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Rajat Gupta: Grace And Disgrace

A global corporate legend. An Indian role model. And then a fallen icon. Rajat Gupta tells what really happened

Madhavankutty Pillai Madhavankutty Pillai | 27 Mar, 2019

Rajat Gupta, former McKinsey managing director

‘I officially retired from McKinsey at the end of 2007 at the age of fifty-nine, just one year short of the mandatory retirement age. I was busier and busier with the Global Fund and other humanitarian causes. Hank Paulson, who was then at the helm of Goldman Sachs, not having yet left to become Treasury Secretary, was encouraging me to join the Goldman board, and to do so would have gone against McKinsey policy. Directors were not allowed to join corporate boards. So I decided to retire a year early. The directors’ conference that year was held in India, and it turned into a moving retirement party, complete with a Bollywood themed celebration and a speech from the Prime Minister—the first time a sitting head of state had ever addressed the firm. It was an emotional moment for me. I’d been with the firm thirty-five years, my entire career and most of my adult life.’

‘Devens Correctional Facility, Massachusetts, October 2014. Four concrete walls and a cold concrete floor. One small window but not enough light to read. A steel door with a grimy plastic window and a small slot in the center, locked shut. A narrow metal bunk with sharp edges, fixed to the wall, and a metal toilet with no seat or curtain for privacy. This was to be my home for the foreseeable future, which wasn’t really foreseeable at all. I had no idea how long they would keep me in “special housing unit” or SHU—a prison euphemism for solitary confinement. It was a shoelace, of all things, that landed me here. I bent down to tie it, right as the Corrections Officer (CO) came by for the twice-daily “stand-up count.” A few seconds earlier or later and I’d have been fine, standing to attention outside my bunk in the prison camp, as I did every morning at precisely ten, every afternoon at four, and very night at ten…The rules specify you must be standing straight, and not move or speak during the count.’

THESE TWO PORTIONS from Rajat Gupta’s book Mind Without Fear (published by Juggernaut, Rs 699, pages 354) crunch the trajectory of his life in less than a decade. Images online have him bigger with the gravitas of a Cardinal; in person, at the meeting room of The Oberoi, Delhi, he looks slighter and, for someone who touched 70 last December, fitter. The affability has a hint of weariness. His India trip in early February, a month-and-a-half before the book launch, has been a series of dawn-to-dusk media interviews. It is not familiar terrain.

If you believe Gupta, then he is a character in a Kafkaesque tragedy; a concatenation of circumstances without any specific villain that ended with him—a decent highly successful man recognised for the good he did by the elite of the world—in jail. If you don’t believe him, then it is a lesson on greed, the fall of someone who stood little to gain by the crimes he is said to have committed but did so anyway. Everyone gets to choose their version of Gupta. In the US, the business press have no doubts about his criminality. The New York Times last week, while reviewing his book, castigated him for being unrepentant. In India, insider trading, for which he was convicted, isn’t considered such a big sin; there are plenty of stories of iconic industrialists and stockbroking legends who revelled in it and even now, when proved, they get away with gentle raps on the knuckles, like a fine.

The facts of the case, briefly, are thus: Gupta, an IIT graduate from Delhi who went to the US as a Harvard student in 1971, rose to lead McKinsey, one of the biggest consulting firms in the world.

Around the mid-2000s, with retirement age approaching, he turned his attention to social causes. He was on the advisory board of the Bill and Melinda Gates Foundation, was chairman of the Global Fund for AIDS, Malaria and Tuberculosis, was responsible for the coming up of the Indian School of Business and also initiated the Public Health Foundation of India. He was a member of the board of directors of some of the most illustrious companies in the world, one of which, Goldman Sachs, would be the source of his unexpected and swift fall.

“My main defence was ‘Look at my life’. I had corporate secrets for 40 years. If I was greedy, I would not be spending half my time building the Publc Health Foundation of India and the Global Fund. In the context of my life, why would I do this?,” says Rajat Gupta, former McKinsey managing director

In 2009, a year after the recession triggered by the fall of investment banks, a hedge fund manager, Raj Rajaratnam, was arrested for securities fraud. His phone had been tapped and investigators also found that Gupta had been in constant contact with him. Gupta was charged, convicted and sent to jail for two years. In his book, he does not dispute the facts but provides his context, a reinterpretation towards innocence.

