Rajat Gupta: Touched by scandal - Full version

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Rajat Gupta: Touched by scandal - Full version

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By Duff Mc, contributorOctober 1, 2010:

FORTUNE -- This is not the way the Rajat Gupta story is supposed to end. It's

supposed to go out on a high note, like the previous chapters. He is an Indian

nationalist's son who made it to Harvard Business School. He's the only

non-Westerner to have served as managing director of storied management

consulting firm McKinsey & Co., adviser to CEOs the world over. The ultimate

behind-the-scenes business operator, Gupta over the years has whispered in the

ear of everyone from Lloyd Blankfein of Goldman Sachs to Bill of

Medtronic to A.G. Lafley of Procter & Gamble. More recently he's become a global

philanthropist who rubs shoulders with Bono, Bill Clinton, and Bill Gates,

tackling problems like malaria in Africa and AIDS in India.

And yet today, at 61 years of age -- a time when he should be taking victory

laps -- his reputation hangs in the balance because of news reports that have

linked him to the biggest insider-trading scandal in hedge fund history.

In a front-page article on April 15, the Wall Street Journal reported that the

government was investigating whether Gupta had shared confidential information

with his onetime friend and business partner Raj Rajaratnam, the hedge fund

heavyweight whose $3 billion Galleon fund disintegrated in October 2009 after

authorities announced sweeping charges of illegal trading. The ongoing Galleon

investigation includes an examination of trading in shares of Goldman Sachs (GS,

Fortune 500). The government's filings don't name names, but in a second

front-page story the Journal, citing an unnamed source, reported that Gupta -- a

member of the Goldman board since late 2006 -- had tipped off Rajaratnam about

Warren Buffett's confidence-boosting $5 billion investment in the teetering

investment bank in September 2008, during the depths of the market turmoil.

Gupta left the Goldman board in May when his term expired rather than stand for

reelection. To date, no criminal charges have been filed against Gupta.

Gupta's defenders say that any suggestion of impropriety is absurd for a man

whose exemplary reputation has been built on the twin pillars of integrity and

discretion. But Gupta's close association with Rajaratnam invites scrutiny.

Government filings for a private equity firm that the two co-founded listed one

of Gupta's homes as Rajaratnam's contact address as recently as 2008. They ran

in the same social circles in New York, and, according to the Journal, Gupta was

a frequent visitor at the Galleon offices. Other connections also raise

suspicion. In January, Gupta's former protégé at McKinsey, Anil Kumar, pleaded

guilty to providing Rajaratnam with confidential information. Kumar admitted

taking a total of $2.6 million in exchange for revealing secrets about McKinsey

clients, including chipmaker AMD (AMD, Fortune 500).

It bears repeating: The government, which has hardly been reluctant to sling

criminal charges in the Galleon case -- 21 people have been charged to date, and

12 have pleaded guilty to various charges -- has yet to accuse Gupta of

anything. But he remains in limbo nonetheless, counseled to keep quiet by

advisers while the legal process plods forward.

Through a spokesperson, Gupta declined repeated requests to speak with Fortune

for this article. But his lawyer offers a defiant statement of his client's

innocence. " Rajat Gupta's record of ethical conduct and integrity in his

professional as well as personal life is beyond reproach, " says attorney

Naftalis. " He also has served with distinction and selflessness many

philanthropic and civic causes around the world, including both the United

States and India. Rajat has not violated any laws or regulations, nor has he

done anything improper. "

Nevertheless, Gupta's limbo will probably persist at least until Rajaratnam goes

to trial in January. (Rajaratnam has pleaded not guilty to all charges.) The

outcome of a hearing scheduled for early October in which Rajaratnam's lawyers

will challenge the admissibility of thousands of wiretapped conversations --

including, possibly, tapes of Gupta and Rajaratnam -- could have a significant

bearing on the strength of the government's case. If evidence ultimately emerges

that shows that Gupta provided Rajaratnam with confidential information, his

exemplary reputation will be obliterated and his board positions at companies

like P & G (PG, Fortune 500) will no doubt vanish.

For now we are left with questions. Rajat Gupta spent his entire career at

McKinsey, getting access to the privileged information of the companies McKinsey

consulted. His post- McKinsey career has been built on utilizing the connections

that he made during that time. Did he lose sight of the line between the two?

The Gupta era at The Firm

Rajat Kumar Gupta was born Dec. 2, 1948, in Calcutta. The second of four

children, he and his family moved to Delhi in 1953. His father, a journalist

fighting for Indian independence, served time in prison under the British on

more than one occasion. His mother was the principal of a Montessori school.

Both parents had died by the time Gupta was 19 years old.

After studying mechanical engineering at the famed Indian Institute of

Technology Delhi, he applied to and was accepted at Harvard Business School,

graduating in 1973. Like many HBS graduates, he interviewed for a job at

McKinsey -- but was initially rejected. But the resourceful Gupta prevailed on a

Harvard professor with McKinsey connections to put in a good word. After a full

day of further interviews, Gupta was invited to join McKinsey's New York office

as an associate. He spent the next 34 years at the company that calls itself The

Firm, becoming an American citizen along the way. In 1994, the firm's 148 senior

partners voted him worldwide managing director, a post he held for three

three-year terms, the maximum allowed.

