Tuesday, June 19, 2012

Rajat Gupta's trial and conviction

The jury has just convicted Rajat Gupta, once the head of the iconic consulting firm, McKinsey, of insider trading. After his retirement from McKinsey, Mr. Gupta got seats on the boards of Goldman Sachs and Proctor and Gamble. The prosecutors in his trial presented evidence linking his presence at board meetings to phone calls he made to his co-conspirator, the hedge fund head Mr. Rajaratnam, and to trades the latter promptly executed to make money on the inside information Gupta had presumably relayed.

The prosecution presented no wiretaps of Gupta tipping off Rajaratnam. Instead, the jury was persuaded by the circumstantial evidence that when, for example, the Goldman Sachs board, at the depth of the financial crisis, made a decision to accept an investment of $5 billion from Warren Buffet, Gupta, as his cell phone records show, called Rajaratnam immediately after the board meting had adjourned. Within minutes, the latter bought Goldman stock just before the market closed. Needless to say, Goldman stock rose after the news of Buffet’s investment went public. Indeed, Mr. Rajaratnam was himself convicted of insider trading a year ago, based on actual wiretaps of conversations he had with other co-conspirators. He was sentenced to 11 years in prison and fined $93 million.

Absent a wiretap in which Gupta and Rajaratnam are talking about how to profit from the inside information to which Gupta had access, it is impossible to know if Gupta is actually guilty. What is striking however is that Gupta himself made no money from Rajartnam’s trades. In fact, in 2009 he lost money, some news sources suggests as much as $10 million, on a venture capital fund, called Voyager, that he and Rajaratnam had co-founded. Moreover, Gupta had a sterling reputation as an advisor to the most powerful companies and governments in the world. As one of his investment partners described him, “Rajat is sui generis, there’s no one else quite like him on the planet. He’s extremely smart, he has an unbelievable Rolodex. If I went to the South Pole, I could call Rajat, and if he didn’t know someone directly, he’d call someone who did.” His status, his  standing. the sense of his reliability, even generosity,  seemed secure. If he is guilty, we are compelled to ask, “What more could he possibly want?

I can only speculate. But I am drawn here to the distinction between the management consulting business and world of finance and investment. The big story from the early nineties until the Great Recession is the story of risk, finance and investment. It was the period in which the United States became the “risk society.” The risk society grew up around a methodology for pricing and distributing risk across many asset classes by using derivatives and options. These instruments enabled banks to shield themselves from the vagaries of money markets, increasing their ability to provide millions of dollars of instant liquidity to institutional markets. This propelled the growth of new ventures. Of course, the methodologies for pricing risks could also backfire.  For example, the AAA tranches of mortgage-backed securities were not as safe as was calculated. This mis-pricing unleashed bankruptcies, defaults, and as is evident in Europe, considerable social unrest.  We do live in a risk society.

There are two other distinctive features of the  risk society. First, successful risk taking is disproportionately rewarded. This is one reason that the stock market grew so rapidly until the Great Recession. Second, the risk society gave rise to a culture of entrepreneurship. Talented young people who might have once become doctors, lawyers, accountants and consultants were now eager to start or join start-ups.

This risk society and its associated culture has been on balance a creative one, witness the rise of Google, Facebook, and the second coming of Apple. This may be one reason as the chart below shows, that the US still has the most productive economy in the world, even as it has lost manufacturing jobs, become a service economy, and weathered a housing bust. 

One hypothesis is that Gupta felt excluded from the settings and culture of the risk society. Management consulting is a service business. Mckinsey’s brand enabled it to charge for its labor costs plus a markup while relying on a continuing stream of referrals and requests from old and new clients. In other words, it faced minimal market risk, and little execution risk. It was close to a “cost-plus” business. Gupta in this sense was sidelined, away from the action. Indeed, as a management consultant myself, I experienced a period in which business consulting had a certain “glamor.” The best graduates of the top business schools wanted to join the top management-consulting firms. But starting in the mid nineties, the world of entrepreneurship became much more glamorous. 

Facing these developments perhaps Gupta's prior accomplishments seem in retrospect less meaningful to him. This may explain why he started “New Silk Road,” a venture capital fund committed to investing in Indian companies with growth potential. He could join his passion for helping his native country with his desire to play in the world of risk and reward. He was not looking for more money -- there is little indication that he was greedy -- but rather for more meaning.   

Of course this remains speculative. It does not give a complete account of why he might have crossed the line and conspired with a colleague. Perhaps, despite his accomplishments, he may have felt unprepared to compete in the world of risk and so came to rely excessively on a colleague, who prior to his own indictment and jailing, appeared to be one of the most successful hedge managers in the United States.

It is always puzzling to learn that very successful people are unsatisfied with their accomplishments. Psychoanalysis reminds us that a person performs in front of two audiences, one external, our actual friends, colleagues and family members, and the other internal. Freud described the internal audience as the “ego ideal,” This inner voice is the precipitate of the voices of parents and other authority figures, as we have internalized them .The ego ideal is a positive force when it stimulates us to achieve. But it can also be source of shame, when according to our own internal and sometimes overly strict standards, we have failed. This sense of shame implicates our identity, we are no longer sure of who we are. One can imagine how, to avoid feeling this kind of shame,  a person might cross the line. If this is true, we are presented with a case in which Gupta, seeking to avoid the shame from within, shamed himself in front of the people he most valued.


  1. Very thoughtful and interesting – as always. An interesting counterpoint to the oh so common, even cliché, story of lament for ignoring the inner voice and then redemption for listening to it (one way institutions of our childhood keep a perpetual hold on us?)

    Perhaps the lesson is a reminder is to maintain a vigilance of that inner voice: Whose voices are they precisely. Are they sane? Are they pertinent? And are they in harmony? (for indeed it’s not a single voice but rather a parliament, or perhaps if we’re lucky, a chorus)

    In his remarkable Autobiography “Open,” André Agassi tells of his realization very early in his competitive career that his father’s voice – a single-minded focus on tennis to the detriment of every other aspect of life – had indeed become his own. Most of his story can be understood as his quest to change that insane scream into a chorus of sane, sensible, thoughtful and caring voices as he completes his journey from also-ran to champion both on and off the court.

    Perhaps a central problem of life as we know it is the pervasive failure to critically examine and systemically update this inner chorus. We sort of know it’s important to surround yourself with good people, but what’s really important is to actually let good voices in.

  2. Steve, thanks for the reference to Agassi- I have been meaning to read it. I think updating the inner chorus requires considerable psychological work, for example in psychotherapy. Alternatively, religious beliefs- for example that God loves you-- can short circuit this process and give a person an entirely different inner voice. Sometimes, becoming a true believer in something accomplishes the same.