The Firm: The Story of McKinsey and Its Secret Influence on American Business (41 page)

Despite the uncertainty, Gupta showed no signs of backing away from his public life. He maintained board seats at four public companies, including Procter & Gamble. Former Procter & Gamble chief A. G. Lafley—with whom Gupta had worked on the Gillette acquisition—even stuck his neck out for Gupta. “Rajat starts from purpose and values and ends up at strategies and principles,” Lafley told
Fortune
. “He also brings an analytical and objective approach to the question at hand. I think of him like Thomas Aquinas. He wasn’t just asking what we should do. He was helping us figure out the right thing to do.”
¹⁹

The International Chamber of Commerce made him chairman in June 2010. And as far as successful Indians are concerned, he was still in the club. “I find him of exceptionally good character,” multibillionaire Indian industrialist Adi Godrej told
Fortune
. “He is extremely devoted to helping India’s development and progress, things he doesn’t have to spend his time and energy on.” In 2012 support for Gupta went the modern route, with the launching of a website, www.friendsofrajat.com, complete with inspirational quotations on injustice, suffering, and endurance from Bishop Desmond Tutu, Mahatma Gandhi, and Elie Wiesel. An open letter on the site was signed by Indian luminaries including Mukesh Ambani, Sabeer Bhatia (co-founder of Hotmail), and Deepak Chopra, among others, as well as retired McKinsey directors Anjan Chatterjee, Atul Kanagat, Michael Obermeyer, and Ali Hanna.
²⁰

Not everyone was so sanguine. Back at McKinsey, there was a desperate search under way to find out whether the firm was an investor in Galleon—McKinsey manages billions of dollars of its consultants’ retirement accounts through the McKinsey Investment Office. There was a palpable sense of dodging a bullet when it came to light that no, the firm had not invested with the hedge fund.

Still, there was an anxious desire on the part of McKinsey that the
charges against Gupta prove unfounded. Throughout 2010, he had spoken to a number of his former colleagues and assured them that there was nothing to the allegations. And there was reason for optimism, as more than a year after the big bust, neither the Justice Department nor the Securities and Exchange Commission had filed a single charge against Gupta. “My sense of it is that he has been caught up in the ‘Get Goldman’ furor,” one of the firm’s senior partners said in December 2010. “The press and the SEC were out to get Goldman, and he was on the board, so he was an easy target. I have talked to Rajat, and I don’t think there is anything there.” Three months later the partner was proven utterly, incontrovertibly wrong.

•    •    •

On March 1, 2011, the SEC filed a civil administrative proceeding against Gupta, accusing him of leaking confidential information to Rajaratnam, from not just the board meetings of Goldman Sachs but also those of Procter & Gamble. The SEC alleged that Rajaratnam had made $18.2 million in trading profits from Gupta’s tips alone.

The allegations were damning, if not as undeniable as the wiretaps of Rajaratnam and Kumar. On September 21, 2008, for example, Goldman Sachs CEO Lloyd Blankfein informed the Goldman board via teleconference that the company was exploring “strategic alternatives,” including a possible investment by Warren Buffett. The next morning, Gupta and Rajaratnam “very likely” had a phone conversation, after which Rajaratnam bought 80,000 shares of Goldman Sachs; he had no previous position in the stock. The
next
morning, Rajaratnam phoned Gupta for a fourteen-minute conversation. A minute into the call, Galleon purchased 40,000 more shares of Goldman. At 3:15 that afternoon, the Goldman board approved a $5 billion preferred stock investment from Buffett by conference call. That call lasted until 3:53 p.m. Just
three minutes
after the call ended, Gupta
called Rajaratnam. In the remaining minutes of the trading day, Rajaratnam bought 175,000 more shares of Goldman.

And that was just one example. The SEC also accused Gupta of giving Rajaratnam confidential information about Goldman’s second-and fourth-quarter 2008 results, as well as Procter & Gamble’s fourth-quarter numbers. In April 2012 prosecutors added a claim to this effect to their charges against Gupta. After learning that P&G was going to lower its sales forecasts, prosecutors claimed, Gupta had lunch with Rajaratnam. Immediately after that lunch, Rajaratnam ordered his traders to short the stock of the company.
²¹

From the very beginning, Gupta’s lawyer, Gary Naftalis, called the charges “baseless”—a patently absurd remark, given the circumstantial evidence—and he spent a large part of 2011 making it clear that Gupta had made no money as a result of any of the alleged phone calls to Rajaratnam, in direct payments or as an investment in Galleon, and that it was therefore inappropriate to charge him with insider trading. Naftalis continued through 2012 with that simple boilerplate defense every time a new charge was added by prosecutors.