As the head of McKinsey and the senior counselor to its top clients, Gupta had a

hand in some of the biggest corporate decisions of his time, including Procter &

Gamble's 2005 acquisition of Gillette, a deal he helped conceptualize with P & G's

then-chairman and CEO, A.G. Lafley. " Rajat starts from purpose and values and

ends up at strategies and principles, " says Lafley. " He also brings an

analytical and objective approach to the question at hand. I think of him like

Aquinas. He wasn't just asking what we should do. He was helping us

figure out the right thing to do. "

Every leader has his detractors, however, and Gupta did not lack for them.

McKinsey grew rapidly during his tenure -- there were 3,300 consultants when he

took over as managing director, and 7,700 when he stepped down -- and to many

McKinsey traditionalists, it was too much, too fast. The firm opened 23 offices

in 20 countries during the Gupta era.

For decades a restrained approach to growth had allowed McKinsey to nurture its

culture of elitism and to perpetuate its image of working only for the executive

in the corner office. But when you're fielding nearly 8,000 consultants and

bringing in nearly $4 billion annually, it's harder to make that claim.

" McKinsey used to interview only the Baker Scholars from Harvard Business

School, " laments one disenchanted alumnus. " By the time Rajat was done, the firm

interviewed just about anybody who wanted to be interviewed, and you had about a

one-in-three chance of getting an offer. That kind of changes the sense of an

elite status. "

Under Gupta, McKinsey also became more aggressive in its pursuit of big paydays.

His predecessors had consistently refused to accept equity stakes in client

companies in lieu of cash as payment for McKinsey's services. Forgoing potential

IPO riches gave them the high ground when it came to their advice: McKinsey

consultants didn't emphasize short-term stock price performance over long-term

wisdom. During Gupta's tenure, that policy was jettisoned as McKinsey sought

dotcom lucre along with everyone else.

McKinsey's reputation for insight also took a hit when the company got caught up

in the euphoric -- and ultimately fraudulent -- growth of Enron, which was not

only a major client but also had a former McKinsey man, Jeff Skilling, as CEO.

Asked whether McKinsey strayed from its values during the Gupta era, Ian ,

who succeeded Gupta as managing director in 2003, says, " The pressure on the

firm from the outside was considerable, and some of our values were under

stress. But this was not about Rajat alone. It is worth emphasizing that you

don't get elected three times unless you are doing well in the eyes of your

colleagues. "

One fact that's hard to argue with is that during Gupta's tenure he and his

partners became exceedingly rich. As a private partnership, McKinsey doesn't

divulge its finances, but estimates of Gupta's take as managing partner run to

more than $5 million annually. After becoming managing director, he and his

family moved into an $8 million mansion a stone's throw from Long Island Sound

in Westport, Conn., that was once owned by the J.C. Penney (JCP, Fortune 500)

clan. Gupta's winter getaway is a sprawling $4 million oceanfront house on Palm

Island, a private resort on Florida's gulf coast. By one estimate, he is now

worth $100 million or more.

By the time Gupta retired from McKinsey in 2007, he was already well on his way

to a second career as a global citizen and bigtime philanthropist. In 2001, he

helped raise $1 billion in relief funds in the wake of the Gujarat earthquake in

India. In the process he co-founded the American India Foundation with Bill

Clinton. Gupta subsequently co-founded the Global Fund to Fight AIDS,

Tuberculosis and Malaria. He has taken on roles with the United Nations and

joined the board of the World Economic Forum.

His long career as a well-connected corporate consigliere made Gupta highly

coveted as a director. Between 2006 and 2009, Gupta picked up seats on the

boards of five public companies -- American Airlines parent AMR (AMR, Fortune

500), global outsourcer Genpact (G) (of which he is also chairman), Goldman

Sachs, audio equipment giant Harman International (HAR), and Procter & Gamble

(see table). He also joined the supervisory board of Russia's Sberbank and the

board of the Qatar Financial Centre. Altogether, those positions paid him more

than $3.2 million in 2009.

Gupta has drawn criticism for his hefty board income. He left his position with

Sberbank in June. But in 2008, he was paid $525,000 -- more than he made for his

Goldman board seat -- to sit on the board of the bank, the largest in Russia and

Eastern Europe by assets, while the next-highest-paid director earned only

$110,000. The question of whether he could actually be " independent " while being

paid $525,000 was a serious enough one that RiskMetrics, the

corporate-governance watchdog based in Washington, D.C., advised minority

shareholders to vote against his nomination in 2009. He was reelected anyway.

When Gupta joined the board of Goldman in November 2006, he seemed a perfect fit

-- the former top executive of one secretive, elite firm joining another. Less

than two years later Gupta reportedly told Goldman CEO Lloyd Blankfein that he

wanted to step down -- he had spread himself too thin -- only to be persuaded to

stick around to avoid the public relations fallout of a director quitting in the

midst of the financial crisis. The recent publicity has turned out to be much

worse. But fellow Goldman director Bill , the former Medtronic (MDT,

Fortune 500) CEO, says the board will miss Gupta's presence. " On boards of

directors, you find out who really matters during times of crises, " says .

