The issues involved with the Rajat Gupta case and relevant learnings

The need for ethics

One of the reasons for Guptas downfall was his greed. In a wire-tapped phone call,
Rajaratnam said, And I think here he sees the opportunity to make $100 million over the
next five years or 10 years without doing a lot of work he wants to be in that
[billionaires] circle. As Gupta became enthralled by the lifestyle of the opulent
Rajaratnam, Guptas greed for more allegedly drove him towards divulging corporate
secrets. The fact that he had been involved in several philanthropic activities makes his
lapse in judgement more perplexing. Maybe even the best men could fall prey to greed.
In the past, successful businesses have failed due to a lack of business ethics and values.
For a business to be sustainable, it must focus on customer relationships and always
strive to establish trust with the community it is serving. To accomplish this, businesses
need to facilitate a caring foundation for its customers and establish a strong connection
that will leave a long-lasting impression. Without following the values and ethics of a
business, an organization cannot succeed. Guptas professional career had inspired many
future business leaders to establish strong ethical frameworks and pursue a life of
honesty. From growing up as an orphan and graduating from Harvard Business School
on a scholarship, Gupta had inspired many people to pursue their dreams even when
given little resources. As the global head of McKinsey and later joining the boards of
companies like Goldman and Procter & Gamble, Gupta focused on establishing the
ethical frameworks and values of many firms, which ultimately lead to their success.
With his recent prosecution however, business leaders need to be aware that ethics is an
extensive concept and is not all about generating profits and making the numbers. Ethics
is about establishing a strong connection between businesses and the world surrounding
them.
Examples of disobeying a companys values is trading on inside information to get ahead
of the stock market and gain excess revenue. Gupta did not uphold his personal values
and ethics because insider trading is dishonest and leaves other people at a disadvantage.
The reason this accusation is so significant is because it exemplifies the importance of
maintaining strong business ethics. The primary aim of business should not be to just
maximize profits; it should also facilitate the needs of society and work towards serving
the community. If a business is caught disobeying its ethical framework through illegal
practices, negative externalities, and dishonesty, it will loose all credibility and ultimately
fail in the long run. Goldman Sachs, for example, was caught betting against its own
poor performing deals to loyal, but nave, customers in the housing bubble of 2008. This

type of business practice is unethical and takes away from a companys reputation.

Ethical and moral analysis

Would a virtuous person have leaked the information to Raj Rajaratnam? Rajat Gupta
showed a failure of character:
Integrity: Integrity is honesty and truthfulness or accuracy of a persons action. Rajat
Gupta does not show integrity to his company Goldman Sachs, where he was a Board of
Director. Instead gives away insider information for personal benefits.
Trust: Rajat Gupta broke the trust to other Directors on Goldmans board and to of other
people with whom he has done business. His actions affect the relationship with
McKinsley & Company.
Fairness: Rajat Guptas actions are not fair for two reasons. First, other investors who do
not have the information on Buffetts deal are at a disadvantage. Second, he uses the
information entrusted to him to benefit himself and Rajaratnam.
Honesty: He was not honest with Goldman Sachs and his fellow board members to
whom he implicitly promised not to share inside information.
Self-Control: If Rajat Gupta had self-control he would not have leaked inside
information to Rajaratnam for personal gain.
Gupta was commended by people who knew him as a person who helped others. He was
very active in providing medical and humanitarian relief to the developing countries.
Born to humble circumstances, he became a pillar of the consulting community and a
trusted advisor to the worlds leading companies and organizations. A word that was used
repeatedly in media coverage for Rajat Gupta during his trial was respected. In the past,
much less so now, we assume people in leadership positions are virtuous. However,
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

Essentially, Mr. Rajat Gupta was a great role model. He was the first global corporate
leader and Indians aspired to follow in his footsteps. His prowess was not just limited to
the boardrooms of McKinsey, Goldman Sachs, and Procter & Gamble but also the fields
of education and health. He was a co-founder of the American India Foundation and the
Indian School of Business. A key member of several charitable foundations like The
Gates Foundation, Gupta could have left an enduring legacy.

