Famous HBS Alum Charged With Insider Trading

Rajat Gupta is an top adviser to many business schools

One of Harvard Business School’s most distinguished alums and a major adviser to five top business schools was charged today (March 1) with insider trading by the Securities & Exchange Commission. The SEC alleged that Rajat Gupta, a former director of Goldman Sachs and Procter & Gamble, was leaking boardroom details from both companies to a friend who racked up $18 million of illegal gains by trading on the information.

Gupta is the second Harvard MBA in less than a month to have been charged with insider trading. On Feb. 8th, Samir Barai, who graduated from Harvard in 1999, also was accused of insider trading by the government. But the charges against Gupta, who had in 1994 become the first non-Westerner to hold the top leadership position of McKinsey & Co., are even more shocking.

His was a storybook tale of achievement. He received his undergraduate degree in engineering from the prestigious Indian Institute of Technology in 1971. The first time he ever flew in an airplane was on the trip that brought him to Harvard and its MBA program. After graduating in 1973, Gupta applied for a job as an associate in McKinsey’s New York office but was turned down because he didn’t have an work experience. One of Gupta’s HBS professors, Walter Salmon, wrote to the manager of the New York office asking him to reconsider the decision. Some 21 years later, at the young age of 45, Gupta was elected McKinsey’s managing director, a post he held until 2003.

Now, 62, Gupta has been one of the most successful Indian-born businessmen of his generation. His success at McKinsey led to his board invitations at Goldman and P&G as well as on numerous advisory boards for top business schools, including Harvard, Northwestern’s Kellogg School of Management, MIT’s Sloan School, and Wharton’s Lauder Institute of Management & International Studies. Gupta also has been instrumental in founding the Indian School of Business (ISB) in Hyderabad and remains its chairman of the board.

“Gupta was honored with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets,” SEC enforcement chief Robert Khuzami said in a statement.
The 62-year-old Gupta is one of the highest-ranking corporate executives implicated in the government’s wide-ranging insider trading probe, which has resulted in criminal or civil charges against dozens of individuals.

According to the SEC complaint, Gupta leaked details about Warren Buffett’s $5 bilion investment in Goldman Sachs to Raj Rajaratnam, founder of the hedge fund Galleon Group and a long-time friend and business associate. Gupta, who the SEC said invested in at least some Galleon hedge funds, also is accused of illegally tipping off his friend about quarterly earnings at Goldman and P&G, where he resigned as a director on Tuesday. An odd footnote to the story: It was a business school connection that brought the two together. Gupta and Rajaratnam, who is from Sri Lanka, met through the Indian School of Business. Rajaratnam, who originally came to the U.S. to attend Wharton, is a billionaire who will go on trial next week on criminal charges of insider trading, has been a major donor to ISB.

Gary Naftalis, a lawyer for Gupta, called the SEC allegations “totally baseless” and said his client had lost his entire $10 million investment in one of Galleon funds managed by Rajaratnam. “Mr. Gupta has done nothing wrong,” Naftalis said in a statement. “There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo.”

The SEC alleged that Gupta tipped Rajaratnam about Goldman’s results for the second and fourth quarters of 2008, resulting in more than $16.6 million of illicit gains. It said he tipped Rajaratnam about Procter & Gamble’s results for the final quarter of 2008, resulting in more than $570,000 of profit.

The SEC said Gupta had at least two phone calls with Rajaratnam shortly before Goldman announced Berkshire’s investment in Goldman on September 23, 2008. The SEC charged that Gupta’s contacts with his friend included a call just before the market closed that day, immediately after Gupta disconnected from a phone link to the board meeting where Goldman approved the investment. Rajaratnam’s trades in Goldman based on these tips resulted in more than $900,000 of profit, the SEC said.

  • Mandy Moore

    This doesn’t surprise me at all. The lack of ethics in business these days is appalling. The worst is that these guys really don’t think what they are doing is wrong. It’s all in the name of maximizing your own and your company’s revenues and profits, at any cost. It’s the kind of ruthlessness people hire McKinsey for.