Gupta’s lawyer and public relations team had insisted since the scandal broke that Gupta’s original investment with Rajaratnam had already tanked by 2008 and that he had lost his entire $10 million. But evidence presented during the Rajaratnam trial in 2011 seemed to suggest otherwise, listing his stake in the Voyager Fund in June 2008 at $16.4 million.
²²
According to testimony and wiretaps, Gupta was also negotiating with Rajaratnam for a 10 to 15 percent stake in the Galleon International Fund and a possible role as the fund’s chairman in exchange for making introductions to new investors.

Two weeks after the SEC filed its charges, McKinsey’s 1,200 partners were in Washington for their annual get-together, located this time around at the Gaylord National Hotel and Convention Center. On that day, prosecutors in the Rajaratnam trial played a wiretapped
phone conversation between Gupta and Rajaratnam, during which Gupta told Rajaratnam that Goldman was mulling an acquisition of Wachovia or AIG Group. Whether or not it was legally damning, it was a clear indication of a breach of confidentiality.

What’s more, the tapes appeared to show that Gupta knew that Rajaratnam was paying Kumar for information. The wiretaps also revealed Rajaratnam telling Kumar that he thought Gupta had tired of being a “poor” consultant and desired to join the “billionaire circle” of which Rajaratnam himself was a part. Response to the tapes was high anger. “If he’d come within fifty miles of the place, there would have been a lynching,” said one partner. “At a minimum, grotesque unprofessionalism,” added Ian Davis. “At a maximum, illegality.”
²³

The firm’s Professional Standards Committee convened for what proved a very brief meeting. The verdict: Forget the justice system; the McKinsey partners knew a violation of their values when they saw one. The next week Dominic Barton called Rajat Gupta to tell him that he was persona non grata at the firm from that point forward.

One former director thinks McKinsey’s response to the whole debacle smacked of the firm’s own myopia. “That’s what’s funky about the place,” he said. “They actually think that was a big call that Dom made. I would have done it by 9:05 a.m. on the day the wiretap came out. You become much tougher and edgier outside those walls. ‘But he was our
managing director
!’ they’ll say. Well, fuck him.”

A cornered Gupta lashed out in response to the SEC charges. On March 18, 2011, he filed a lawsuit against the SEC in the Southern District of New York challenging the proceedings. Five months later, on August 4, 2011, the SEC dismissed the charges, suggesting for a brief moment that Gupta had prevailed in civil court, if not in the court of his McKinsey partners or that of public opinion. But that illusion proved short-lived.

On October 13, 2011, Raj Rajaratnam was convicted of insider
trading and sentenced to eleven years in prison. Less than two weeks later, on October 26, 2011, the SEC refiled its civil charges. More significantly, the Justice Department did what so many had been wondering had taken so long—it indicted Rajat Gupta on criminal charges.

In a wide-ranging interview in
Newsweek
two weeks after his conviction, Rajaratnam claimed that FBI agents had asked him to wear a wire to catch Gupta in the act of insider trading. Rajaratnam may have been a billionaire hedge fund guy, but Gupta was one of the most respected Indian business leaders in the United States, if not
the
most respected of all. Rajaratnam had refused to cooperate. In the same article he referred to Kumar as a
choot
—Hindi for “c*nt”—and said, “That word fits him.”

He went on to explain why, despite intense pressure, he wouldn’t turn rat himself. “They wanted me to plea-bargain,” he told the magazine. “They [wanted] to get Rajat. I am not going to do what people did to me. Rajat has four daughters.”
²⁴
Neither did Kumar seem to offer authorities anything on Gupta. But that was less of a surprise. Rajaratnam was Sri Lankan. With Kumar caught dead to rights on the wiretap, he had little choice but to turn on his erstwhile friend. But to turn on Gupta? He would be ostracized by the entire Indian community. In the end, though, he did just that and testified against his former mentor in order to avoid jail time himself.

