Gupta Secretly Defied McKinsey Before SEC Tip Accusation

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.

Photographer: Paulo Filgueiras/United Nations via Bloomberg

Rajat Gupta speaks during the United Nations General Assembly on September 14, 2005. Close

Rajat Gupta speaks during the United Nations General Assembly on September 14, 2005.

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Photographer: Paulo Filgueiras/United Nations via Bloomberg

Rajat Gupta speaks during the United Nations General Assembly on September 14, 2005.

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.”

At a time when students at Harvard Business School were overwhelmingly white, Gupta stood out culturally and intellectually, Carberry says.

“Gupta was unassuming and humble,” he says. “When he spoke in class, though, everyone put their pencils down and listened. He was the smartest guy in my section, just brilliant.”

Baker Scholar

Gupta became a Baker Scholar, a distinction earned by the top 5 percent of students in his graduating class in 1973. With his Master of Business Administration degree, he applied for a spot with McKinsey.

Even with his stellar academic record, the firm turned him down. Walter Salmon, one of Gupta’s professors who had McKinsey connections, wrote Gupta a recommendation, and the consulting firm decided to hire him in New York.

Gupta advanced steadily, becoming a McKinsey partner in 1980 and moving to Copenhagen the following year. In 1984, Gupta began overseeing all of the firm’s business in Scandinavia. He moved to McKinsey’s Chicago office in 1987 and became head there in 1989. The office served many of the region’s manufacturing and consumer products companies.

James Kilts, a former CEO of Nabisco Group Holdings Corp. and Gillette Co., says he was impressed when he first met Gupta in Chicago in the late 1980s. Kilts was then an executive at Kraft Foods Inc. (KFT), and Gupta advised him about strategy for cheese products.

‘Self-Deprecating’

“He was very thoughtful and self-deprecating,” Kilts says. “He could take a complicated subject and simplify it.” Kilts kept in touch with Gupta as both men advanced. “You could always learn something from him,” he says.

Gupta’s big career leap came in 1994, when McKinsey held elections for a new leader, something that happens every three years. The firm’s 427 partners nominated seven of their peers in the order they preferred. After several rounds of ballots, Gupta, who was 45 at the time, was elected. He became McKinsey’s youngest managing director.

McKinsey grew rapidly under his leadership. He won re- election twice, and during his three terms, the maximum the firm allows, revenue increased to $3.4 billion from $1.2 billion. The number of partners rose to 891, according to Kennedy Information LLC, a research firm that tracks the consulting industry.

McKinsey opened 26 new offices globally under Gupta, who pursued global expansion in India, China and other emerging markets where the firm’s biggest clients increasingly were doing business.

Internet Startups

As the tech boom took hold in the 1990s, Gupta pushed McKinsey to take on Internet startups as clients, even when they could pay only in stock. That broke from the firm’s tradition of serving mostly blue-chip clients who paid fees. The equity, which McKinsey accepted from about 150 fledgling firms, went into a profit pool for partners, according to former partners.

Client demand for McKinsey services declined following the bursting of the Internet bubble in 2000. Global Crossing Ltd. (GLBC), Kmart Corp., Swiss International Air Lines AG and other companies McKinsey had advised filed for bankruptcy. The biggest public embarrassment was Enron Corp.’s collapse.

The Houston-based energy trader, which had been the seventh-largest company by assets in the Standard & Poor’s 500 Index, lost almost all of its value when regulators found the company had used accounting gimmicks to create a massive fraud.

Outside Interests

Enron had McKinsey in its bloodlines. Jeffrey Skilling, the firm’s CEO, had once been a McKinsey partner, and the consulting firm had advised the company for 18 years as it transformed itself from an oil pipeline operator to a derivatives trader. Skilling was convicted of fraud in 2006 and sentenced to 24 years in federal prison.

As McKinsey’s spate of woes swelled, so did Gupta’s outside interests. He raised personal donations from India’s top business executives, including Infosys Technologies Ltd. (INFO) Chairman N.R. Narayana Murthy, to start the Indian School of Business.