Instead his past few years would be remembered exemplifying the need for ethics and
morals in the corporate world, and the future generation of leaders. The lessons from the
Rajat Gupta case could lead to the right ethical choices, better corporate governance, and
faster legal actions. The words of the presiding judge Jed Rakoff about Gupta,
prominently come to mind.
He is a good man. But the history of this country and the world, I'm afraid, is full of
examples of good men who do bad things."

Legal issues
Tighter controls
Several instances of insider trading and corporate fraud have been reported over the past
few years around the world. While these cases only seem to be the tip of the iceberg, the
penalties imposed on the convicted have not done much to put fear in the guilty. For
example, the median prison term for insider-trading convictions from 2009 to 2011 in
USA is 30 months. In fact, there has not been a case of convicted people going to prison
in India on account of insider trading. The maximum penalty of $5 million looks
miniscule compared to the wealth amassed by such parties.
It is of paramount importance that boardroom privacy remains sacrosanct in the corporate
world. In order to deter the miscreants, tighter controls and stricter penalties must be
enforced by the authorities. At the same time, instances where continued displays of
integrity should be recognised and rewarded by the firm and the society.

Lessons for India

The actions of not just Gupta but also the law enforcement agencies and the regulatory
bodies could serve as a lesson for India. In July 2008, FBI agents listened in on a call
between Gupta and Rajaratnam involving discussion of confidential information. Gupta
and Rajaratnam were found guilty by June 2012 and their sentence was imposed by
October 2012. In just over four years, the authorities convicted one of the most highprofile businessmen in USA, having contacts with Bill Gates, Bill Clinton, and Kofi
Annan.
While insider trading is alleged to be rampant in Indian markets, there have been very
few cases of conviction. In addition, several cases of corporate fraud and conspiracy have
been kept on the back-burner in India. The most recent high-profile case is that of Mr.
Ramalinga Raju of the erstwhile Satyam Computers. In spite of Mr. Raju admitting to his
fraudulent activities in 2009, the end of the court case is nowhere in sight. The prime

accused in a 1992 securities scam, Harshad Mehta died in jail in 2001 with many
litigations pending against him. A similar gap of nine years is seen between the fraud and
the conviction of Ketan Parekh.
There is an alarming lack of speed and alacrity in the Indian enforcement agencies,
especially in matters of corporate fraud. The due process, in most cases is hindered by
several political and systemic obstacles. A speedy resolution with a strict penalty to the
impending insider trading cases would move the system in the right direction. Another
aspect of the Rajat Gupta case critical to its speedy completion was the cooperation
between the federal authorities, the law enforcement agencies and the securities
commission. SEBI could take similar steps to apprehend people involved in insider
trading in India.

Decisions Made
Former Goldman Sachs director Rajat Gupta was found guilty of insider trading charges
and was sentenced to two years in prison on October 24, 2012. He was convicted on four
charges of securities fraud and conspiracy for divulging boardroom discussions to the
convicted Galleon Group founder, Raj Rajaratnam. From the elite society of global
corporates to a convicted criminal, it was a tragic fall from grace for the Indian-born
businessman.
Starting around 2003, he and Mr. Rajaratnam began investing millions of dollars together,
according to court documents from his trial, both in vehicles related to Galleon and in an
Asia-focused private-equity fund Mr. Gupta had helped to start.
In the ensuing years, Mr. Gupta leaked Mr. Rajaratnam inside information, both because
of their friendship and business dealings, prosecutors said.

The Transactions
In September 2008 Warren Buffet agrees to pay $5 billion to Goldman Sachs in exchange
for preferred shares in the company. This news is likely to raise the share price of
Goldman Sachs. The news is not supposed to be announced and made public until the end
of day. Less than a minute after the board approved the Buffet purchase, Rajat Gupta calls
his longtime friend Raj Rajaratnam, a hedge fund manager and billionaire founder of
Galleon Group. Once Rajaratnam gets this information, he immediately buys shares of
Goldman Sachs. Next day when the stock market opens, Raj Rajaratnam makes nearly
$1.2 million in profits as Goldman Sachs shares rose. The SEC estimates the tip leaked
by Rajat Gupta generates profits and avoids losses of more than $23 million.

