Gupta Secretly Defied McKinsey Before SEC Tip Accusation
By John Helyar, Carol Hymowitz and Mehul Srivastava - May 17, 2011 10:03 AM PT
Bloomberg Markets Magazine
Rajat Gupta, seen here as senior partner emeritus of McKinsey & Company. Photographer: Seokyong Lee/Bloomberg
March 24 (Bloomberg) -- Lloyd Blankfein, chief executive officer of Goldman Sachs Group, told a jury yesterday that former Goldman board member Rajat Gupta violated the firm’s confidentiality policies by allegedly telling Raj Rajaratnam about the firm’s earnings and strategic plans. Prosecutors called Blankfein to the stand to help build their case that Rajaratnam, the Galleon Group LLC hedge fund co-founder, traded on inside information about Goldman Sachs he obtained from Gupta. Bloomberg's Jon Erlichman reports. (Source: Bloomberg)
Rajat Gupta, seen here as former senior worldwide partner at McKinsey & Co., and a board member of AMR Corp., the parent company of American Airlines, leaving the company's annual shareholders meeting in New York on May 19, 2010. Photographer: Ramin Talaie/Bloomberg
Rajat Gupta speaks during the United Nations General Assembly on September 14, 2005. Photographer: Paulo Filgueiras/United Nations via Bloomberg
On a sunny Friday afternoon in June 2003, Rajat Gupta was greeted at his waterfront home in Westport, Connecticut, by scores of his McKinsey & Co. partners. They had come from London, Frankfurt, New Delhi and other cities around the world -- and brought along an elephant, which they tethered on the front lawn.
Gupta was stepping down after nine years as managing director of the global consulting firm, and his colleagues were gathered to celebrate his tenure and wish him the best in the next phase of his career.
They offered champagne toasts and took photos of Gupta, standing next to the elephant, which was draped in a brightly colored shawl called a jhool. The decorated elephant represented the Hindu god Ganesh, who bestows good fortune on new ventures. Gupta smiled as he rested his arm on its trunk, Bloomberg Markets magazine reports in its July issue.
Today, some of those same people say they’re stunned by what they’ve since learned about Gupta. In March, the U.S. Securities and Exchange Commission filed an administrative order against him saying that he had passed confidential information to hedge fund billionaire Raj Rajaratnam, the central figure in the biggest crackdown on insider trading in U.S. history.
Rajaratnam was convicted on 14 counts of conspiracy and securities fraud on May 11 and could face 19 years in prison, pending his July 29 sentencing in federal court.
Double Life
Government wiretaps and phone records show that Gupta called Rajaratnam nine times in 2008 and 2009, giving the hedge fund manager information to make trades for his New York-based Galleon Group LLC.
Gupta, 62, who divides his time between his Connecticut home, a Manhattan apartment and a Florida getaway, has lived a double life. For 34 years until 2007, he worked for McKinsey, including nine years as the top executive of one of the world’s most trusted and prestigious consulting firms.
He was the confidant of chief executive officers such as Goldman Sachs Group Inc. (GS)’s Lloyd Blankfein and Procter & Gamble Co. (PG)’s former head A. G. Lafley. Gupta sat on the boards of both of those companies -- and he was a director at four other publicly traded corporations.
As a philanthropist, Gupta raised millions of dollars for education and health care, especially in India where he was born and to which he wanted to give back. He’s done charitable work with Microsoft Corp. co-founder Bill Gates, former U.S. President Bill Clinton and Indian Prime Minister Manmohan Singh. Friends describe him as brilliant and humble.
Keeping Secrets
At McKinsey, a firm known for keeping secrets, Gupta harbored a few of his own. As the managing director and then as senior partner of McKinsey for four more years before he retired, he ran his own consulting business on the side -- a violation of McKinsey rules.
He and Anil Kumar, a former McKinsey partner who last year pleaded guilty to passing confidential information to Rajaratnam, set up their own consulting company. Gupta also independently advised Genpact Ltd. (G), a Gurgaon, India-based firm that manages business processes for other companies. That work, too, broke McKinsey’s rules.