" And in the fall of 2008, Rajat was an extraordinarily valuable member of the

board. I was very disappointed to learn of his decision to step down. And as for

the issues with Mr. Rajaratnam, no one [on the board] knows anything. No one has

been contacted. "

Fast friends and business partners

Gupta got to know Rajaratnam in the mid-2000s when he contacted the Sri

Lankan-born hedge fund manager to thank him for making a substantial donation to

the Indian School of Business in Hyderabad. Gupta co-founded the school in the

late 1990s and remains chairman. The two South Asian-born businessmen had nearly

crossed paths before, notably in the late 1990s when they both invested in

venture capital firm TeleSoft Partners. (Gupta remains an adviser to the firm;

Rajaratnam is no longer an investor.) But after Rajaratnam's donation, they

became fast friends.

Before long, they were in business together. In 2006, Gupta and Rajaratnam

joined private equity veteran Parag Saxena and Mark Schwartz, a former Goldman

Sachs executive, to found Taj Capital, an investment firm focused on South Asia,

with plans to offer both private equity and hedge fund investment opportunities.

The hedge fund portion never came to fruition, so Rajaratnam ultimately had no

role in the operations of what came to be known as New Silk Route. (He remains

an investor, however.) Schwartz ultimately dropped out. Gupta and Saxena went on

to raise $1.4 billion through 2007 and 2008, of which $700 million has been

invested. While they have had no " exits " for any of their investments, the

performance of their portfolio holdings is tracking well, according to Saxena.

There is no reason to believe that Gupta's and Rajaratnam's dealings in New Silk

Route are under investigation.

Did his investment with Rajaratnam compromise Gupta? People who know him say the

former consultant has shown a tendency to blur the lines between his

professional and personal relationships over the course of his career. Consider

Anil Kumar. There is no shortage of McKinsey sources willing to claim that

Kumar's success at the firm depended more on his friendship with Gupta than on

his ability as a consultant. Then there's the fact that SEC filings for New Silk

Route's Asian private equity fund list Gupta's home address in Westport as

Rajaratnam's mailing address. Is that evidence of anything untoward? No. But it

is perhaps a telling example of the fact that the boundaries in Gupta's

extensive network are not always clearly delineated. Did they become even

blurrier with success, comfort, and age?

When pressed as to whether it's possible that Gupta might have spilled Goldman's

secrets to Rajaratnam, a handful of Gupta's supporters suggest that if he did

share any confidential information, it must have been " unknowingly. " But the

former McKinsey über-consultant is far too savvy for that explanation to be

plausible. If you're looking for a best-case scenario, it's probably that Gupta

is guilty of nothing more than poor judgment in his choice of friends.

No matter how things turn out, that circle of friends no longer includes Raj

Rajaratnam. While Gupta hasn't spoken publicly since March, sources close to him

say that he and Rajaratnam had a personal and professional falling-out before

September 2008, when Buffett made his investment in Goldman. Gupta wasn't even

on speaking terms, in other words, with the man to whom he is supposed to have

been feeding information. If that sounds like spin, it very well could be. But

it also might have the virtue of being true. Since neither Gupta nor Rajaratnam

is talking, it's impossible to know for sure.

So what's next? As more time passes, it seems less likely that Gupta will ever

be charged. (Meanwhile, both the SEC and the Department of Justice are looking

into " leaks " in the case.) Gupta's bigger problem may be not that he is actually

charged with a crime, but that it's easy to believe he might have committed one.

The government does believe that Rajaratnam traded in shares of Goldman based on

inside information. If you were making a list of who might have given him that

information, Gupta's name would certainly be on it. Speculation won't cease

until the government makes its case against Rajaratnam.

Meanwhile, Parag Saxena is forced to see the names of his two partners at New

Silk Route in the news for all the wrong reasons. " Regarding Rajaratnam, I

cannot explain what I read in the papers, " he says. " So I am going to wait and

see what happens, along with everyone else. As for Rajat, it is absolutely out

of the question that he would do what the papers have suggested he has done. "

Pressing on through a crisis

Despite the uncertainty, Gupta is showing no signs of backing away from his

public life. He still holds board seats at four public companies. The

International Chamber of Commerce made him chairman in June. And as far as

successful Indians are concerned, he's still in the club. " I find him of

exceptionally good character, " says multibillionaire Indian industrialist Adi

Godrej. " He is extremely devoted to helping India's development and progress,

things he doesn't have to spend his time and energy on. "

But his ability to stay effective in that mission may hinge on what happens in

the Rajaratnam trial. In a 2008 speech to the Leaders in Dubai Business Forum,

Gupta offered a wise observation to his audience. " There's only one thing that's

predictable about crises, " he said. " Sooner or later, almost every organization

will endure one. " Gupta the global citizen has so many commitments -- private,

public, for-profit, and philanthropic -- that he might as well be called an

organization unto himself. Now he has his own crisis to endure.