He also tapped McKinsey consultants based in India, including Anil Kumar, who would later get caught up in the Galleon scandal. The school, which has become the most prominent one-year business school in India, opened in July 2001.

When an earthquake struck the Indian state of Gujarat in April 2001, Gupta co-founded the American India Foundation to raise funds for victims. The foundation has since raised millions of dollars from Hollywood stars, executives and money managers to aid India’s poor.

Secret Business

Rajaratnam and his wife donated $1.5 million to the foundation in 2006 for an HIV-AIDS program, and made more donations later.

Gupta’s McKinsey partners supported his philanthropic efforts. They didn’t, however, know about the for-profit work he did while still at the firm, according to Stewart, McKinsey’s director of communications.

In 2001, Gupta and Kumar set up their own consulting company, Mindspirit LLC, in the names of their wives, Anita Gupta and Malvika Kumar, according to a filing with the SEC by Omaha-based InfoGroup Inc. The two men, working for Mindspirit, gave advice to the company’s CEO, according to the SEC filing.

InfoGroup, a database company, compensated Mindspirit with 200,000 stock options, which the consulting company exercised for an undisclosed amount, the filing said.

Bill Clinton, honorary chairman of the American India Foundation and another InfoGroup consultant, according to the filing, was granted 100,000 stock options he never exercised.

All-Female-Crew

The same filing disclosed the settlement of a shareholder suit against InfoGroup’s CEO Vinod Gupta for his use of company funds for personal pleasures. He had 28 club memberships, 20 cars, a yacht with an all-female crew and a private jet he used to fly his family and friends to Africa, Cancun and Italy.

Vinod Gupta, who’s not related to Rajat Gupta, had collaborated with Rajat Gupta in building the American India Foundation. He resigned as CEO in August 2008 and repaid InfoGroup $9 million, according to the filing.

Another company that Gupta independently advised was Genpact Ltd., a Gurgaon, India-based company that had been spun off from General Electric. Genpact’s sole client initially was GE, to which it provided back-office support.

Stock Options

Gupta was an advisory director from 2005 to 2007, for which he was granted 81,405 stock options, valued at 93 cents each then, according to Genpact’s 2008 proxy statement. He hasn’t exercised the options which expire in 2015, according to company filings. Genpact shares traded at $16.88 on May 16.

Gupta became enamored of private equity as he saw others on Wall Street earning far more than he could make at McKinsey. In 2006, he co-founded New Silk Route Partners, which eventually raised $1.3 billion to invest in India and other emerging economies, company filings show. Rajaratnam dropped out as a partner before New Silk Route opened. He invested $50 million in the firm. He withdrew his stake last year, according to Kathleen Lacey, an outside spokesperson for New Silk Route.

After retiring from McKinsey in 2007, Gupta globe-trotted constantly. He traveled to India to look for investments for New Silk Route and to cities throughout the U.S. and overseas for meetings at the five public companies and many nonprofit boards on which he was a director.

Galleon’s Headquarters

When Gupta was in New York, he spent time with Rajaratnam. According to testimony at Rajaratnam’s trial, Gupta and his New Silk Route co-founders initially worked in cubicles at Galleon’s headquarters. New Silk Route later leased an office on Madison Avenue that was less than a block and a half from Galleon’s.

Gupta, in 2007, joined Rajaratnam and a third partner to form GB Voyager Multi-Strategy Fund, an investment fund, contributing $10 million of his own money. The $50 million fund invested in Galleon hedge funds, including those that traded on Gupta’s allegedly illegal tips, the SEC says.

Gupta passed confidential information to Rajaratnam in 2008 and 2009, the SEC says. He disclosed information on two calls to Rajaratnam in September 2008 about the $5 billion investment in Goldman Sachs from Warren Buffett’s Berkshire Hathaway Inc., the regulator says.

Rajaratnam’s Galleon Technology funds, which held no Goldman Sachs investments before those calls, bought 120,000 Goldman Sachs shares after Gupta talked to Rajaratnam, the SEC says. On a telephone conference call at 3:15 p.m. on Sept. 23, the Goldman Board approved Berkshire’s $5 billion investment.