“It has always been a clear violation of our values and professional standards for any firm member to provide consulting or advisory services outside of McKinsey for personal monetary gain,” says Michael Stewart, a McKinsey partner and director of communications.
McKinsey conducted an internal investigation of Gupta and Kumar, and has cooperated with prosecutors and the SEC.
Off Track
During the past decade, Gupta, who was already a millionaire, began to veer off track. He spent more time with Wall Street money managers. He told colleagues that he wanted to be a dealmaker, not just a consultant. Gupta declined to comment on what he told his colleagues or on anything else reported in this story.
While Gupta was devoted to his philanthropy in India, his quest to amass great wealth led him to lapses in judgment, says Bala Balachandran, dean of the Great Lakes Institute of Management in Chennai, India, and a friend for almost three decades.
“He wanted a billionaire’s life and the question for him was how could he become a billionaire in a short time,” Balachandran says.
Gupta, a man to whom corporate chieftans turned for advice and counsel, chose poorly when it came to investment partners.
In December 2006, two years before he reached McKinsey’s mandatory retirement age of 60, Gupta co-founded private equity firm New Silk Route Partners with investors, three of whom had previously paid fines to settle SEC actions against them.
The Fines
Among the three was Rajaratnam, whose Galleon Group paid a $2 million fine and forfeited profits to the government in May 2005 to settle an SEC complaint it had made improper trades. He neither admitted nor denied wrongdoing.
Two other investors in New Silk Route, Parag Saxena and Victor Menezes, like Gupta, had connections in the U.S. and India.
Saxena, a former money manager, paid a $250,000 fine in 1994 to settle civil claims that he had received pre-initial- public-offering stock in companies at big discounts and then recommended the shares to his clients at Chancellor Capital Management Inc., after the companies went public.
In January 2006, Menezes, a former Citigroup Inc. (C) senior vice chairman, paid $2.7 million in a fine and forfeited trading profits to the U.S. to settle SEC charges that he sold Citigroup holdings ahead of an announcement of losses from a subsidiary in Argentina. Both men neither admitted nor denied wrongdoing.
Balachandran says he warned Gupta of his choice of business partners.
‘The Chicken Flu’
“You’re an eagle, so why do you want to be with these chickens who can’t fly?,” Balachandran says he told Gupta. “You’ll get the chicken flu.”
Gupta hasn’t been charged with a crime in the Galleon insider trading scandal. The SEC administrative action against him is a civil complaint -- and the most that could happen to him is a fine and a consent decree that could bar him from serving on public company boards in the U.S.
Gupta and Rajaratnam have known each other since the 1990s, and their relationship is both personal and professional. Gupta invested $10 million of his own money with Rajaratnam, according to Gupta’s lawyer, Gary Naftalis. Gupta gave Rajaratnam more than money; he passed along information on Goldman and P&G, prosecutors said during Rajaratnam’s trial in Manhattan.
Unindicted Co-Conspirator
Justice Department prosecutors called Gupta an unindicted co-conspirator. They presented wiretap evidence to the Rajaratnam jury showing that Gupta had told the hedge fund manager that in 2008 Goldman Sachs’s board was discussing possible acquisitions of American International Group Inc. or Wachovia Corp.
Gupta also gave Rajaratnam early word on earnings at Goldman Sachs and P&G, the SEC says in its action.
Gupta sent an e-mail in late February to fellow directors of the Indian School of Business, declaring his innocence.
“I have done nothing wrong,” he wrote to the board of the school, which he co-founded in 2001 in Hyderabad. “The SEC’s allegations are totally baseless.”
For the 85-year-old McKinsey, the Kumar conviction and the SEC action against Gupta have been a blow to its elite image. The firm counts among its clients hundreds of the world’s leading corporations, including Bloomberg LP, and governments.