The Aftermath
After the conviction of Mr. Rajaratnam in May 2011, friends said, Mr. Gupta seemed
worried and nervous about his own future. "He was distraught. He seemed upset," Anand
"Bill" Julka, a childhood friend, previously told The Wall Street Journal.
Mr. Gupta's lawyer, Gary Naftalis, told the jurors who convicted him on four of six
counts that Mr. Gupta had no idea about Mr. Rajaratnam's "secret world" of insider
trading and argued unsuccessfully that a falling out over a failed investment had negated
his motive to leak. Nor did he personally trade on inside information, although
prosecutors said he benefited from his business relationships with Mr. Rajaratnam.
Mr. Gupta, despite his desire to testify in his own defense, took his lawyers' advice and
remained silent. Jurors, some of them shedding tears, ultimately convicted him on three
counts of securities fraud and one count of conspiracy. He was acquitted of two counts of
securities fraud, including the only one relating to P&G.

"We wanted him to walk, go home to his family, live a very prosperous life," juror
Ronnie Sesso, a 53-year-old youth advocate in New York, said in an interview after the
verdict. "I struggled with everythingbut looking at the evidence made it clear."

Parties affected
The primary parties are affected are Rajat Gupta, McKinsley & Company, Goldman
Sachs, Raj Rajaratnam, Galleon Group, Warren Buffet, and the U.S. equity markets.
Other parties indirectly affected are family and friends of Rajat Gupta, employees at
McKinsley & Company and Galleon Group, investors in Goldman Sachs and its
creditors, and government and officials involved with the case.

How it affects the market?

The impact of illegal insider trading is considered negative for both the small investors
and for the markets. Illegal insider trading ensures that there is no fair play involved and
there is no fair demand and supply of stocks, all detrimental to the functioning of a
healthy capital market.
Illegal insider trading weakens the faith of investors in the investing system and an
unchecked insider trading could keep off people from investing capital and this could
potentially harm the economy as a whole.
Now what we learn from this case:
If a system is strong enough and fair enough for people from any part of the world
to excel, same system can come back to bite you if you are on the wrong side of
the law.
When you do good work, you directly or indirectly bring glory to your
community, country of origin and institution, and same is true when you are
convicted of crimes.
No individual is above the law, and one should try to maintain highest level of
ethics in all actions, which is actually more stringent than simply following all
laws of the land.
Your past record and accomplishments may not help you in the future for your
present crimes.
Choose your friends well.
Do not make phonecalls to potential criminals, not at all after confidential
company meetings, where that criminal has financial interests.

 Know the laws. Of course Gupta knew all the laws he violated. However as an
average international student and as a new immigrant, make extra efforts to know
the laws of the land. Ignorance of law is never a good excuse.
Finally, Rajat Gupta is a perfect example of how any young person should begin
and lead his professional life. But the sad end of his professional life teaches us to
be very careful and ethical in all that we do.

References
1. Rajat Gupta: Virtue is never a given.(Forbes)
http://www.forbes.com/sites/johnbaldoni/2012/10/25/raj-gupta-virtue-is-never-agiven/
2. Virtue, ethics and corruption
http://www.innovation.cc/scholarly-style/virtue-ethics-corruption.html
3. Lessons that the Rajat Gupta case holds for India, Rediff Business, (October 26,
2012)
http://www.rediff.com/business/slide-show/slide-show-1-special-lessons-that-therajat-gupta-case-holds-for-india/20121026.htm#2
4. Sebi to set up panel for revising insider trading norms, (The Economic Times, Feb
26, 2013)
http://articles.economictimes.indiatimes.com/2013-0226/news/37309670_1_chairman-u-k-sinha-regional-offices-sebi-act