Rajat Gupta – Fallen Angel
Sandipan Deb’s new book

A remarkable IITian, former global McKinsey Head fallen from grace. Two year sentence? Greed or unlucky?

On 24 October, 2012, Dusserah day, a US court sentenced Rajat Gupta to two years in prison, plus one year of supervised release (which is somewhat similar to being out on parole), and a $5-million fine. In end-Feb 2013 another court ordered him to pay $6.2 million to Goldman Sachs as a victim of this insider trading. In October the judge had denied a request from Gupta’s lawyer to allow him to remain free during his appeal. Four months earlier, on June 15, Gupta had been convicted for insider trading. All evidence against him had been circumstantial, but the jury had found it to be convincing enough to pronounce him guilty. Yet, a few members of the jury had been seen weeping as they left the courtroom after the verdict.

Gupta has since been permitted to stay out of prison till the appeal against his conviction is heard and judged. What follows is an edited extract from my recently published book Fallen Angel: The Making and Unmaking of Rajat Gupta, by Sandipan Deb (1986 alumnus of IIT Kharagpur.)

On the morning of May 21, 2012, a crowd of journalists waited in front of the US District Court for the Southern District of New York to intercept a man whose life had been the sort of near-magical immigrant success story that lay at the heart of the American dream. A man who had spent the last two decades of his life moving among the richest businessmen, the biggest philanthropists, the most powerful statesmen in the world. Former (and the first non-American-born) head of McKinsey & Co, the elite and secretive management consultancy firm; special advisor to former United Nations Secretary General Kofi Annan; confidant and consultant to heads of state; former Chairman of the Board for The Global Fund to Fight AIDS, Tuberculosis and Malaria; former member of the boards of iconic American firms like Goldman Sachs and Procter & Gamble. Sixty-three-year-old Rajat Gupta was a corporate legend with a career that could only be described as awe-inspiring.

He was also the biggest name in corporate America to have ever been accused of insider trading. His criminal trial was about to begin.

Gupta’s indictment and trial were the slipstream of the biggest insider trading trial (and conviction) in the history of Wall Street. A year and 10 days ago, Sri Lankan-born billionaire Raj Rajaratnam, head of the Galleon Group, which ran a clutch of hedge funds, had been found guilty on 14 counts of security fraud and conspiracy. He had been sentenced to 11 years in prison.

Gupta had been close to Rajaratnam. He was the among the five people in the list Rajaratnam had dictate to his executive assistant in 2008, who were to be given access to the Galleon boss immediately, no matter how busy he was. The US government was now charging Gupta with having passed on confidential information to Rajaratnam, who had made a killing on the stockmarket based on this.

Why would a man of Gupta’s stature and accomplishments have done so, if at all, that is, he had? Even the US government seemed unsure. Gupta’s indictment was rather vague on this count, stating merely that he “benefited and hoped to benefit from his friendship and business relationships with Rajaratnam in various ways, some of which were financial.”

The evidence that the government had based its case against Gupta on came down finally to three phone conversations that Rajaratnam had in 2008 and one in 2009. One of them had been tapped by the Federal Bureau of Investigation (FBI).

[Link to the taped conversation] 

The FBI had been on Rajaratnam’s trail for quite some time, but the other three had not been. But phone records showed that they were calls made by Gupta to Rajaratnam, and the timing of the calls appeared highly significant.

On the afternoon of 23 September 2008, Gupta joined members of the Goldman Sachs board on a conference call. The board wanted to discuss some extraordinarily good news. While the US stockmarkets were facing their worst crisis in 80 years, and venerable Wall Street firms like Lehman Brothers had gone belly-up, America’s most prudent investor, Warren Buffett, “the Sage of Omaha”, had just agreed to invest $5 billion in Goldman Sachs.