Old Boys’ Club
Consultants never talk about their clients in public, and the firm won’t even disclose customers’ identities. Leaders of major companies have started their careers at McKinsey, including Boeing Co. CEO Jim McNerney, former American Express Co. head Harvey Golub and one-time International Business Machines Corp. CEO Lou Gerstner.
For decades, until the 1970s, the firm was the ultimate old boys’ club, where consultants were required to wear hats and long, dark-colored socks, with white, button-down cotton shirts and conservative suits. Gupta was the first nonwhite and non- U.S.-born elected managing director of the firm.
McKinsey veterans have been deeply troubled by Gupta’s run- in with the SEC.
“I was shocked, totally and completely shocked, at the news of the allegations,” says Ian Davis, who succeeded Gupta as McKinsey’s managing director from 2003 until 2009 and is now a director of BP Plc and Johnson & Johnson.
Gupta got caught up in envy and emulation of the super- rich, says Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco.
‘Seductive Power’
“You can never underestimate the seductive power of three or more zeroes added to net-worth numbers,” says Connelly, a former managing director at Salomon Brothers Inc. “You can be successful, but if you’re in hedge fund managers’ circles and you’re not rich like them, you can start asking, ‘Why can’t I get that? I’m every bit as smart.’”
Smart is a word people often use when describing Gupta. His ascent from lower-middle-class roots in Kolkata to the top of McKinsey is a triumph of brainpower and drive.
He was born in December 1948, 14 months after India became independent of British rule. His father, a journalist who worked for two newspapers, fought for India’s independence and was jailed several times for his political activism. His mother was a teacher in a Montessori school.
The family moved to New Delhi when Gupta was five. He, his two sisters and younger brother attended Modern School, one of India’s few English-language, Western-style high schools at the time -- located off what was then New Delhi’s most exclusive shopping district, Connaught Place.
Orphaned at 18
Gupta was orphaned at age 18 after both his parents died of natural causes within two years of each other. He persuaded an unmarried aunt to live with him and his siblings, according to a 1994 interview Gupta gave to ‘Business Today,’ an Indian magazine.
He said he was shattered by his father’s death and became very studious, careful never to make a mistake that could cost him his high school scholarship.
Gupta ranked in the top 20 applicants among hundreds of thousands of Indian youth who took the entrance examination in 1966 for a spot at the elite Indian Institute of Technology, according to an interview he gave to the “Economic Times” of India when he became head of McKinsey.
He chose the Delhi campus, which kept him close to home and, in 1971, he earned a bachelor’s degree in mechanical engineering. His main leisure activity was acting in plays in the school’s drama club, where he met his future wife, Anita Mattoo, an electrical engineering student.
Choosing Harvard
In the socialist India of the 1970s, white-collar positions outside the civil service were scarce. Gupta got his first job offer from ITC Ltd. (ITC), a British-owned company that sold cigarettes and ran hotels. He turned it down when he was admitted to Harvard Business School on scholarship.
The academic workload was unrelenting for most but not for Gupta, says John Carberry, who lived in the same Boston dormitory and was Gupta’s friend.
“Sometimes we’d still be doing cases at 2 a.m., but he’d be done by 11 p.m. and lying on his bed, watching Johnny Carson,” says Carberry, who’s now president of Wellesley, Massachusetts-based F.L. Putnam Investment Management Co. “But if you had problems with your schoolwork, he’d always help.”
McKinsey Tightens Rules
Meanwhile, McKinsey has tightened its rules, barring consultants and support staff, as well as their spouses and children, from investing in any company McKinsey has served in the past five years or is cultivating. Employees also are required to take a test about this policy and won’t receive their bonus unless they achieve a 100 percent score.
Gupta’s former Harvard dorm mate Carberry says he’s dumbfounded as to what went wrong with his friend.
“If the SEC charges are true, something happened to Rajat,” he says. “The Rajat I knew at business school was of the highest integrity. The Rajat I’ve heard on wiretapped conversations isn’t the person I knew.”
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