rajat gupta case issues

7/21/2019 Rajat Gupta Case Issues

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The issues involved with the Rajat Gupta case and relevant learnings

The need for ethics

One of the reasons for Gupta’s downfall was his greed. In a wire-tapped phone call,

Rajaratnam said, “And I think here he sees the opportunit to make !"## million o$er thene%t fi$e ears or "# ears without doing a lot of work& he wants to 'e in that

('illionaire’s) circle.* As Gupta 'ecame enthralled ' the lifestle of the opulent

Rajaratnam, Gupta’s greed for more allegedl dro$e him towards di$ulging corporate

secrets. +he fact that he had 'een in$ol$ed in se$eral philanthropic acti$ities makes his

lapse in judgement more perple%ing. a'e e$en the 'est men could fall pre to greed.

In the past, successful 'usinesses ha$e failed due to a lack of 'usiness ethics and $alues.

or a 'usiness to 'e sustaina'le, it must focus on customer relationships and alwas

stri$e to esta'lish trust with the communit it is ser$ing. +o accomplish this, 'usinesses

need to facilitate a caring foundation for its customers and esta'lish a strong connection

that will lea$e a long-lasting impression. ithout following the $alues and ethics of a

'usiness, an organi/ation cannot succeed. Gupta’s professional career had inspired man

future 'usiness leaders to esta'lish strong ethical frameworks and pursue a life of

honest. rom growing up as an orphan and graduating from 0ar$ard 1usiness 2chool

on a scholarship, Gupta had inspired man people to pursue their dreams e$en when

gi$en little resources. As the glo'al head of c3inse and later joining the 'oards of

companies like Goldman and 4rocter 5 Gam'le, Gupta focused on esta'lishing the

ethical frameworks and $alues of man firms, which ultimatel lead to their success. ith his recent prosecution howe$er, 'usiness leaders need to 'e aware that ethics is an

e%tensi$e concept and is not all a'out generating profits and making the num'ers. 6thics

is a'out esta'lishing a strong connection 'etween 'usinesses and the world surrounding

them.

6%amples of diso'eing a compan’s $alues is trading on inside information to get ahead

of the stock market and gain e%cess re$enue. Gupta did not uphold his personal $alues

and ethics 'ecause insider trading is dishonest and lea$es other people at a disad$antage.

+he reason this accusation is so significant is 'ecause it e%emplifies the importance of

maintaining strong 'usiness ethics. +he primar aim of 'usiness should not 'e to just

ma%imi/e profits7 it should also facilitate the needs of societ and work towards ser$ing

the communit. If a 'usiness is caught diso'eing its ethical framework through illegal

practices, negati$e e%ternalities, and dishonest, it will loose all credi'ilit and ultimatel

fail in the long run. Goldman 2achs, for e%ample, was caught 'etting against its own

poor performing deals to loal, 'ut na8$e, customers in the housing 'u''le of 9##:. +his



tpe of 'usiness practice is unethical and takes awa from a compan’s reputation.

Ethical and moral analysis

ould a $irtuous person ha$e leaked the information to Raj Rajaratnam; Rajat Guptashowed a failure of character<

Integrity< Integrit is honest and truthfulness or accurac of a person’s action. Rajat

Gupta does not show integrit to his compan Goldman 2achs, where he was a 1oard of

=irector. Instead gi$es awa insider information for personal 'enefits.

Trust : Rajat Gupta 'roke the trust to other =irectors on Goldman’s 'oard and to of other

people with whom he has done 'usiness. 0is actions affect the relationship with

c3insle 5 >ompan.

Fairness: Rajat Gupta’s actions are not fair for two reasons. irst, other in$estors who donot ha$e the information on 1uffett’s deal are at a disad$antage. 2econd, he uses the

information entrusted to him to 'enefit himself and Rajaratnam.

Honesty: 0e was not honest with Goldman 2achs and his fellow 'oard mem'ers to

whom he implicitl promised not to share inside information.

Self-Control : If Rajat Gupta had self-control he would not ha$e leaked inside

information to Rajaratnam for personal gain.

Gupta was commended ' people who knew him as a person who helped others. 0e was$er acti$e in pro$iding medical and humanitarian relief to the de$eloping countries.

1orn to hum'le circumstances, he 'ecame a pillar of the consulting communit and a

trusted ad$isor to the world’s leading companies and organi/ations. A word that was used

repeatedl in media co$erage for Rajat Gupta during his trial was “respected .* In the past,

much less so now, we assume people in leadership positions are $irtuous. 0owe$er,

instances like the Rajat Gupta insider trading case and other financial scandals remind us

that the assumption is not well-founded.