The conference call ended at 3:54 p.m. Sixteen seconds later, Gupta called Rajaratnam’s office. The conversation lasted 56 seconds. Immediately afterwards, at 3:58 p.m, just two minutes before the markets closed, Rajaratnam bought $27 million worth of Goldman stock. Two hours later, Goldman announced the Buffett investment. The bank’s shares spiked in after-hours trading. The next morning, when the markets opened, Rajaratnam sold, and walked away with a cool profit of nearly a million dollars.

The US Attorney for the Southern District of New York, Preet Bharara—like Gupta, an Indian-born American citizen, and the man who had spearheaded the investigations, believed that Gupta had called Rajaratnam to tell him about Buffett’s offer. If this was true, it was a classic case of insider trading.

On October 24, during a wiretapped conversation, Rajaratnam told a colleague: “I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share. The Street has them making $2.50.” A minute later, he says, “I’m gonna whack it, you know,” and laughs with unrestrained glee.

He had just sold Galleon’s entire position in Goldman, and avoided, according to the prosecutors, a loss of more than $3.6 million. The day before, Gupta had been told during a Goldman board meeting that the company had lost almost $2 a share. And just 23 seconds after the board meeting ended, Gupta had called Rajaratnam and spoken to him for 13 minutes.

On January 29, 2009, a day before Procter & Gamble announced its quarterly earnings, Gupta participated in a P&G board meeting through conference call. Earnings were discussed. A few hours later, Gupta called Rajaratnam and spoke to him for eight minutes. Later that day, Rajaratnam’s Galleon funds short-sold about 180,000 P&G shares, and ended up making a profit of more than $570,000.

October 26, 2011, the United States Attorney’s Office filed charges against Gupta on five counts of securities fraud and one count of conspiracy to commit securities fraud. He surrendered to the FBI and pleaded not guilty. He was released on the same day on $10 million bail secured by his Westport, Connecticut house, once owned by retail chain magnate J.C. Penney. The white 18-room mansion, which Gupta purchased in 1999, sits on 2.28 acres and has more than 12,000 square feet of living space.
Gupta had just become the 56th person charged in the biggest insider trading probe ever in US history. Of the 55 people charged before Gupta, 50 had either pleaded guilty or been convicted at trial.

The day Gupta was arrested and charged, his lawyer Gary Naftalis had issued a statement categorically declaring his client’s innocence. “The government’s allegations are totally baseless,” he said. “The facts in this case demonstrate that Mr Gupta is innocent of any of these charges and that he has always acted with honesty and integrity…He did not trade in any securities, did not tip Mr Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo.”
In the courtroom, Gupta sat with Naftalis and his team, and his family sat in the audience right behind him.

The moment that Gupta’s entire life seemed to have led up to had arrived. Under US law, this man, who had been orphaned as a teenager in India, and then fought his way up to reach the very pinnacle of the US corporate world, was facing as long as 20 years in prison if convicted on each of the securities fraud charges and as long as five years if convicted of conspiracy. He could also be fined as much as $5 million.

The trial for Case No US v Gupta, 11-cr-00907, US District Court, Southern District of New York (Manhattan), was beginning.

UPDATE: A US Court has dismissed a case alleging Rajat Gupta’s liability to Goldman for Rajaratnam tips. Rajat Gupta has filed an appeal for the reversal of his insider trading conviction.

The author is a 1986 alumnus of IIT Kharagpur and has been a journalist for more than 20 years. He has been Managing Editor of Outlook, Editor of The Financial Express, and Founder-Editor of Open. He is also the author of the book The IITians (Penguin/ Viking, 2004), and a novel The Last War (2012). He lives in Delhi.

