Indians in insider trading

Anil Kumar and Rajat Gupta are the names that come to our mind whenever anyone talks about the evil of insider trading. They formerly worked for McKinsey and Co., perhaps one of the most prestigious consultant firms in the world. The fact that top ranked officials in such a firm could indulge in the nefarious practice rattled several erstwhile clients who trusted the character and capacity of consultants.

Indians figure disproportionately in the list of suspected insider traders. The latest to appear in this abominable list is 39-year-old Mathew Martoma whose name was Ajay Mathew Thomas before he was expelled from Harvard Law School for forging his 1st year grades in applications for clerkship with judges. He had also studied in Stanford University Graduate School of Business.

The charge against him now is that he indulged in insider trading while being a funds manager at SAC Capital Advisors promoted by Steven A. Cohen. He is alleged to have made illegal use of non-public information relating to an experimental drug for Alzheimer's disease. This transgression of law is supposed to have fetched additional profit of $276 mn. for the company and a consequent $9.3mn. bonus for Martoma. This episode of insider trading is notoriously called as "the most lucrative insider trading scheme ever charged". Of course, this record may not hold for a long time!

Mathew (let us call him so because this is common between his old and current names) has been described as an intelligent, ambitious and 'idealistic' young scholar by his friends and as extraordinarily intelligent, remarkably analytical and wonderfully fair-minded individual by his professors.

What is the message from this developing story? Do we succumb to greed for pelf when business pressures mount? How does an idealistic person become an insider trader? Are there both Dr.Jekyll and Mr.Hyde in each one of us with the latter always waiting for an opportunity to manifest himself?

Scott London

After posting the last message, I came across the following news item.
                                                                                        Scott London was a New York based Senior Partner in KPMG. He is only 50 years old now, but has already ruined his career by inappropriately sharing "insider information" with a jeweller friend of his.

The criminal case against him is said to be airtight.

London's lawyer says (according to the Guardian), "London just can't understand why he did it. It makes no sense".

Confronted with the opportunity to make money, even otherwise thoughtful professionals are apt to become unethical. Maybe they are taking what they assume to be a reasonable risk. For every crook who is caught, hundreds may be going "scot-free" (unintended pun).

Rajat Gupta's "Chasing Dark Nights"

When Eugene O'Kelly, CEO and Senior Partner of KPMG, was diagnosed with blood cancer and was told of his imminent death, he focussed his attention on a more spiritual and less mundane way of looking at life and came up with in immensely valuable book titled "Chasing Daylight". There is no wonder that readers of this book are eternally beholden to the author.

When King Parikshit was cursed that he would die in 7 days, he made the best use of the remaing week listening to Srimad Bagavatam. This incident motivates thousands of believers to study Srimad Bagavatam and thereby enrich their life.

When Rajat Gupta ultimately lands in prison, would he write down his rich experience including where he went wrong in a book that may be christened "Chasing Dark Nights"? That may well be the only way of cleansing his false steps.

Rajat Gupta's remorseless regrets

Rajat Gupta who studied in IIT,Delhi and Harvard University and who headed McKinsey and was a Director in companies including P & G and Goldman Sachs has been sentenced to two years in jail and "impoverished" by $5 million fine. The punishment is much lighter than what the American law allows. The judge, Rakoff admitted to "wrestling with the 63-year old's extraordinary attributes and his disgusting conduct before handing down the sentence".

Gupta pleaded that he may be permitted to render social service in Rwanda and New York ghettos instead of being sent to the slammer. Many dignitaries including Bill Gates and Kofi Annan sought leniency from the judge in view of Gupta's unassailable contribution to society. Rakoff could not accept this argument fully because "while no defendant should be made a martyr to public passion, meaningful punishment is still necessary to reaffirm society's deep-seated need to see justice triumphant". The judge also rubbished the "Mother Theresa argument" (Gupta's social service merited his immunity from harsh punishment) and clarified, "It is unquestionable that Mr.Gupta is a good man. But the history of this country and the world is full of examples of good men who do bad things!"

Gupta's statement made in the court just before the sentencing was noteworthy for absence of 'mea culpa'. Gupta concluded his well-drafted statement saying, "As I come before you to be sentenced , the overwhelming feelings in my heart are acceptance of what has happened, of gratitude to my family, and friends, and of seeking forgiveness from them all. It is with these feelings that I hope to move forward and dedicate myself to the service of others." He did not seek forgiveness from those shareholders who lost money unjustly because of his indulgence / complicity in insider trading. Gupta continues to maintain his innocence.

Rakoff described Gupta's passing of insider information to Raj Rajaratnam as "disgusting in its implications" and a "terrible breach of trust". When Gupta's guilt is proved to the satisfaction of the jury and the judge and he refuses to own his culpability, fairness demands strict sentencing and not lenience. There is no place for inconsistency in delivery of justice. Judiciary is not a banana republic where the rich and the powerful and those with influential friends will be treated with velvet gloves.

Among the many reactions from Indian business people, Adi Godrej's was pejoratively notable. "I do not want to comment on individual case. However, I strongly feel that norms against insider trading in India are quite robust". What a revelation!

Rajat Gupta goes aggressive

Rajat Gupta who has been charged by SEC for insider-trading has now filed a case against SEC . His main contention is:
1) SEC seeks administrative trial against him rather than court trial thereby trying to accelerate proceedings and denying him the rights which defendants in a court case are entitled to and 2) SEC is seeking retro-active application of a law called the Dodd-Frank. He alleges discrimination and arbitrariness on the part of SEC. The counter-attack is interesting and is obviously argued by eminent lawyers.

http://dealbook.nytimes.com/2011/03/18/ex-goldman-director-sues-s-e-c-over-galleon-allegations/?ref=business

Galleon hedge fund

The alleged insider trading by Raj Rajaratnam, the promoter of $7 bn hedge fund is big news because the sum involved in insider trading $20 mn is the largest of such cases so far. Proving charges of insider trading are notoriously difficult, but in this case it appears that FBI has wiretapped the needed evidence.
Anil Kumar, a co-founder of Indian School of Business who is a director in McKinsey is also allegedly involved having passed on some crucial information that he had as a consultant.
What to make of this alleged fraud? Galleon was apparently trading on information. Information is a double-edged sword. Privileged information when obtained illegally with a view to leverage it lands the informed in deep trouble. Information is power. It intoxicates and snares its possessor into an abyss unless it is carefully handled.
Galleon has an office in Mumbai also although its investments in India are marginal.