Past legacy and the future

6ssentiall, r. Rajat Gupta was a great role model. 0e was the first glo'al corporate

leader and Indians aspired to follow in his footsteps. 0is prowess was not just limited to

the 'oardrooms of c3inse, Goldman 2achs, and 4rocter 5 Gam'le 'ut also the fields

of education and health. 0e was a co-founder of the American India oundation and the

Indian 2chool of 1usiness. A ke mem'er of se$eral charita'le foundations like +he

Gates oundation, Gupta could ha$e left an enduring legac.



Instead his past few ears would 'e remem'ered e%emplifing the need for ethics and

morals in the corporate world, and the future generation of leaders. +he lessons from the

Rajat Gupta case could lead to the right ethical choices, 'etter corporate go$ernance, and

faster legal actions. +he words of the presiding judge ?ed Rakoff a'out Gupta,

prominentl come to mind.

“He is a good man. But the history of this country and the world, I'm afraid, is full of

eam!les of good men who do "ad things.#

Legal issues

Tighter controls

2e$eral instances of insider trading and corporate fraud ha$e 'een reported o$er the past

few ears around the world. hile these cases onl seem to 'e the tip of the ice'erg, the

penalties imposed on the con$icted ha$e not done much to put fear in the guilt. or e%ample, the median prison term for insider-trading con$ictions from 9##@ to 9#"" in

2A is B# months. In fact, there has not 'een a case of con$icted people going to prison

in India on account of insider trading. +he ma%imum penalt of !C million looks

miniscule compared to the wealth amassed ' such parties.

It is of paramount importance that 'oardroom pri$ac remains sacrosanct in the corporate

world. In order to deter the miscreants, tighter controls and stricter penalties must 'e

enforced ' the authorities. At the same time, instances where continued displas of

integrit should 'e recognised and rewarded ' the firm and the societ.

Lessons for India

+he actions of not just Gupta 'ut also the law enforcement agencies and the regulator

'odies could ser$e as a lesson for India. In ?ul 9##:, 1I agents listened in on a call

'etween Gupta and Rajaratnam in$ol$ing discussion of confidential information. Gupta

and Rajaratnam were found guilt ' ?une 9#"9 and their sentence was imposed '

Octo'er 9#"9. In just o$er four ears, the authorities con$icted one of the most high-

profile 'usinessmen in 2A, ha$ing contacts with 1ill Gates, 1ill >linton, and 3ofi

Annan.

hile insider trading is alleged to 'e rampant in Indian markets, there ha$e 'een $er

few cases of con$iction. In addition, se$eral cases of corporate fraud and conspirac ha$e

'een kept on the 'ack-'urner in India. +he most recent high-profile case is that of r.

Ramalinga Raju of the erstwhile 2atam >omputers. In spite of r. Raju admitting to his

fraudulent acti$ities in 9##@, the end of the court case is nowhere in sight. +he prime



accused in a "@@9 securities scam, 0arshad ehta died in jail in 9##" with man

litigations pending against him. A similar gap of nine ears is seen 'etween the fraud and

the con$iction of 3etan 4arekh.

+here is an alarming lack of speed and alacrit in the Indian enforcement agencies,

especiall in matters of corporate fraud. +he due process, in most cases is hindered '

se$eral political and sstemic o'stacles. A speed resolution with a strict penalt to the

impending insider trading cases would mo$e the sstem in the right direction. Another

aspect of the Rajat Gupta case critical to its speed completion was the cooperation

'etween the federal authorities, the law enforcement agencies and the securities

commission. 261I could take similar steps to apprehend people in$ol$ed in insider

trading in India.



Decisions Made

ormer Goldman 2achs director Rajat Gupta was found guilt of insider trading charges

and was sentenced to two ears in prison on Octo'er 9D, 9#"9. 0e was con$icted on four

charges of securities fraud and conspirac for di$ulging 'oardroom discussions to the

con$icted Galleon Group founder, Raj Rajaratnam. rom the elite societ of glo'alcorporates to a con$icted criminal, it was a tragic fall from grace for the Indian-'orn

'usinessman.

2tarting around 9##B, he and r. Rajaratnam 'egan in$esting millions of dollars together,

according to court documents from his trial, 'oth in $ehicles related to Galleon and in an

Asia-focused pri$ate-eEuit fund r. Gupta had helped to start.

In the ensuing ears, r. Gupta leaked r. Rajaratnam inside information, 'oth 'ecause

of their friendship and 'usiness dealings, prosecutors said.

The Transactions

In 2eptem'er 9##: arren 1uffet agrees to pa !C 'illion to Goldman 2achs in e%change

for preferred shares in the compan. +his news is likel to raise the share price of

Goldman 2achs. +he news is not supposed to 'e announced and made pu'lic until the end

of da. Fess than a minute after the 'oard appro$ed the 1uffet purchase, Rajat Gupta calls

his longtime friend Raj Rajaratnam, a hedge fund manager and 'illionaire founder of

Galleon Group. Once Rajaratnam gets this information, he immediatel 'us shares of

Goldman 2achs. e%t da when the stock market opens, Raj Rajaratnam makes nearl

!".9 million in profits as Goldman 2achs shares rose. +he 26> estimates the tip leaked

' Rajat Gupta generates profits and a$oids losses of more than !9B million.