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  1. adminFebruary 16, 2013 at 5:37 amReplyAuthor

    Published in the Economic Times, India, on 7th Nov. 2011

    (Vijay Mahajan, and Pramath Sinha (IITians) with others)

    As people who have known and worked closely with Rajat Gupta, over varying periods of time, ranging from ten to forty years, we have been following very keenly, the developments around his recent arrest. We are pained and saddened by the charges leveled against him. It is hard to imagine that somebody as mild mannered and humble as Rajat, could have engaged in any criminal activity. But what has pained us even more, as we have read the views of “eminent people” and watched the debates on TV, is the viciousness with which people have lashed out at him, and the vicarious pleasure they seem to derive as they discuss and dissect his actions and motivations. Suddenly, nothing the man ever did or achieved in his life is held respectable or valuable. Everything about his work and character, as we have known it so far, is being rubbished and ulterior motives are being attributed to every good deed that he has done. The list of his accomplishments, as a highly respected professional, is well known, and we’re not going to recount it here. What is less well known though, is the enormous amount of time and energy he has spent in recent years, on philanthropic efforts and in promoting public private partnerships to make delivery of public services more effective. We have known him to spend all his waking hours, from 6am in the morning to midnight, reaching out to people around the globe, in face to face meetings or over the phone, to build a coalition of supporters for creating world class Institutions in areas as diverse as management education, public health, urban development and eradication of chronic diseases. He helped establish institutions such as the Indian School of Business, the PHFI (Public Health Foundation of India) and the AIF (America India Foundation). He worked with the Gates Foundation and the Clinton Foundation in their efforts for the eradication of AIDS and malaria, not only in India, but in far flung corners of remote Africa. Nothing he conceived of was small in imagination or limited in its impact. His ability to bring people together for a cause, and motivate them to achieve the impossible, is truly awe inspiring. And he did all this quietly, without putting himself in the limelight or promoting a larger than life image of himself, as many other people in similar positions are wont to do. An unlikely profile of a man who’s only motivation was to become a billionaire!
    Our intention here is not to defend, or indeed offer any view on the charges leveled against him. But we do find it unfair and unacceptable that as a people, we should negate all the past good that a man has done and suddenly discover that we always knew that he was a “rogue”, and “deserves” this fall from grace. We find it sad that wise grown up people, should in full public view, behave like five year olds, who would clap their hands and mock one from among their group, who has tripped and fallen. We wonder if any of those who are gleefully pointing fingers at Rajat, can honestly put their hands on their heart and claim that if somebody dug deep enough into their pasts, they would not find anything questionable, anything violating the spirit of the law if not it’s intent, anything bordering on the unethical, if not immoral. We have seen enough examples of that in the past few days, and many of our “heroes” have thus fallen from grace. We all have our weaknesses, but on balance, some people compensate for theirs and still make a huge impact on the world and people around them. Rajat is one such person.
    Robert Kennedy once said: “Only those who dare to fail greatly, can ever achieve greatly.”…………. Let not one failing of the man blind us to all his life’s achievements.
    —Analjit Singh, Chairman, Max India Group
    —Pramath Sinha, former McKinsey partner
    —Savita Mahajan, Deputy Dean, Indian School of Business
    —Vijay Mahajan, Chairman, BASIX Group

    (the views expressed above are personal, and do not necessarily, represent those of the Institutions we are affiliated with )

  2. Sid BayanSeptember 18, 2013 at 2:42 pmReply

    Certainly the trial showed a lot of incongruencies in what was claimed as definitive evidence of R Gupta’s fraud.
    I wonder what the transcript of the 53 sec call made after the 23 Sept 2008 GS Board meeting shows.

    You picked an excellent book title captuers the circumstance well.

  3. Ramaswamy BalasubramanianJanuary 3, 2014 at 11:19 amReply

    I read Anita Raghavan’s book The Billionaire’s Apprentice detailing Rajat Gupta’s fall from grace. But I got a strong feeling that he was overwhelmed by his position at a point of time and was not guarded enough in what he spoke . People like Rajaratnam exploited this weakness. I strongly believe that he did not do anything wrong with intentions of profiting from what he disclosed.Knowing that Rajaratnam was hedge fund owner, he should have been wary of what he spoke to him and the time when he called him or returned his calls.That was his biggest folly. I would rather call it a bad corporate accident.

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