Passing the Word

“Gupta participated in the board meeting telephonically, staying connected to the call until approximately 3:53 p.m.,” the SEC wrote. “Immediately after disconnecting from the board call, Gupta called Rajaratnam from the same line.

“Within a minute after this telephone conversation, at 3:56 p.m. and 3:57 p.m., and just minutes before the close of the markets, Rajaratnam caused the Galleon Tech funds to purchase more than 175,000 additional Goldman shares,” the SEC wrote.

Galleon made more than $900,000 on the Goldman stock bought in advance of the announcement of Berkshire’s stake, according to the SEC.

A month later, Gupta called Rajaratnam 23 seconds after a Goldman Sachs board call during which senior executives informed directors of poor results by the bank, the SEC says.

Gupta also knew that Kumar, who was still employed at McKinsey, was being paid by Rajaratnam from offshore accounts, according to phone calls tape-recorded by federal investigators.

“You know, Rajat, I’m paying him a million a year for doing literally nothing,” Rajaratnam told Gupta in a July 2008 call recorded by federal investigators.

‘Very Generous’

“I think you’re being very generous,” Gupta replied. “He should sometimes thank you for that, you know?”

Kumar, in pleading guilty, said Rajaratnam paid him $1.75 million to $2 million.

For himself, Gupta wanted at least a 10 percent stake in the Galleon International Fund, one of Rajaratnam’s hedge funds, in exchange for attracting investors. In a May 2008 wiretapped call, Rajaratnam told Kumar that he was ready to offer this to Gupta.

“He’s not giving me the luxury of saying, ‘Why don’t you come up with a package?’” Rajaratnam said. “He’s telling me, ‘I want so much.’”

Gupta never got that stake, according to testimony at Rajaratnam’s trial. The $10 million he invested in the Voyager fund with Rajaratnam was wiped out in the 2008 global subprime financial meltdown.

No Profit

Gupta’s New Silk Route private equity fund hasn’t turned a profit with exits on any of its investments to date, according to Venture Intelligence, a Chennai-based research firm that tracks private equity in India.

Rajaratnam was arrested in October 2009. Gupta left Goldman Sachs’s board in 2010, remaining a director at AMR, Genpact, Harmon International Industries Inc., P&G and Sberbank of Russia. (SBER)

In January 2011, the SEC notified Gupta that it had tied him to Rajaratnam and would file an administrative action against Gupta. He gave no hint of his legal perils when, on Feb. 27, he joined friends and business colleagues in a corporate box at Bangalore’s Chinnaswamy Stadium.

India was facing England in a group stage match in the Cricket World Cup.

“He was chatty and looked dapper and cheerful,” says Shoba Narayan, an Indian author and acquaintance of his.

Gupta had already informed fellow directors at the Indian School of Business that an SEC action was imminent.

‘No Tapes’

“Just to be clear: There are no tapes or any other direct evidence of me tipping Mr. Rajaratnam,” he wrote in the e-mail he sent directors. “I have spent my entire professional career zealously guarding the confidences of my clients. There is no reason for me to suddenly deviate from a lifetime of probity and honor.”

Gupta flew back to New York after the match, which ended in a tie. Two days later, on March 1, the SEC filed its administrative action against Gupta.

Gupta’s civil case is scheduled to be heard by an SEC administrative judge in July. He has sued to get the case moved to a federal court. The lawsuit says the SEC administrative proceedings deny Gupta his right to a jury trial and procedural protections afforded by court. In a press release responding to the SEC administrative order on March 1, Naftalis, Gupta’s lawyer, called the accusations “totally baseless.”

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.”

To contact the reporters on this story: John Helyar in Atlanta at jhelyar@bloomberg.net Carol Hymowitz chymowitz1@bloomberg.net or jhelyar@bloomberg.net and; Mehul Srivastava in New Delhi at msrivastava6@bloomberg.net

To contact the editor responsible for this story: Jonathan Neumann at jneumann2@bloomberg.net

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