Posted in Human Resources Articles, Total Reads: 2090
, Published on 30 April 2013
Securities and Exchange Board of India (SEBI) has recently announced a committee to relook at the regulations governing insider trading. The committee aims to look at the existing practices in various countries to assist it give recommendations. The precedents of insider trading could also help SEBI and the nation learn lessons and avoid such cases in the future. The Rajat Gupta affair was one of the most high-profile insider trading cases in US history. As a case involving a well-respected business leader’s lapse of judgement, it provides a poignant lesson in morality to the future generation. At the same time, the need for tighter controls in the corporate world from within and from legal and regulatory bodies is highlighted. India, in particular could learn from the swift justice dealt by the US authorities. Most importantly, it serves as a reminder that an unethical act can tarnish a legacy.
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.
Born in Kolkata, Gupta was born to a middle-class family and achieved success by dint of hard work and brilliance, despite being orphaned in his teens. "He kind of came to epitomize, if not exactly a rags-to- riches story, but more of how a person from a relatively humble background, out of sheer hard work and merit, could really rise to the top of the ladder," said Paranjoy Thakurta, an independent journalist. An IIT Delhi and Harvard grad, Gupta went on to become the Managing Director of McKinsey and a board member of several corporate giants. But as the saying goes, crime does not pay. In spite of these achievements, Gupta’s career would now be remembered as a lesson for corporate ethics.
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 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 [billionaire’s] circle.” As Gupta became enthralled by the lifestyle of the opulent Rajaratnam, Gupta’s 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.
It is vital to maintain one’s integrity in the face of luring vices, especially when involved at the helm of global organisations. There is a clear and present need to inculcate the importance of ethics into the leaders of tomorrow. Several business schools including Harvard, IIM Ahmedabad do have a course on ethics in business. Today’s graduates from business and graduate schools would become tomorrow’s top management in global organisations. The importance of morals, ethics, and integrity to the graduates could be taught through case studies like that of Rajat Gupta. With proper training and guidance, the coming generation of leaders could reduce frauds and conspiracy in the corporate world.
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 high-profile 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.
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. In the end, the words of the presiding judge Jed Rakoff about Gupta 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."
Before scandal, Rajat Gupta was role model for middle-class India, Tony Munroe, Reuters, October 31 2012, http://in.reuters.com/article/2011/10/31/idINIndia-60200920111031
Gupta Gets Two Years for Leaking Inside Tips, Michael Rothfeld and Dan Strumpf, The Wall Street Journal, October 25, 2012, http://online.wsj.com/article/SB10001424052970203897404578077050403577468.html#project%3DGALLEON0211_timeline%26articleTabs%3Darticle
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-the-rajat-gupta-case-holds-for-india/20121026.htm#2
Lessons from Rajat Gupta’s Downfall, Sonia Jaspal, June 26, 2012, http://soniajaspal.wordpress.com/2012/06/26/lessons-from-rajat-guptas-downfall/
Rajat Gupta says he should not be required to pay $6.78 mn to Goldman, Business Standard, Jan 13, 2013, http://www.business-standard.com/india/news/rajat-gupta-says-he-should-not-be-required-to-pay-678-mn-to-goldman/495710/
Raj Rajaratnam Did Not Appreciate Rajat Gupta’s Attempt To Leave The Goldman Board, Join ‘The Billionaire Circle’, Bess Levin, Dealbreaker, 14 March, 2012, http://dealbreaker.com/2011/03/raj-rajaratnam-did-not-appreciate-rajat-guptas-attempt-to-leave-the-goldman-board-join-the-billionaire-circle/
Sebi to set up panel for revising insider trading norms, The Economic Times, Feb 26, 2013, http://articles.economictimes.indiatimes.com/2013-02-26/news/37309670_1_chairman-u-k-sinha-regional-offices-sebi-act