The ftermath

After the con$iction of r. Rajaratnam in a 9#"", friends said, r. Gupta seemed

worried and ner$ous a'out his own future. H0e was distraught. 0e seemed upset,H Anand

H1illH ?ulka, a childhood friend, pre$iousl told +he all 2treet ?ournal.

r. Guptas lawer, Gar aftalis, told the jurors who con$icted him on four of si%

counts that r. Gupta had no idea a'out r. Rajaratnams Hsecret worldH of insider

trading and argued unsuccessfull that a falling out o$er a failed in$estment had negated

his moti$e to leak. or did he personall trade on inside information, although prosecutors said he 'enefited from his 'usiness relationships with r. Rajaratnam.

r. Gupta, despite his desire to testif in his own defense, took his lawers ad$ice and

remained silent. ?urors, some of them shedding tears, ultimatel con$icted him on three

counts of securities fraud and one count of conspirac. 0e was acEuitted of two counts of

securities fraud, including the onl one relating to 45G.



He wanted him to walk, go home to his famil, li$e a $er prosperous life,H juror

Ronnie 2esso, a CB-ear-old outh ad$ocate in ew Jork, said in an inter$iew after the

$erdict. HI struggled with e$erthing&'ut looking at the e$idence made it clear.H

Parties affected

+he primar parties are affected are Rajat Gupta, c3insle 5 >ompan, Goldman

2achs, Raj Rajaratnam, Galleon Group, arren 1uffet, and the .2. eEuit markets.

Other parties indirectl affected are famil and friends of Rajat Gupta, emploees at

c3insle 5 >ompan and Galleon Group, in$estors in Goldman 2achs and its

creditors, and go$ernment and officials in$ol$ed with the case.

!ow it affects the mar"et#

+he impact of illegal insider trading is considered negati$e for 'oth the small in$estors

and for the markets. Illegal insider trading ensures that there is no fair pla in$ol$ed and

there is no fair demand and suppl of stocks, all detrimental to the functioning of ahealth capital market.

Illegal insider trading weakens the faith of in$estors in the in$esting sstem and an

unchecked insider trading could keep off people from in$esting capital and this could

potentiall harm the econom as a whole.

ow what we learn from this case<

If a sstem is strong enough and fair enough for people from an part of the world

to e%cel, same sstem can come 'ack to 'ite ou if ou are on the wrong side of

the law.

hen ou do good work, ou directl or indirectl 'ring glor to our

communit, countr of origin and institution, and same is true when ou are

con$icted of crimes.

o indi$idual is a'o$e the law, and one should tr to maintain highest le$el of

ethics in all actions, which is actuall more stringent than simpl following all

laws of the land.

Jour past record and accomplishments ma not help ou in the future for our present crimes.

>hoose our friends well.

=o not make phonecalls to potential criminals, not at all after confidential

compan meetings, where that criminal has financial interests.



3now the laws. Of course Gupta knew all the laws he $iolated. 0owe$er as an

a$erage international student and as a new immigrant, make e%tra efforts to know

the laws of the land. Ignorance of law is ne$er a good e%cuse.

inall, Rajat Gupta is a perfect e%ample of how an oung person should 'egin

and lead his professional life. 1ut the sad end of his professional life teaches us to

'e $er careful and ethical in all that we do.



References

". Rajat Gupta< Kirtue is ne$er a gi$en.Lor'esM

http<NNwww.for'es.comNsitesNjohn'aldoniN9#"9N"#N9CNraj-gupta-$irtue-is-ne$er-a-

gi$enN

9. Kirtue, ethics and corruption

http<NNwww.inno$ation.ccNscholarl-stleN$irtue-ethics-corruption.html

B. Fessons that the Rajat Gupta case holds for India, Rediff 1usiness, LOcto'er 9,9#"9Mhttp<NNwww.rediff.comN'usinessNslide-showNslide-show-"-special-lessons-that-the-rajat-gupta-case-holds-for-indiaN9#"9"#9.htmP9

D. 2e'i to set up panel for re$ising insider trading norms, L+he 6conomic +imes, e'9, 9#"BMhttp<NNarticles.economictimes.indiatimes.comN9#"B-#9-9NnewsNBQB#@Q#"chairman-u-k-sinha-regional-offices-se'i-act

http://www.innovation.cc/scholarly-style/virtue-ethics-corruption.html

http://www.rediff.com/business/slide-show/slide-show-1-special-lessons-that-the-rajat-gupta-case-holds-for-india/20121026.htm#2




http://www.innovation.cc/scholarly-style/virtue-ethics-corruption.html

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