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Insider Trading: An analysis of Rajat Gupta Case

Rajat Gupta a brief introductionRajat Gupta passed out from IIT Delhi and later did his MBA at HBS, graduating with distinction as a Baker scholar.Was one of the earliest Indian-Americans at McKinsey(1973) and in 1994 became first Chief Executive born outside of US.He remained as head of McKinsey for 3 terms till 2003 and continued as senior partner till he was made senior partner emeritus in 2007.During Gupta's time as head of McKinsey, the firm opened offices in 23 new countries and doubled its consultant base to 891 partners, increasing revenue 280 percent to $3.4 billion.Co-founder of ISB, American India Foundation and private equity firm New Silk Route- all 3 had donations or investments from Raj Rajarathinam.Served as member of the board for Goldman SachsProcter & GambleAMR (American Airlines)Harman InternationalRussian bank called SberbankCo-founded the Indian Institute of Technology Alumni Association Served on the board of educational institutions like University of Chicago, Yale, MIT Sloan, Harvard Business School, Wharton and Kellogg (among others) at different points of time.

Philanthropy and volunteer workChairman of the Board for The Global Fund to Fight AIDS, Tuberculosis and Malaria Chairman of the Public Health Foundation of IndiaChairman of the advisory board and the India AIDS initiative of The Gates FoundationTrustee for the Rockefeller FoundationChairman of the International Chamber of CommerceCo-founder and co-chair of American India Foundation after the 2001 Gujarat earthquake to aid in relief work.Member of the Foundation Board for the World Economic ForumSpecial Assistant to the Secretary General for Management Reform for UN Secretary General Kofi Anan.Member of the United Nations Commission on the Private Sector and Development.

Insider trading case

On September 23,2008 Rajat Gupta spoke to Raj Rajarathnam over phone and told him about Goldman board's deliberations about a $5 billion investment in the bank by Berkshire Hathaway immediately after a board meeting of Goldman Sachs.A month later Rajat left a Goldman board teleconference and 23 seconds later phoned Rajaratnam to inform him of the as-yet-secret information that Goldman would report a loss of $2 a share in the fourth quarter, its first and only quarterly loss since going publicOn Jan. 29, 2009, after a meeting of P&G's audit committee, Gupta again called Rajaratnam to relay P&G's as-yet-unannounced fourth-quarter earnings.According to the SEC, Gupta's tips to Rajaratnam resulted in a gainprofits made and losses avoidedof more than $17 million.Mr.Gupta has willingly indulged in insider trading by passing on information (that he had access to as a member of the board of directors) to a known friend and business associate.Galleon hedge fund founder Raj Rajarathnam has previously made donations to Mr.Guptas philanthropy efforts as well as to Indian School of Business (co-founded by Rajat Gupta). He also invested $50 million in NSR, a PE firm co-founded by Mr.GuptaThis indicates a clear case of using confidential information to commit securities fraud

Insider Trading And Laws

Applying Virtue Ethics : To Rajat Gupta CaseVirtue Ethics-Virtue ethics is an agent-based approach to ethics. This approach focuses on the fundamental character and motivations of the individual moral agent.The virtue ethics approach focuses on the integrityof the moral actor. Aristotle and Virtue Ethics-The virtuous agent is involved in a continual quest to find balance in ethical decision-making. Such an agent does not apply any specific rules in making ethical decisions, but rather attempts to make decisions that are consistent with the pursuit of a particular kind of excellence that entails exercising sound moral judgment.

Applying Ethical theories to Insider Trading

Insider Trading ought to be Legal and ethical

Deontological Fairness in Financial Markets means that all parties have equal information relevant to the asset valuation.

Utilitarianism Insider trading decreases market efficiency in long term.