The Firm: The Story of McKinsey and Its Secret Influence on American Business (40 page)

“I have two senior partners who come and see me every three months,” this alumnus continued. “I tell them I only want one sheet of paper. But they come in, lean back in their chair, and say things like, ‘What’s going on? How are you feeling about progress?’ And my response is something like, ‘Why are we having this conversation?’ I don’t need therapy right now. It’s like someone told them to listen to the CEO and ask open-ended questions. It’s amateurish. I want them to tell me five ways to knock five basis points off the cost base of crucial lines of business. In those cases, when getting it right or wrong by a small amount is real money, I have no problem spending five million or ten million on consulting. But it’s a rifle shot, not a shotgun.”

Would McKinsey hire itself? It does every single day, said Michelle Jarrard. “And while some people say the firm is a big pain in the ass as a client—that it’s not change ready—that’s baloney. We move fast. There are multiple McKinsey teams working for McKinsey at any given moment, right down to having engagement managers and McKinsey billing.”
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The diaspora brings with it increased scrutiny too, as investors and the media show an increased vigilance for any sign of cronyism. In June 2010 investors in financial services outfit Prudential responded with outrage when it was revealed that high-flying Prudential CEO Tidjane Thiam—himself a McKinsey alum—had paid the consultants three million pounds during a
failed
$35.5 billion bid to acquire AIA, AIG’s Asian business.
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Here’s an amazing statistic: Until just a few years ago, McKinsey maintained that no partner or other employee had been charged with securities law violations in the eighty-plus-year history of the firm. (That’s not to say no violations had occurred; it’s just that no one had been charged with any.) That’s a remarkable claim to be able to make, especially in light of McKinsey’s philosophical proximity to Wall Street, home to nearly seasonal spasms of criminality. That all changed on October 16, 2009, when federal agents arrested McKinsey director Anil Kumar on charges of being part of the largest insider-trading ring in history.

Because Kumar fainted upon being arrested and had to be briefly hospitalized, several hours passed during which McKinsey was in the dark about the charges. The confusion was such that for a time, it wasn’t even clear if the charges had to do with a “security” issue like terrorism or a “securities” issue like insider trading. Whatever it was, it wasn’t good.

Barton moved into damage-control mode immediately, convening a group at McKinsey known as SORC, or the Special Operating Risk Committee, which included regional leaders; the firm’s general counsel, Jean Molino; and Michael Stewart, who heads media relations.
The arrest had happened on a Thursday. By Saturday Barton had circulated a note to the staff alerting them to the news of Kumar’s arrest. On Sunday a similar message went to the firm’s alumni. Barton spent the rest of the weekend on the phone with a highly concerned clientele. By Monday morning Barton had almost nine hundred e-mails from distraught current and former partners of the firm asking for more information.

Upon hearing the news famous McKinsey alum Tom Peters voiced what was surely a universal notion, even among those who hadn’t actually worked at the firm in decades. “McKinsey and I parted company due to strangeness on my part and our big tussle over the
In Search of Excellence
project,” he said. “But having worked for the institution was still a source of unmitigated pride for me. The first thing I did when I heard was call Bob [Waterman] and say, ‘What the fuck is going on? This isn’t my McKinsey. I smell a rat.’ Bob didn’t disagree with me.”
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This was a trial by fire for Barton, who had been on the job just three months, not even enough time to appoint his own kitchen cabinet. And it was a mortification for Ian Davis. “The arrest and everything happened after I left, but the crime itself happened on my watch,” said Davis. “It was the worst thing that happened to me in my time as managing director.”
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When it emerged that Kumar had indeed been charged with insider trading—selling client secrets to his Wharton classmate and hedge fund billionaire Raj Rajaratnam, who used them to generate profits for his $3 billion Galleon fund—the gravity of the situation became crystal clear. The basis of any client relationship with the firm is trust. Companies share their most competitive secrets with McKinsey with the understanding that confidentiality is paramount. McKinsey consultants aren’t even supposed to tell their own spouses
about their client work—and here was
a partner
of the firm selling client secrets out the back door for cold, hard cash.

If Kumar was acting as part of some sort of insider-trading ring within McKinsey, the likelihood of an Arthur Andersen–style collapse was high. Even if he’d acted alone, nervous clients could defect en masse. At the very least, those clients whose information Kumar had been selling—technology companies AMD, Business Objects, Samsung, and Spansion—seemed likely to sever relations with the firm.

Known as a quiet, careful, and even shy man, Anil Kumar was one of McKinsey’s Silicon Valley experts. A protégé of Rajat Gupta—some say a “bag carrier”—he had as modest a profile as you could have at McKinsey and still be a senior partner. That was, those who knew him argued, at least in part due to his relationship with Gupta. “He was a Rajat follower,” said a former partner of the firm. “But that’s okay. The big dogs always had people they carried.”

But Kumar
did
have an impressive résumé. After joining the firm in 1986, he’d moved to India in 1993 to help build the firm’s local operations, as well as to launch the New Delhi–based McKinsey Knowledge Center, a research and analytics subsidiary that was an early pioneer in the coming wave of outsourcing that was about to wash over India.
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In 1996 he and Rajat Gupta co-founded the Indian School of Business in Hyderabad in partnership with the Indian government. In 1999, the year the foundation stone was laid, he returned to the United States to work with technology clients out of McKinsey’s Palo Alto office. After his return, the Confederation of Indian Industries, a lobbying organization, asked him to cochair the Indian American Council.
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Kumar quickly denied the charges through his high-profile veteran defense lawyer, Robert Morvillo, but it was merely a pro forma—and
almost comical—denial. The government had wiretap evidence clearly implicating him, including an August 2008 call during which he advised Rajaratnam to buy shares of AMD in advance of an announcement coming after Labor Day that the government of Abu Dhabi intended to invest $6 billion to $8 billion in the microprocessor maker.