Seven months after Rajaratnam’s sentencing, Gupta himself was convicted of insider trading, in part due to helpful testimony from Kumar. After a month-long trial, it took the jury just two days to find him guilty of leaking confidential information to Rajaratnam on three different occasions in 2008, as well as a conspiracy charge. “Having fallen from respected insider to convicted inside trader, Mr. Gupta has now exchanged the lofty boardroom for the prospect of a lowly jail cell,” said Preet Bharara, the United States Attorney in Manhattan.
²⁵

While Gupta’s lawyer, Gary Naftalis, continued to insist that his client had done nothing wrong, the evidence was so overwhelming that the jury managed to get by what some had thought Gupta’s strongest defense—the fact that he didn’t seem to have enjoyed explicit personal financial gains from the leaks. But Rajaratnam had, and it was enough. There was something vintage McKinsey in the whole debacle: Ever the behind-the-scenes player, Gupta had ceded the outright financial gain in return for whatever influence with Rajaratnam the illegal favors might have earned him. But under the harsh glare of federal prosecution, the McKinsey model—take no credit, but take no blame—collapsed on itself. In October 2012, he was sentenced to two years in prison and fined $5 million for his crimes. At his sentencing, he expressed remorse for the negative association McKinsey had suffered from his case despite his having retired from the firm. “I am extremely sorry for the negative comments from clients and the press that McKinsey has had to deal with,” he said. “I take some comfort that, given the strength of the firm, I hope that it will not suffer any long-term reputational harm.”

The soul-searching at the firm and among alumni went deeper than examining the moral and ethical failures of two men. “I think it goes back to what happened after Marvin left,” says one longtime and now retired partner of the firm. “Ron Daniel didn’t entirely take up the mantle of Marvin’s value-driven approach. And that left the door open to start focusing more and more on measurement of results by financial returns. Which created an environment where someone who was very good at producing those returns could lead the firm without the checks and balances Marvin put in place. That led to two separate things. The first was Gupta. The second was the abandonment of our top-management approach.”

He continued: “But again, it’s much larger than Gupta himself. The revelation that someone who had led the firm for ten years could have
so lost sight of the value systems that Marvin had built into the place made me aware of both how far the United States had moved in a money-is-all-that’s-important direction as well as how far the financial community had lost sight of why it was set up in the first place, which was to help actual companies doing actual things. And there is no doubt that the modern McKinsey is part of that malaise. Of course, it’s very hard to see something you gave fifteen years of your life to succumb to such a different set of values than the professional ones it once had. But to have the leading nation in the world lose its soul is a much bigger loss than the mortification of Rajat Gupta.”

Still, there was no question that McKinsey was left to wonder how, just nine years after his death, the spirit of Marvin Bower had been so desecrated in such a short period of time. “Marvin Bower said they were greedy fucks at the end,” said one client who knew the man. “He was old but lively.” And at least in this case, it seems he was right.

In the search for answers in the midst of the Kumar/Gupta scandal, McKinsey turned inward. And it didn’t like what it saw, which was a firm that had deceived itself into thinking that the Gupta-era excesses had been left behind. It had merely papered over the problem and missed a fundamental—and permanent—change in the nature of the firm. At its current size, McKinsey could no longer assume that Marvin Bower’s principles would endure.

“The stuff with Anil [Kumar] was noteworthy in the effect it had on people,” said Michelle Jarrard, director of firm personnel. “It was a disappointment, and we can’t pretend it’s not. You might try to tell a silver-lining story about the fact that it caused us to increase our vigilance going forward, but it’s fair to say that it hurt.”
²⁶

One obvious issue raised by the Kumar incident, in particular, is that of the senior person too far out on the fringe of a large and growing company. Did he engage in illegal behavior purely out of greed? Or out of frustration at not being close enough to McKinsey’s inner circle? In a sense, McKinsey might have been a victim of its own success. It was now so large that the chance of a partner’s becoming disaffected had risen along with the company’s top and bottom lines. In the 1980s, for example, about half the firm’s directors were on either the shareholders committee or the directors committee. If you weren’t one of these directors, you certainly knew many (or all) of them, so few partners could get lost in the wilderness. By 2011 that proportion had fallen to about 10 percent, and the odds of disenchantment had risen inversely.