Rajat Gupta's Tragic Ambition

Jurors weighing the insider-trading case against Raj Rajaratnam in a Manhattan federal courtroom are hearing plenty about Rajat Gupta, the former head of McKinsey. They've listened to a wiretap on which he confided to Rajaratnam that the Goldman Sachs (GS) board, on which he sat, discussed acquiring Wachovia or American International Group (AIG). They've watched Goldman Sachs Chief Executive Officer Lloyd Blankfein testify that Gupta violated the company's ethics code for directors. Prosecutors have called Gupta, who has not appeared as a witness, an unindicted co-conspirator, and the Securities and Exchange Commission has filed an administrative action against him for his alleged role in the scandal. Still, nothing explains why Gupta, once one of the world's most trusted advisers to companies, would risk his reputation by sharing confidential information with a hedge fund manager.

Gupta, 62, led McKinsey, the global consulting firm, from 1994 to 2003. He sat on the boards of some of the largest multinationals, including Goldman Sachs and Procter & Gamble. He raised millions for charity, hung out with the Prime Minister of India, and attended President Barack Obama's first state dinner at the White House. He divided his time between a waterfront home in Westport, Conn., that once belonged to J.C. Penney, a Manhattan apartment, and a Florida getaway.

Yet Gupta had grander ambitions. After stepping down from the top job at McKinsey, he pursued a second career as a dealmaker. The man CEOs turned to for his expertise and sound judgment made questionable decisions as he invested with Rajaratnam, the co-founder of the hedge fund Galleon Group. The SEC has accused him of passing confidential information on earnings at P&G and Goldman Sachs, and Warren Buffett's $5 billion investment in Goldman Sachs. Those tips generated more than $17 million in illicit profits or avoided losses for Galleon, the SEC says. Gupta's lawyer, Gary Naftalis, calls those allegations "totally baseless."

The son of a man who fought for India's independence, Gupta was orphaned as a teenager. He worked his way from lower-middle-class roots in Kolkata to Harvard Business School and joined McKinsey in 1973. His big leap came in 1994 when McKinsey held elections for a new leader. Gupta won over two other candidates, becoming the first non-U.S.-born managing director of the firm. He served for three three-year terms, the maximum under McKinsey's rules.

Gupta remained at McKinsey as a senior partner until 2007. By then, financial markets were booming, and private equity and hedge fund managers were New York's new elite. Many of the CEOs he had counseled were finding positions in this lucrative world. Gupta figured he could leverage his own contacts and add to his wealth, says a senior executive at a company where Gupta was a director until March. He loved gathering Wall Street rumors and analyzing them in his professorial way, the executive says. He liked the idea of doing 8 or 10 deals a year—making introductions among executives and investors, and leaving the math and paperwork to others, says the executive, who didn't want to be named because his conversations with Gupta were private. That's also how Rajaratnam saw him. "Your value-added is not to do cash flows," Rajaratnam told Gupta in a July 2008 wiretapped phone conversation submitted at the trial. "Your value-added is to bring people together, deals together, at the right time to make the call."

Several wiretapped conversations indicate Gupta coveted a role at KKR (KKR), one of the largest private equity firms. He knew Henry Kravis, KKR's co-chairman, from his philanthropic work and through some clients. "He's enamored with Kravis, and I think he wants to be in that circle," Rajaratnam told Anil Kumar, a McKinsey consultant at the time who has pled guilty to insider trading, in an Aug. 15, 2008, taped call. "That's a billionaire's circle. … I think here he sees an opportunity to make $100 million over the next 5 or 10 years without doing a lot of work."

Gupta began doing business with a group of men who, like him, had connections in the U.S. and India: Parag Saxena, Victor Menezes, and Rajaratnam. All three had had trouble with regulatory authorities. In 2006 he co-founded a fund called New Silk Route Partners with Saxena and Menezes. Rajaratnam contributed $50 million to the fund, which eventually raised $1.3 billion to invest in ventures in India and other emerging countries.

Saxena had paid the SEC a $250,000 fine in 1994 to settle civil charges that he received pre-initial-public-offering stock at big discounts and then recommended the stocks to his clients at Chancellor Capital Management after they went public. Menezes, a former Citigroup (C) senior vice-chairman, paid the SEC $2.7 million in a fine and disgorged profits in 2006 after he dumped his Citigroup stock ahead of an announcement of bad news from a subsidiary in Argentina. And in 2005, before Rajaratnam's current troubles, his Galleon Group paid $2 million in a fine and disgorged profits to settle charges that it had made improper trades.

Some worried about Gupta. "I told him once, 'If you are in a herd of pigs, you'll also smell like a pig,' " Bala Balachandran, a business professor who has known Gupta for three decades, said in an interview last year. In 2007, Gupta joined Rajaratnam and a third man to form the GB Voyager Multi-Strategy Fund, contributing $10 million of his own. The $40 million fund "invested in numerous Galleon hedge funds, including those that traded on Gupta's illegal tips," according to the SEC's complaint. Gupta asked Rajaratnam for a 10 percent stake in the Galleon International Fund in exchange for attracting investors, according to a May 28, 2008, wiretapped call between Rajaratnam and Kumar. He never got that, according to testimony at Rajaratnam's trial.

Gupta's dealmaking career never took off. The New Silk Route fund hasn't turned a profit on any of the investments it has made so far, according to Venture Intelligence, a Chennai-based research firm. The Voyager Fund was wiped out in the 2008 financial crisis, costing Gupta his $10 million investment, according to his attorney.

"I think Rajat Gupta got caught in that whole New York milieu where people measure themselves by their net worth, the size of their bonus, or square footage of their house," says Shoba Narayan, an author who was part of that circle through her husband, a former Morgan Stanley (MS) banker. "If he'd lived away from that incestuous Wall Street set, perhaps none of this would have happened."

Gupta's civil case is scheduled to be heard by an SEC administrative judge in July, and the worst punishment he could receive is a fine and a consent decree that could bar him from serving on public company boards. Naftalis has filed a suit on his behalf to get the SEC civil case transferred to a federal court where it would be heard by a jury.

Even if Gupta is not sanctioned, "he'll never recover the pristine reputation he had before," says Georges Ugeux, a former New York Stock Exchange official, now CEO of Galileo Global Advisors, a New York firm that advises investment banks. "Whether he's fined or indicted is secondary to the fact that many people have lost respect for him."

The bottom line: The SEC says Gupta fed Rajaratnam information worth $17 million. His reputation may never recover.

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