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How Rajat Gupta Came Undone

The former McKinsey head was a gilded member of the corporate elite. But a tape of his voice, divulging secret details of a Goldman board meeting to a convicted hedge fund manager, cost him what no amount of money can buy

(Our story incorrectly stated that Rajat Gupta was removed from various corporate boards. He resigned.)

Although he would be described later by friends—in a conversation captured on an FBI wiretap—as being on the verge of "a massive implosion," Rajat K. Gupta appeared relaxed as he greeted hundreds of guests on the manicured lawns of his estate in Westport, Conn., on the afternoon of June 21, 2008. The occasion was the marriage of the eldest of his four daughters, Geetanjali, and it was a lavish affair—"the wedding of the decade," one guest called it in an account published in the African Sun Times. The invitations had been trimmed with gold, many of the guests flown in from around the globe. Photographs show a large Hindu temple garlanded with flowers, women in glittering saris, the bride's father, in traditional kurta pajamas, mingling with his guests in the gardens outside his French Provincial-style mansion. It was an event that was in keeping not only with Gupta's wealth but also with his corporate stature. The former head of McKinsey and a trusted consigliere to chief executives around the world, he was a director of American Airlines (AMR), Procter & Gamble (PG), and Goldman Sachs (GS), and sat on the boards of the Rockefeller and the Bill & Melinda Gates Foundations. At the time, he was also that rare businessman whose integrity was considered beyond reproach.

Yet if the Securities and Exchange Commission is to be believed, just 11 days before his daughter's wedding celebration, Gupta had done something virtually no one who knew him could have imagined. According to the SEC, it was on the evening of June 10, 2008, that Gupta, in "a flurry" of phone conversations with Raj Rajaratnam, the founder of the Galleon Group of hedge funds, allegedly divulged Goldman Sachs's still secret second-quarter earnings.

In early March, the SEC stunned global business circles when it filed a civil administrative proceeding against Gupta, accusing him of leaking information from confidential boardroom discussions held by Goldman and Procter & Gamble to Rajaratnam—accusations Gary P. Naftalis, Gupta's attorney, calls "baseless." Gupta has not been criminally charged, but for seven weeks this spring, during Rajaratnam's sensational insider-trading trial, hardly a day passed when Gupta's name was not mentioned. Although federal prosecutors called him an unindicted "co-conspirator," he never appeared at the trial. But jurors heard his voice, caught on an FBI wiretap, resonating through the courtroom, saw his face in a photograph beamed onto a large video screen, and listened as his professional and personal lives were dissected by federal witnesses. While Rajaratnam is alleged by the SEC to have made more than $17 million from Gupta's information, what Gupta himself might have earned is less clear.

Gupta has been removed from the prominent corporate and philanthropic boards on which he once served and is shunned by business leaders who were once his friends. His spectacular fall from grace has left the world's leading companies shocked and mystified. Rajaratnam's conviction on 14 counts of fraud and conspiracy on May 11 closes a central chapter in the story, but Gupta's alleged role in the scandal raises new and pressing questions about the motivations of one of the world's most connected and trusted corporate insiders, about his past, and about who Rajat Gupta really is. If the SEC is correct about the secrets he shared, why would he risk so much for so little?

Impeccably tailored, articulate, charming, and worldly, Gupta, 62, had a quality that set him apart from most other business leaders. Apparently ego-less, he could sit in high-level meetings for hours listening intently but never speaking. As Joel Bleeke, Gupta's former McKinsey colleague, told the Chicago Tribune in 1994, his style had a "very Eastern orientation," emphasizing "wisdom rather than pure intellect." Gupta read Indian poetry and quoted Gandhi, which impressed men such as Alan G. Lafley, the former CEO of Procter & Gamble, who before Gupta's fall was quoted in the press comparing him to the 13th century saint and philosopher Thomas Aquinas. Gupta's ability to understand what Bleeke described as "the softer, emotional sides of people" made others trust him. Yet, as Gupta himself admitted, it also often left people wondering what he was really thinking.

"I could be more direct and forthright," Gupta said in a 2001 interview. "Sometimes my colleagues, of course, find that a very frustrating process, and they think, 'Why don't you say what exactly you mean?' " There were those who described him as Taoist in his approach to life—patient, calm, almost recessive. Or, as Gupta once told India's Business Today, "generally, I'm a soft person." But that masked a tougher side. As The Economist wrote in an article about McKinsey published in July 1996, "There is something of the predator in his quietness."