For instance, one recorded conversation on July 29th, 2008. The transcript is available on the internet. In it, Rajaratnam says he has heard a rumour that Goldman is planning to buy a commercial bank and whether Gupta had heard anything. Gupta says that it was a big discussion at the Board meeting and gives some details. In a different part of the conversation, Rajaratnam talks about paying another McKinsey person, Anil Kumar, for insider information, ‘And I, you know, honestly, Rajat, I’m, giving him a million dollars a year for doing literally nothing. Just because…’. To which Gupta replies, ‘I know, you’re being… I think you’re being very generous’. Gupta concedes to being indiscrete but says that was because Rajaratnam was soon to have a business meeting with Goldman’s president Gary Cohn and he was keen to facilitate it in the interest of Goldman. And when Rajaratnam spoke of paying off Kumar, he had not thought it was for insider information.

Gupta says, “Anil and Rajaratnam had been classmates and were very close. He was trying to hire Anil and Anil was trying to work with him and this was going on for months. And they are both kind of exaggerators. When he says, ‘I paid Anil Kumar’, (to me) it’s like every other day. If you recorded all the conversations (between us), there must be 10 times he had told me I’m about to hire Anil. So I didn’t give any great credence to it.”

His explanation for being continuously in touch with Rajaratnam was that they were partners in a venture. In 2005, Gupta, Rajaratnam and a friend Ravi Trehan started a fund called Voyager in which he was a passive investor. Subsequently, he learnt that Rajaratnam was cheating him and when he asked for clarification, gave him the run around. His series of calls to Rajaratnam was during this period when he was trying to find out the actual state of affairs. “I should have sued him. But I’d never sued anybody in my life before and I never could think why would this guy who is worth billions want to cheat me? And then I needed to have proof. So that’s why I was asking him for these statements and he was dragging his feet. By that time, the market turned. In one of the recorded tapes, he’s talking to his friend and saying, ‘The fund has gone to zero. But I didn’t tell Rajat that I had taken the money out, now we have to make up some story’.”

“There’s one thing Rajaratnam did which I respect him for. The government offered him five years less jail term if he testified against me. And he said, I’ve nothing to testify against him”

On the afternoon of September 23rd, 2008, Gupta attended over teleconference an emergency board meeting called by Goldman where they were informed about the investor Warren Buffet making an investment of $5 billion into Goldman, a signal that would inspire confidence in the firm following the collapse of other investment banks. He called Rajaratnam immediately after. The hedge fund manager subsequently bought Goldman shares. The call was not recorded by the investigating agencies but there were logs to show it had happened. Gupta claims it was to enquire about the Voyager documents he needed.

On October 23rd, the same year, after yet another Goldman board meeting over teleconference, Gupta called Rajaratnam, who the next morning sold shares of Goldman. The hedge fund manager was recorded telling another colleague that he had been tipped off by someone in the board that Goldman was losing $2 a share. Gupta says that earnings weren’t mentioned in that board meeting at all, and in court, Goldman’s CEO was ambivalent, saying it was his general practice to discuss earnings but he couldn’t remember whether it had been discussed.

One of the puzzles about the episode is why would Gupta, with his reputation for integrity and philanthropy, associate with Rajaratnam? Their acquaintance began after Rajaratnam made a big donation to the Indian School of Business that Gupta was trying to set up. “Yes, we are very different but it’s a little bit of revisionist history. Now they say how could you associate with this crook but if you go back to that time Rajaratnam was a star, highly regarded as a trader and a builder of hedge funds with great returns. Before I went investing [with him] I checked with Hank Paulson who was a longstanding friend of mine. And he gave him glowing marks.”

Gupta was a self-made man, gifted since childhood but having to endure his share of struggle. His father, a freedom fighter and journalist, passed away when he was just 15. This was followed by his mother’s death a year later. With two elder sisters and a younger brother, it fell on him to be the head of the family since then. “I was a completely spoiled brat. In my early teenage years, I don’t know what it was, I changed to being responsible. I think it was because maybe my father was ill,” he says.

He ranked 15th in the IIT entrance exam and chose to attend IIT Delhi which was close to his home. At the institute, Gupta excelled in academics and outside of it. He acted in plays and was head of the student government. His book has an interesting anecdote about how Subramanian Swamy, the BJP leader who was lecturer there then, unionised staffers who went on strike. When students wanted to join in, Gupta resisted and successfully managed to get them to stay away. The next year, Swamy turned out to be his Economics professor but there was no bad blood.When Gupta applied for Harvard, it was Swamy who wrote his recommendation letter.