  • arvon

    Thanks Arthur on the article on the HBS driven Monitor group, only see wat fame, power and money can do.. detest Harvard the so called elite school!

  • Arthur Dullsworthy

    More bad news about an HBS-connected consulting firm and Kaddafi: http://motherjones.com/politics/2011/03/libya-qaddafi-monitor-group

  • answering_theanonymous

    Let’s not take this topic as Indian and non-Indian, so lame. I’m an Indian and outright will say what Rajat did was wrong .. nothing has to to do with the community here. It’s individuals, and every race will have good and bad people. Consider the whole world a community and let’s make it a better place to live in!

  • academy_call

    Hey comeon lets not forget the other guy Rajaratnam, he is a Wharton MBA passout!.. its not HBS alone.. its Wharton too..that has equal number of ‘the bad guyz’ together spoiled the economy!

  • Arthur Dullsworthy

    Gupta, through his leadership of McKinsey, was singlehandedly more responsible for the harm done to American workers by outsourcing than any the entire financial crisis.

  • Anonymous

    I have one theory about this new round of Indian American Harvard MBA’s caught with insider trading. Indians come from a culture where achievement, success, and titles IS your identity. You are taught from day one by your parents, colleagues, and society that you are extremely special and worthy of worship b/c of all the titles and paychecks you have earned. So there are humongous egos amongst their midst who believe they are above the law! It is no surprise that most of the Wall St workforce and Silicone Valley workforce is filled with Jews, Indians, and Chinese – all groups that put a very very high premium on achievement. With Indians there is twist though – they are hippocrites and would never acknowledge that a Raj Gupta or Samir Barai could exist in our communities. A Jewish women at my gym acknowledged that Bernie Madoff was a bad person who happened to be Jewish. I would never hear an Indian say that!

  • Chris – Kellogg

    Yes, this looks bad for HBS, but it also reflects on most of the other top tier schools. Gupta sits on the boards of Wharton, Sloan, Kellogg, Booth, and HBS.

    He’s also on the boards of P&G, American Airlines, Sberbank, Genpact, and until recently, Goldman. Not to mention he at McKinsey for 30 years (and was the managing director for a while). Think about how well-connected this guy is. Insider trading seemed almost inevitable…

  • Bruce_alter

    Uh, the Harvard MBA again! Bruce its not one or two.. there are so so many of them as culprits! who gave these culprits a bigger share of the cake, aint it not for the Harvard degree, would he have gotten this far.. infact there are so many .. the greedy HBS MBA’s! Let them teach some ethics along with their tricky management strategies! In the next HBR issue you will find a case study ‘why shouldnt a man of 60 do insider trading’? Pls buy and read that! bcoz that will give them money back! They brought our economy down!

  • Bruce Vann

    Help me out here. I’m failing to see the connection between entitlement and insider trading. And what does “Film at 11” mean?

  • Schools promote an atmosphere of entitlement, and graduates act upon their feelings of being entitled. Film at 11.

  • Bruce Vann

    “The better question is what’s going on with HBS and their alums?”

    That is a good question. But remember, as elite as HBS is it’s also huge. I think it’s always been much bigger than the rest of the b-schools. It’s hard to filter the character of that many people coming in. I wouldn’t necessarily say that it’s the school’s problem as much as I’d say it’s a moral failure of individuals. Just my opinion.

  • Arthur Dullsworthy

    Wisdom of the admissions consultants.

  • Chris P.

    The better question is what’s going on with HBS and their alums?

  • Tsk-tsk….

  • johnnie welker

    One most wonder why someone who is that successful would want to be involved in such scheme. Dude is over 60 years old; had everything he wanted in life (I guess).

    I understand why Raj was doing it at 39, but it is insane to think an aged and successful man would do that. Pathetic.

  • Imagine that.

  • Arthur Dullsworthy

    A feast of Schadenfreude!