Manhattan Insider Trading Sentencing Is Felt in India
India's business and journalism circles pulsed last week with the news that a U.S. District Court judge in Manhattan had sentenced the prominent Indian-American business leader Rajat Gupta to two years in prison on the charge of insider trading.
For decades, Gupta had stood tall in the consciousness of middle-class Indians trapped in a semi-socialist, semi-feudal economy. He seemed a flag bearer of the American Dream, an ambitious, self-made man who from modest beginnings had become one of the first Indians to achieve a position of prominence on the global corporate stage. Gupta left India for the U.S. in 1971 at the age of 23. He obtained an MBA from Harvard Business School and then spent most of his career at McKinsey & Co., serving as its managing director from 1994 to 2003. Although he became a U.S. citizen in 1984, he kept up many links to India, co-founding the Indian School of Business in Hyderabad in 1998, serving as a consultant on public policy to the Indian government, quoting verses from the Bhagavad Gita in commencement speeches and taking part in humanitarian work.
After retiring from McKinsey in 2008, Gupta became a director on the board of Goldman Sachs Group Inc. In 2008, in the course of a Department of Justice investigation of insider trading, Gupta was recorded sharing information about a Goldman Sachs board meeting with the hedge fund manager Raj Rajaratnam, a close friend. Last year, Rajaratnam, who made a profitable transaction based on the information, received the far longer sentence of 11 years in prison on the same charge.
The reactions to Gupta's conviction in India were revealing, both for the assumptions on which they rested and the language in which they were couched. Prominent Indian business leaders, many of them close friends of the former executive, went to great lengths to portray him as essentially honest, just and socially-committed. Newspapers emphasized his "downfall." Both sides seemed to muddle the concepts of character and action, as if people always behave in consistent ways or are only good or only bad. In this way of thinking, serious lapses of judgment should finally be accounted for on a kind of moral balance sheet that, when it shows a profit, deserves to supersede the crime itself.
A revealing instance of this last tendency, which we might call the "But he's a jolly good fellow" fallacy, was the "open letter" put out by a group of petitioners, many of them prominent figures in Indian industry, called "Friends of Rajat." The letter claimed that "The REAL Rajat known to us over several decades is completely at odds with the public narrative" and that "We fully stand by him in his cause to win back his well-deserved reputation for integrity in all aspects of his life and his dedication to humanitarian causes." It is full of moral non sequiturs, including the quotations from historical figures in the sidebar that serve as spurious justifications for the enterprise, such as this one from Elie Wiesel:
I swore never to be silent whenever and wherever human beings endure suffering and humiliation. We must always take sides.
Meanwhile, most Indian papers inserted the news of the sentence into a simplistic pride-and-disgrace storyline. Consider this lead sentence from the Hindustan Times's "The Rise and Fall of an Indian Poster Boy":
Scholar, executive, leader, philanthropist, educationist — Rajat Gupta took 40 years to build a reputation. It took just one year after that for his downfall.
Both these interpretations seem somewhat less than fully adult. The evidence available suggests that Gupta was breaking the law, never suspecting that the phone of the person he had just called had been tapped. He could hardly have been oblivious to the fact that his actions constituted insider trading, but seemed to think it acceptable, as one of the duties of power and influence to others within the same club, that a close friend and business associate should stand to make profits from the tip-off. At his trial, Gupta expressed regret for the impact of his actions "on my family, friends and institutions that are dear to me" but stopped short of admitting to guilt or repentance -- a revealing omission that suggests insider trading is seen in business as morally in a different category from, say, embezzlement or fraud.
By focusing so much on Gupta's personality and past record of probity and philanthropic work, Gupta's friends and defenders seem to imply that the offense of insider trading, even if proscribed, was nothing more than a visionary's minor peccadillo. As Bloomberg View's Jonathan Weil noted in "Rajat Gupta's Friends In High Places," Judge Jed Rakoff faced enormous pressure to reduce or even waive Gupta's looming prison sentence:
Earlier this week I spent a few hours at the federal courthouse in downtown Manhattan reading through the hundreds of letters sent on Rajat Gupta’s behalf to U.S. District Judge Jed Rakoff. ...
The letters that most interested me were from people with ties to Berkshire Hathaway, the conglomerate run by Warren Buffett. One person who wrote was Microsoft founder Bill Gates, who is a member of Berkshire’s board of directors. Another was Ajit Jain, Berkshire’s reinsurance chief. A third was Manoj Singh, chief operating officer of Deloitte Touche Tohmatsu. Deloitte’s U.S. arm, Deloitte & Touche LLP, is Berkshire’s independent audit firm.
Here’s the rub. Gupta was convicted of illegally tipping his friend and business partner, hedge-fund manager Raj Rajaratnam, about Berkshire’s $5 billion investment in Goldman in September 2008. Rajaratnam, who got an 11-year prison sentence, used that information to trade illegally in Goldman’s stock. This is why it seems awkward, and perhaps even inappropriate, for Gates, Jain and Singh to have written to the judge seeking leniency for Gupta.
Meanwhile, while making the most of the scandal of Gupta's "fall from grace," much of the Indian press forgot to emphasize a point of larger consequence, which was the speed and efficiency of the American justice system in dealing with the case and the absence of special privileges and protection for the rich and powerful. The point, blithely ignored by the "Friends of Rajat" in all their rambling about elephants and mice, that the case was about principles and not personalities, was made by Sundeep Khanna in Livemint. Khanna asked "Would Rajat Gupta have been punished in India?":
In the last three years, at least 70 traders, bankers, lawyers and corporate executives have been convicted of insider trading crimes. This wasn’t a political battle or a settling of past scores or even a victimization of Asians-come-good, as some reports had suggested. No. This was a reinforcement of a financial system with the aim of rescuing the market system, so central to the US, from the clutches of manipulators and fraudsters.
Gupta’s past record as global head of blue-chip consulting firm McKinsey, as Goldman Sachs director, even as a proven and acknowledged philanthropist cut no ice with the judicial system. “He is a good man,” judge Rakoff said of Gupta. “But the history of this country and the history of the world is full of examples of good men who did bad things.”
How often do we hear of a dynasty’s contribution to India’s freedom struggle or of the sterling past record of a public figure as defence against current offences? We saw just a month ago how the entire government machinery including ministers and governors jumped to the defence of a “private citizen” because he happened to be related to a powerful political family. It is repeated cuts and nicks such as these that have corroded the foundations of our democracy.
Gupta's jail term begins Jan. 8.
(Chandrahas Choudhury, a novelist, is the New Delhi correspondent for World View. Follow him on Twitter. The opinions expressed are his own.)
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