“I didn’t put my version out at the trial. I wish I had because I would have had the satisfaction of saying I fought my best. It was an error in judgement… I wrote this book because I thought if I take my name out of it, it’s still an interesting story”

He excelled in Harvard but when it was time to apply for a job, found that his lack of work experience was a hurdle. He had his sight on McKinsey but even though the interview went well, he was told to get a few years of work under his belt before reapplying. When he came to class dejected, a professor noticed that he was off colour. He called Gupta to his office, found out the reason and immediately called a contact in McKinsey. Gupta was reinvited for an interview and got the job. It would be the only company he would ever be employed at. He didn’t plan it that way.

“McKinsey is an up or out place. It’s a very tough system because only one in six makes it to partner. So five out of six leave within the first six years. I used to always say I’m here till they fire me,” he says. He started slow, with colleagues of similar experience getting promoted over him, but then he didn’t just catch up, instead he raced ahead. One of the defining moments in that journey was being transferred to Scandinavia which at the time was an outpost and meant there was room to grow. The office manager had an alcoholism problem and was sent for rehabilitation. Gupta, to his surprise, found himself being the replacement boss; at 33 the first junior partner to head an office in McKinsey.

“We were three young partners— myself, a Swede and a Dane. The Swede was six months junior to me and the Dane one year junior but they were both very good. The office took off dramatically. It was a great success story within the firm. We were the only consulting firm with an office in Scandinavia. So we decided to play pre-emptive strategy—corner every client you can get and corner the supply which is the talent. Nobody [competitors] came for 10 years. Nobody could open an office because they couldn’t establish a foothold,” he says.

His success made him a star at the firm, propelling him to become managing director after he returned to the US. He was just 45 then. Even after retirement, he continued to have an office with them. When McKinsey asked him to sever all links following the Rajaratnam case, he realised that he would be without an email id. The company’s email was the only one he had ever had.

Gupta says he wrote the book because he didn’t put his version out at the trial primarily because of two reasons. First, his lawyers advised him against taking the stand and he reluctantly agreed. “I wish I had because I would have had the satisfaction of saying I fought my best. It was an error in judgement.” The second was not being permitted to mention any of his social work to the jury. Labelling it an invalid Mother Teresa defence, the judge said, ‘If Mother Teresa were charged with bank robbery, the jury would still have to determine whether or not she committed a bank robbery.’ Gupta finds it unfair.

“You cannot prove a negative. There’s no proof I can provide that says I didn’t pass information. My main defence was, ‘Look at my life.’ I had corporate secrets for 40 years. I sat on six boards, four times a year, 24 board meetings. They recorded every call of Rajaratnam’s. Where are the calls if I were an informant to him? And then in the context of my life, why would I do this? If I was greedy, I would not be spending half my time building a PHFI and Global Fund. I would be trying to make money. There’s no other defence I have, other than to say, look at my life,” he says.

In jail, Gupta would run into Rajaratnam, unwell and on dialysis with kidney problems. He found him defensive but not offering an apology. They did not discuss the case again. Gupta says he forgave him anyway. “He didn’t try to get me into trouble intentionally. He is just a loud mouth. He’s that kind of guy. I didn’t see any point in holding a grudge. There’s one thing he did which I respect him for. The government offered him five years less jail term if he testified against me. And he said, I’ve nothing to testify against him, so I can tell you nothing.”

If he is indeed innocent, who does Gupta hold responsible for what happened to him? “There’s nobody to be held accountable. It’s a kind of confluence of circumstances and times,” he says.

Mind Without Fear is somewhat like a good conspiracy theory—all the situations that Gupta lays out makes a scenario of innocence plausible. The prosecutors couldn’t show any benefit, no recording directly implicates him receiving anything, his motives are not substantiated, Rajaratnam didn’t name him, he could have been a fall guy, as he alleges, in lieu of bankers they weren’t able to prosecute after the 2008 recession. There is, on the other hand, the weight of all the circumstantial evidence put together, which is what convinced a jury and the court.

When we meet, his appeal has just been denied. It was the last one possible. “I didn’t expect anything. I’ve lost appeals before. There is nothing else open for me. That was the end of the road,” he says. My final question is what does he expect from those who read his book? “I have no idea,” he says. “I wrote it because I thought if I take my name out of it, it’s still an interesting story.” That is true.

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