McKinsey didn’t wait for the wheels of justice to start turning. The firm placed Kumar on an indefinite leave of absence and asked two law firms—WilmerHale and Cravath, Swain & Moore—to conduct internal investigations to find out just how far the rot had spread. By December McKinsey had severed relations with Kumar entirely. In January 2010 he pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud. He also agreed to forfeit $2.6 million authorities said he’d been paid by Rajaratnam since 2003, including money deposited in a Swiss bank account Kumar had set up under his housekeeper’s name and some placed in Kumar’s accounts at Rajaratnam’s Galleon hedge funds. In mid-2012, after testifying against both Rajaratnam and Gupta in their respective federal cases, Kumar managed to avoid jail time and received just two years probation for his crimes. His banishment from McKinsey, on the other hand, was permanent.

But here’s the remarkable thing: Even as the McKinsey name was dragged through the mud of the Rajaratnam investigation and ensuing trial, McKinsey’s billings didn’t fall—or at least did not fall by much.
Forbes
estimated 2011 billings at $7 billion.
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Resilient billings aside, it was still a public relations nightmare—and a worsening one. In March 2010 the
Wall Street Journal
reported that none other than Rajat Gupta himself was ensnared in the investigation. The
Journal
’s revelations prompted two almost unthinkable questions: Had a
managing director
of McKinsey engaged in insider trading? And had he done so
while running the firm
?

Of all the managing directors in the firm’s history, Rajat Gupta cultivated the highest public profile after he left McKinsey. Indeed, by the time he retired from the firm in 2007, he was already well on his way to a second career as a global citizen and philanthropist. In 2001 he helped raise $1 billion in relief funds after the Gujarat earthquake in India. He co-founded the American India Foundation with Bill Clinton. Gupta co-founded the Global Fund to Fight AIDS, Tuberculosis and Malaria. He took on roles with the United Nations and joined the board of the World Economic Forum. He chaired the India AIDS initiative of the Bill & Melinda Gates Foundation. He was, in effect, the de facto chairman of the international division of India, Inc.

He also stayed connected to the corporate realm, and his long career as a well-connected corporate consigliere made him highly coveted as a director. Between 2006 and 2009, Gupta picked up seats on the boards of five public companies—American Airlines’ parent AMR, global outsourcer Genpact (of which he was also chairman), Goldman Sachs, audio equipment giant Harman International, and Procter & Gamble. He also joined the supervisory board of Sberbank, the largest bank in Russia and Eastern Europe by assets, and the board of the Qatar Financial Centre. All together, those positions paid him more than $3.2 million in 2009.

In 2008 Sberbank paid him $525,000, while the next-highest-paid director on the board earned only $110,000. The question of whether he could actually be independent while being paid $525,000 was serious enough 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 Sachs 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.

Gupta’s extensive connections and status as one of the most prominent Indian businessmen on the planet made him a natural guest at President Barack Obama’s first state dinner in November 2009, in honor of Manmohan Singh, the prime minister of India. But if he put on a good face in the halls of power, there’s a good chance he was fretting on the inside. Kumar and Rajaratnam had been arrested just weeks before. The Feds had busted Kumar on the basis of several incriminating calls he had made to Rajaratnam in the summer and fall of 2008. During that same period, Gupta had made several intriguing calls to Rajaratnam himself.

•    •    •

Gupta had gotten to know Rajaratnam in 1999, when the Sri Lankan–born hedge fund manager made a substantial donation to the Indian School of Business. The two South Asian–born businessmen had nearly crossed paths before, notably in the late 1990s when both invested in venture capital firm TeleSoft Partners. (Gupta remained an adviser to the firm; Rajaratnam was no longer an investor.) But after Rajaratnam’s donation, they became fast friends.

Before long they were in business together. In 2006, shortly before his formal retirement from McKinsey, 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. A planned hedge fund never came to fruition, so Rajaratnam eventually had no role in the operations of what came to be known as New Silk Route. (He remained an investor, however.)
Schwartz ultimately dropped out. Gupta and Saxena went on to raise $1.4 billion through 2007 and 2008. Gupta also invested several million dollars in a Galleon investment vehicle, GB Voyager Multi-Strategy Fund. According to the
Wall Street Journal
, Gupta was a frequent visitor at the Galleon offices.

If Gupta breathed a sigh of relief at not being implicated in the insider-trading scandal in October 2009, he had only five months during which to relax. In a front-page article on April 15, 2010, the
Wall Street Journal
reported that the government was investigating whether Gupta had shared confidential information with Rajaratnam. A second front-page story in the
Journal
, citing an unnamed source, reported that Gupta had tipped off Rajaratnam about Warren Buffett’s confidence-boosting $5 billion investment in Goldman Sachs in September 2008, during the depths of the market turmoil.

Gupta’s lawyer offered 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,” said attorney Gary 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.”

Gupta nevertheless left the Goldman board in May when his term expired rather than stand for reelection. (He was replaced with another corporate giant, H. Lee Scott Jr., the former CEO of Walmart.) In June fellow Goldman director Bill George, the former Medtronic CEO, told
Fortune
that the board would miss Gupta’s presence. “On boards of directors, you find out who really matters during times of crises,” said George. “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.”
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