem partly stems from strong kinship ties among Indians, who tend to carry their relationships from personal to work life. “There is a lesson here to keep those church and state boundaries separate,” adds the entrepreneur.

Govil counters those who feel Gupta has betrayed the community: “I don’t think it detracts from Gupta’s contributions, and I don’t think it creates a long-term negative image of Indian Americans. We are seeing a lot more positive images.” And one of these positive images has a touch of irony—two of the prosecutors in Rajaratnam’s trial are Indians, Preet Bharara and Sanjay Wadhwa.