When the U.S. Securities and Exchange Commission sued Rajat K. Gupta for insider trading yesterday, it wasn’t simply accusing “a Westport, Conn.-based business consultant” of providing illegal tips to the billionaire hedge-fund manager Raj Rajaratnam.
Gupta, unlike the 26 people charged in the government’s multiyear criminal insider-trading investigation that went public with Rajaratnam’s arrest in October 2009, has served on the boards of some of the largest multinationals, including Goldman Sachs Group Inc. and Procter & Gamble Co. From 1994 to 2003, he ran McKinsey & Co., the global consulting firm that has plotted strategy for companies such as General Electric Co. and AT&T Inc. Gupta remained a senior McKinsey partner until 2007.
“McKinsey is the closest thing the business world has to a confessional, and he was the high priest,” said Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco, and a former managing director at Salomon Brothers. “They have been an icon in the consulting business almost since they were founded.”
Gupta, 62, is the only member of the Bill & Melinda Gates Foundation’s Global Development Program Advisory Panel who has not led a country or at least worked directly for its president or administration, according to foundation biographies. He chairs the panel.
The panel “provides strategic guidance and does not have any financial, fiduciary or audit responsibilities,” the Seattle-based foundation said in a statement. “Rajat is a valued member of the panel and will continue to serve on it.”
Gupta has served on advisory boards at Northwestern University’s Kellogg School of Management, University of Pennsylvania’s Wharton School, Massachusetts Institute of Technology’s Sloan School of Management and Harvard Business School, his alma mater. He went from Harvard to McKinsey, though was rejected after his first application to the consulting firm. He was reconsidered after a recommendation from professor Walter J. Salmon.
“I can only say that he was an outstanding student, and as far as I could tell in my exposure to him in those years an outstanding person,” Salmon said yesterday.
In 2008 and 2009, after stepping down from McKinsey, Gupta passed confidential information to Rajaratnam, founder of New York-based Galleon Group LLC, including early word on quarterly earnings at Goldman Sachs and P&G, according to the SEC’s civil suit. Gupta called Rajaratnam 23 seconds after an October 2008 Goldman Sachs board call during which senior executives informed the board of poor results by the bank, the SEC said.
A month earlier, he disclosed information to Rajaratnam on the $5 billion investment in Goldman Sachs from Warren Buffett’s Berkshire Hathaway Inc., according to the lawsuit.
The tips generated more than $18 million in illicit profits or losses that were avoided by Galleon, the SEC said.
“Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets,” Robert Khuzami, the SEC’s enforcement director, said yesterday in a statement.
The allegations are “totally baseless,” Gary Naftalis, a lawyer for Gupta, said in a statement. Gupta’s “40-year record of ethical conduct, integrity and commitment to guarding his clients’ confidences is beyond reproach,” Naftalis said.
Ed Canaday, a spokesman for Goldman Sachs in New York, declined to comment. Gupta, who stepped down from Goldman Sachs’s board last year, resigned yesterday from the Procter & Gamble board “to prevent any distraction,” said Paul Fox, a spokesman for the Cincinnati-based consumer-products company.
“We were saddened to learn about the civil charges against our former colleague,” Yolande Daeninck, a spokeswoman for McKinsey in New York, said in a statement.
The SEC action “is simply an effort to destroy a favorable witness,” said John Dowd, Rajaratnam’s attorney at Akin Gump Strauss Hauer & Feld LLP in Washington. “There is no case, absolutely none.”
In 1994, after his promotion to the head of McKinsey, the Chicago Tribune reported that the two people Gupta admired most were Mother Teresa and Swami Vivekananda, a 19th-century Hindu hero credited with helping make Hinduism a major world religion.
“I think of him like Thomas Aquinas,” the philosopher and Catholic theologian and priest, former P&G Chief Executive Officer Alan Lafley said of Gupta in an October Fortune story.
A former McKinsey partner recalls Gupta’s philosophical talks, while managing director, in which he likened the firm to a Banyan tree. As the various consulting practices grew, Gupta would say, they would strengthen the overall firm, as the Banyan’s maturing roots do the tree, according to the former partner, who asked not to be named because of the case pending against Gupta.
McKinsey grew to 9,000 employees from 500 in the 35 years he spent there. Even by 1995, his second year at the helm, its global sway was such that a Sunday Times headline complained of a “McKinsey mafia.” In the past year, the newspaper said then, one firm veteran had taken over the prime minister’s policy unit, another became the youngest member of the cabinet and a third became deputy governor of the Bank of England, leaving the helm of the Confederation of British Industry. He was replaced there by a McKinsey veteran.
In 2001, Gupta founded a business school in Hyderabad, India, called the Indian School of Business, whose board was stocked with that country’s corporate leaders, along with McKinsey director Anil Kumar, who has pleaded guilty to providing Rajaratnam, 53, with inside information.
Rajaratnam and Gupta have a 13-year history of business collaboration and co-investing. As of May, Rajaratnam had a stake in a fund managed by New Silk Route NSR Partners LLC, co-founded by Gupta. At a January 2007 benefit honoring Rajaratnam called “A Night for India,” Gupta was the honorary chair along with Zubin Mehta, who conducted the New York Philharmonic in an Elgar cello concerto and Bruckner symphony, according to a program. The music played after a black-tie dinner and before a champagne reception.
Gupta’s reach has extended beyond India, where he was born in the Communist-run Eastern city Kolkata. After McKinsey, he joined the boards of Russia’s OAO Sberbank, American Airlines parent AMR Corp., Harman International Industries Inc. and the business outsourcing company Genpact Ltd. Last year, Sberbank announced that Gupta, its highest-paid director, would instead become a ”strategic adviser.” He has also served as the UN Secretary General’s special adviser on management reform, and in July became chairman of the International Chamber of Commerce. His vice chairman, Stephen Green, another McKinsey alumnus, was the chairman of HSBC Holdings Plc. He left HSBC and ICC to become the U.K. trade minister.
Bala Balachandran, who has known Gupta for three decades and was on the founding faculty of the Indian School of Business, sees his old colleague as “a classy guy” who “delivered results as the number one guy at McKinsey.”
Balachandran, who left that school to found the Great Lakes Institute of Management in Chennai, India, in 2004, said Gupta’s post-McKinsey world of investments was different.
“The arrogance became so high” among sophisticated investors, he said in a May 2010 interview.
“This goes to the heart of the market’s credibility,” Connelly, the business school dean, said of the SEC’s insider-trading lawsuit against Gupta. “All the SEC has done today is introduce the possibility that this kind of chicanery has gone on at what can only be called the highest levels.”
A former managing director at Goldman Sachs described McKinsey yesterday as the psychiatrist-in-chief for corporate America. The executive asked not to be identified because of the SEC case. If Gupta is guilty, the person said, pointing out that the ”if” is necessary because the charges are so extraordinary, it means you can trust no one.