Born in Calcutta, Gupta is the son of Pran Kumari Gupta, a Montessori schoolteacher, and Ashwini Kumar Gupta, a journalist who had been a prominent figure in the fight for India's independence and "had been to jail many times" for his cause, as Gupta told Business Today. When Gupta was 5, the family moved to New Delhi, where his father helped to found a newspaper, the Hindustan Standard. Gupta was 16 when his father died. His mother died two years later, leaving Gupta to care for his two sisters and a brother. The siblings refused to be separated. "We decided to live by ourselves," Gupta said. "It was pretty unusual in those days. Normally we would have been sent off to live with various relatives. Instead we asked a spinster aunt to come and live with us." Their education was paid for with the help of scholarships. "We were all good students," Gupta once said, noting that when he was 18 he ranked 15th in the nationwide entrance exam for the Indian Institute of Technology, where he was awarded a scholarship.

IIT is considered among the most competitive, elite universities in the world, and its alumni include Sun Microsystems co-founder Vinod Khosla, Juniper Networks (JNPR) founder Pradeep Sindhu, and former Citigroup (C) Senior Vice-Chairman Victor J. Menezes. Many of them, according to Vivek Wadhwa, a professor of engineering at Duke who has studied the Indian business community in the U.S., came to America to escape the economic chaos of Indira Gandhi's India, attending its top business and engineering schools and eventually forming the nucleus of what today is referred to as the "Indian mafia." After graduating from IIT with a degree in mechanical engineering, Gupta, again aided by scholarship money, went on to Harvard Business School. Later, he recalled that he had never seen a TV before he got to Harvard.

Gupta joined McKinsey in 1973, the year he graduated. He would eventually head the consulting firm's Scandinavia offices and then its Chicago office. In 1994 he was elected to lead McKinsey, becoming the first non-American-born managing director of the firm. Reelected to two more terms, the maximum allowed, he ran McKinsey until 2003. For nine years, Gupta led a firm that was not only considered "one of the most prestigious organizations in the corporate world," in the words of Anat Lechner, a professor of management at New York University's Stern School of Business, but among the most influential. The management consultant of choice for CEOs at the world's major corporations, McKinsey was the power behind the throne, whose advice guided the restructuring of not just individual companies but entire industries.

When Gupta joined McKinsey, it was still a relatively small, genteel partnership run according to the obsessively high standards of its early leader, Marvin Bower. Consultants were drawn from the top tier of the country's best business schools; its advice was regarded as gospel, its impartiality considered untainted by the firm's pursuit of profit. By the time Gupta took over, however, McKinsey was under pressure from an increasingly competitive market, and under his leadership it underwent a massive change. He aggressively expanded the firm, nearly doubling its size, to 891 partners. He changed the pay structure, enriching partners relative to the younger members. He helped increase revenue 280 percent, to $3.4 billion, but in the process was accused of presiding over the watering down of McKinsey's vaunted principles.

In the '90s the firm began accepting payment from its clients in stock, which had once been regarded as tainting the impartiality of its advice. It was on Gupta's watch that Enron, a company closely tied to McKinsey, collapsed.

Some blamed Gupta for the tensions that arose during his tenure and for the fraying of the firm's standards. Others say the blame is misplaced. Former McKinsey Managing Director Ron Daniel once compared the CEO's job to trying to herd cats; Gupta himself described it as "a sort of servant-leader job," with "at least 150, if not 400, leaders." The challenge, Gupta said, was to "figure out what their aspirations are, synthesize them, and distill them in the direction the firm should take." However controversial his direction was, says one former partner, the fact that Gupta was elected three times by the partners shows he had significant support.

The firm's culture may have shaped Gupta more than he shaped it. McKinsey had a culture of superiority, says one longtime client, who declined to be identified, adding that consultants at the firm really seemed to think they were better than anyone else in the business world. This CEO is still shocked recalling an incident in the late 1980s, when a McKinsey team offered to provide him with a road map of what his competitors were doing. When asked how they could produce such information, he was told that McKinsey also worked with his competitors, but he could trust McKinsey to know what was confidential information and what was to be kept private. He says arrogance permeated the firm. The usual rules seemed not to apply. When this CEO listened to a wiretapped phone call from July 2008, in which Gupta relayed to Rajaratnam the details of the Goldman board's discussions about buying a commercial bank, it sounded to him just like Gupta consulting a client.

During the years he ran McKinsey, money never seemed to be much of a concern for Gupta. He lived well on his salary, which is estimated by friends and former McKinsey employees at anywhere from $5 million to $10 million. In 1999, according to real estate records, he paid $6 million for his Westport mansion, once owned by the J.C. Penney family. He had a vacation home in Florida, and in 2000 he bought a luxury condominium on Central Park West. He put his four daughters through private school, and then Ivy League colleges. In the Indian-American community, especially among his fellow IIT graduates, there were many men who were far richer, but Gupta had prestige. In this "tightly bonded," achievement-oriented, highly competitive community, Gupta was "an icon," says Duke's Wadhwa. "He was a legend—very, very highly regarded."

There are questions today, however, as to how content Gupta really was during those years. According to a report by Bloomberg News, Gupta ran a consulting business called Mindspirit on the side, unbeknownst to McKinsey and in violation of its rules. But the story was even more complicated.

