Insider Trading: An analysis

of Rajat Gupta Case

Rajat Gupta a brief introduction

Rajat 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 Sachs
Procter & Gamble
AMR (American Airlines)
Harman International
Russian bank called Sberbank
Co-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 work

Chairman of the Board for The Global Fund to Fight AIDS, Tuberculosis and Malaria
Chairman of the Public Health Foundation of India
Chairman of the advisory board and the India AIDS initiative of The Gates Foundation
Trustee for the Rockefeller Foundation
Chairman of the International Chamber of Commerce
Co-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 Forum
Special 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 asyet-secret information that Goldman would report a loss of $2 a share in the fourth quarter, its first and only quarterly loss
since going public
On Jan. 29, 2009, after a meeting of P&G's audit committee, Gupta again called Rajaratnam to relay P&G's as-yetunannounced 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.Gupta
This indicates a clear case of using confidential information to commit securities fraud

Insider Trading And Laws

Insider trading may be defined as any form of trading based on nonpublic information relevant for the
fundamental value of a company
Rules 10b-5 and 14e-3. [] Insiders are only liable if they breach a fiduciary duty to the source of the
information. Similarly, recipients of insider tips (tippees) must breach the tippers fiduciary duty before
the tippee becomes liable.
Rule 10b5-2 provides a non-exclusive definition of circumstances in which a person has a duty of trust or
confidence for purposes of the misappropriation theory.

Nearly anyone can be an inside trader if the government can prove that the person knowingly accepted
inside information from a source with a fiduciary duty and traded on that information.

Insider
Ranges from a
director or
shareholder of 10%
or more ,to
someone with no
direct fiduciary
duty .

Material
information:
Information that is
substantially likely
to influence a
reasonable
investor.

Fiduciary duty:
A requirement for
discretion and
confidentiality,
based on a partys
involvement in a
case or deal.

Nonpublic
information:
Information that
has not been
publicly
disseminated.

When a corporate insider

trades on material,
Classical
nonpublic information
regarding a company to
theory:
which s/he owes a
fiduciary duty.

A person doesn't have

to trade on
information to be
considered an insider.
If a person with a
fiduciary duty passes
on information, s/he is
liable.
Even people with no
A person who trades
fiduciary duty to a
on inside information company who pass on
and does not profit is information that they
also considered an
know is from a
insider
fiduciary source are
considered insiders.

When a person trades on

material, nonpublic
Misappro
information that s/he has
priation
obtained from someone
theory:
who has a fiduciary duty
to the company.

Applying Virtue Ethics : To Rajat Gupta Case

Virtue 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.
Rajat Gupta

The players

Ethical analysis

McKinsey & Company

Goldman Sachs
Raj Rajaratnam
Galleon Group
Warren Buffet
Us Equity Markets
Indirectly- Family , friends, , Employees of MC Kinsey and Galleon Group

Integrity- Honesty integrity and truthfulness of ones action. NO integrity as a board member of
Goldman Sachs
Trust-Broke the trust of other members of Goldman Sachs , Effected his relation with MC Kinsey
Fairness- 1) Other investors at disadvantage 2) Uses info entrusted to him to benefit
Honesty- NOT honest to other board members and Goldman Sachs
Self Control- No self control , not have leaked for personal gain.

Applying Ethical theories to Insider Trading

Insider Trading ought to be Legal and ethical
It is a victimless crime
It increases incentives for company officers to increase productivity
It increases efficiency in market

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.