No Big 4 audit firms or their partners have been named in
the insider trading scandal surrounding the now-defunct hedge fund Galleon
Management. But the SEC has accused one of the most prominent businessmen ever
implicated in such crimes, Rajat Gupta, a former McKinsey & Company Global
Mark O'Connor, CEO of Monadnock Research, put together a
research note for his subscribers that gives us the details of the accusations.
He also provides new insight into why a guy like Gupta may have committed these
Gupta is alleged to have tipped Galleon's Rajaratnam, a
friend and business associate, providing him with confidential information
learned during board calls and in other aspects of his duties on the Goldman
and P&G boards. Gupta reportedly made calls to Rajaratnam "within seconds"
of leaving board sessions where market-moving information was discussed.
The complaint alleges that Rajaratnam then either used the
inside information on Goldman and P&G to execute trades on behalf of some
of Galleon's hedge funds, or shared it with others at Galleon, who then traded
on it ahead of public disclosure. The SEC claims the insider trading scheme
generated more than $18 million in a combination of illicit profits and loss
The SEC also says that Gupta was, at the time of the
alleged disclosures of confidential non-public information, a direct or
indirect investor in at least some of Galleon's hedge funds, and had other business
interests with Rajaratnam.
Gupta, as a McKinsey veteran, embodied the "trusted
advisor" consulting ethos and personified the McKinsey "advisor to CEOs"
business strategy and brand. The firm's value to its clients and its
effectiveness as an advisor requires knowing their secrets and holding them
close to the vest.
Gupta was McKinsey & Company's worldwide Managing
Director for 9 years from 1994 through 2003...Gupta, now 62, stepped down as a
McKinsey partner in 2007, and has since served as Managing Director Emeritus,
according to his profile at the Indian
School of Business (ISB). Gupta was instrumental in co-founding ISB in
2001, and continues to serve as its current Governing Board Chairman and
Executive Board Chairman. He is also a current or former board member (or
trustee) of AMR Corp., the parent of American Airlines; the Rockefeller
Foundation; the University of Chicago; Harman International Industries; Genpact
India; the World Economic Forum; the International Chamber of Commerce, World
Business Organization; New Silk Route and New Silk Route Private Equity; and
the Emergency Management and Research Institute. Galleon's Rajaratnam was also
associated with the New Silk Route ventures, where Gupta continues as Chairman.
Rajaratnam is no longer associated with those entities.
Several media commentators have openly wondered whether
the accusations against Gupta, and earlier accusations in the same scandal
against McKinsey senior partner and Gupta protégé Anil Kumar, strike a deadly
blow to McKinsey.
Read this article in its entirety at the re: The Auditors, a blog
by Francine McKenna
Insider trading is discussed in greater
detail in 6 A.A. Sommer Jr., Securities Law Techniques, Ch. 80 (Matthew
Bender Rev. Ed.), " Insider Trading Under Section 10(b) of the Securities
Exchange Act," which can be accessed online by subscribers of lexis.com. This
treatise is also available in the LexisNexis online store.
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