Mindspirit was formed in 2001, according to Anil Kumar, the McKinsey partner accused of taking nearly $2 million from Rajaratnam in return for insider tips on McKinsey clients. As Kumar testified at Rajaratnam's trial, Mindspirit was a company created to handle investments for both his and Gupta's families. That same year, according to SEC documents, Mindspirit entered into a "consulting" agreement with Infogroup "to provide advice and guidance to Vin Gupta," its then-CEO who was also a friend of Rajat Gupta, a fellow IIT graduate and another founding member of the American India Foundation. As payment, Mindspirit received 200,000 stock options, all of which were exercised. In an August 2008 SEC filing, however, Infogroup would say that this payment was not approved by the company's board. The filing—which disclosed the settlement of a shareholder suit against Vinod Gupta for using company funds for personal expenses, including cars, a yacht, jets, and consulting fees paid to his wife—also suggested that the board had no idea Mindspirit was doing any work for the company. When asked about it, Vinod Gupta said, according to the filing, that it "was created by the wives of Rajat Gupta and Anil Kumar, two employees of McKinsey & Company who were rendering business advice."

In 2003, Rajat Gupta stepped down as McKinsey's chief. He would remain at the firm as a senior partner until 2007, but the diminished role marked a huge change in his life. Almost overnight he lost what NYU's Lechner calls "the halo effect" of his position and the tremendous status it conferred. It was around this period, according to some of his friends, that Gupta began to express a certain resentment about money. The wealth of some of his peers in Silicon Valley was mind-boggling; many of them had mega-mansions that made his own lavish residence appear modest. The same was the case with his counterparts on Wall Street. The equity markets were booming, and McKinsey's private equity clients were the new Wall Street royalty, raking in staggering amounts of money while Gupta soldiered on with a mere senior partner's millions—or at least appeared to be doing so. Whether he received any other payments through Mindspirit is unclear. According to Bloomberg News, Gupta also consulted on the side for an outsourcing company called Genpact, whose board he joined in 2007, the year he left McKinsey.

Gupta was still at McKinsey when, in 2006, he tried to set up his own private equity and hedge fund—his first deal involving Rajaratnam. This first attempt stalled, but several months later, Gupta, along with Parag Saxena, a former Citigroup executive and managing partner of Invesco Private Capital (IVZ), succeeded in co-founding New Silk Route, a private equity fund that would invest in ventures in India and other emerging markets. The fund eventually raised $1.3 billion, $50 million of which came from Rajaratnam.

In 2007, Gupta joined with Rajaratnam in another venture, helping to found the GB Voyager Multi-Strategy Fund, a $40 million master fund that would invest in numerous Galleon hedge funds, including those that later, according to the SEC's complaint, "traded on Gupta's illegal tips." Gupta invested $10 million in the fund, all of which, according to his attorney, Gary Naftalis, he lost. However, Galleon records submitted by federal prosecutors during Rajaratnam's trial by June 2008—the month the SEC alleges that Gupta tipped Rajaratnam off to Goldman's second-quarter earnings—show that Gupta's investment in the Voyager Fund was listed in Galleon's books at $16.4 million. By then, according to trial testimony and wiretaps presented by federal prosecutors, Gupta was negotiating with Rajaratnam for a 10 percent to 15 percent stake in the Galleon International Fund in exchange for attracting investors and becoming the fund's chairman.

Exactly when Gupta first met Rajaratnam is unclear. Around 1999, Rajaratnam made a large donation to the Indian School of Business, in Hyderabad, which Gupta had helped found. Rajaratnam followed up on his donation to the ISB with one to the American India Foundation, a philanthropic group made up largely of wealthy, high-powered Indians and Americans organized in the aftermath of the 2001 Gujarat earthquake and of which Gupta was a founding member. In return for his money, the Sri Lankan-born Rajaratnam became an AIF trustee—whose board includes former President Bill Clinton as honorary chair—and by the mid-2000s he and Gupta had become close friends.

Rajaratnam was well-connected and seductive. But by 2006, it was well-known that he had been under regulatory scrutiny. The year before, Galleon Group had paid a $2 million fine and disgorged profits to settle charges that it had made improper trades. Some of Gupta's friends were also concerned about Gupta's ties to Saxena and Victor Menezes, the former Citigroup vice-chairman who had become a senior adviser at New Silk Route, who had also had troubles with the SEC, resulting in fines. In 1994, Saxena settled charges that he had received pre-initial public offering stock at big discounts and then recommended it to his clients at Chancellor Capital Management after the companies went public. In 2006, Menezes paid the SEC $2.7 million in a fine and also disgorged profits after he sold Citigroup stock ahead of an announcement of bad news from an Argentinian subsidiary. Both men neither admitted nor denied wrongdoing. "I told him once, if

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