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The Insider's Trading Woes

It was excessive pride and self-confidence that did in Rajat Gupta in the murky world of hedge funds

Last month, a terrible thing happened in New York. An Indian, on first-name terms with the high and mighty in the corporate worlds of India and the US began serving his two-year sentence in a New York jail. He will not be out until 2016, when may be he will have to fight other cases against him.

How did it happen? The Greeks have a word for it-they call it 'hubris', meaning excessive pride and self-confidence, which leads to a man's fall and eventual destruction. Rajat Gupta, for that is the man's name, was on top of the world until destiny caught up with him, and now he has disappeared from sight.

There are people who say that Gupta, accused of insider trading, asked for it. I am not so sure. Insider trading is not much of a crime in most countries and very few people go to jail for it. Things are, of course, different in the US, and Gupta is the latest victim.

I met Gupta only once, when we travelled together from Delhi to Bombay about three years ago. I had no idea who he was but he had seen my picture in magazines and newspapers and introduced himself. For two hours, we chatted about this and that, and very little about the corporate world, of which I know next to nothing. He said he was going to Hyderabad, but first he had some work in Bombay, and would go back home, meaning New York, in a couple of days, or may be weeks. The insider trading case came much later, and most of us in India did not take it seriously.

Then one day I read in the papers that he was in deep trouble and was fighting with his back to the well. What was the case about? Gupta was a director on the board of Goldman Sachs, a powerful company almost on par with Tatas or Ambanis in India, though not in manufacturing, and certainly not the cleanest of the companies. Gupta is said to have leaked some secrets to a man called Raj Rajaratnam, the founder of a hedge fund called Galleon and apparently a friend of Gupta's. The Sri Lanka-born Raj Rajaratnam, is himself serving an eleven-year sentence in jail, apparently the same jail where Gupta will spend his time.

Gupta is a Delhi boy and was an IIT student before he left for the US, for a course at Harvard. It so happens that the Delhi IIT is located only a couple of kilometres from where I lived for nearly forty years, in Safdarjung Enclave, which he must have passed several times a month. He started his career with a long spell in a consultancy firm called McKinsey which he headed for over a decade. It was through McKinsey that he made forays into the powerful corporate world, which he dominated for some time, until the Rajaratnams of this world waylaid him and brought about his downfall.

What did Gupta do to merit this kind of punishment? He had apparently attended a board meeting of one of the companies of which he was director, and on coming out had either telephoned or e-mailed Rajaratnam some juicy tips. Apparently, he did this more than once which put some people in the district attorney's department on his tail. What he did was certainly wrong, but not as wrong as it is made out to be. Anyway, he fell into the trap, wittingly or otherwise; the rest is history.

Trading in not considered much of a crime in India, but then nothing in taken seriously in our country, where you can get away with murder, and many do. Out of 540-odd MPs in the lower house, as many as a hundred are said to have criminal cases against them, but neither the MPs nor the police take them seriously. Almost every person who deals in the stock market in India must be willy nilly guilty of insider trading, as she or he is always receiving tips from his or her share broker, or maybe a friend or relation working in a company. The person himself may be an employee of a business house which makes it that much easier to receive or pass on so-called secrets to others. And who can resist the temptation of making a little money on the side while you are about it?

Those who hear rumours generally ignore them. And this goes for stock market rumours too. Most of us don't take them seriously, because, first, we don't have the time, and, second, we don't have the cash.

People like Rajat Gupta and Raj Rajaratnam may have the cash and perhaps also the time, which in why the authorities pounce on them. And the New York police, headed by another Indian or Indian-origin gentleman pounced on the Guptas and the Rajaratnams with a viciousness that destroyed them.

But perhaps there is more than meets the eye. The man who hounded-there is no other word for it-Rajat Gupta also happens to be an Indian, a man called Preet Bharara, the New York southern district attorney who handled the case of both Gupta as well as Rajaratnam. Incidentally, it was his office which handled the case against Devyani Khorbragade, a foreign service official of India, who was handcuffed, just as Gupta was handcuffed when he was first taken into custody, in connection with another case. Khobragade happens to be a consular official with diplomatic immunity with the entire might of the Indian Government behind her, and escaped from New York more or less in one piece. Otherwise, she too might be in jail today. I have written all this because, as an Indian, I feel sorry for Rajat Gupta. I hope he will be out soon and resume his career.

The writer is a well-known columnist & economist.