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Rajat Gupta’s Insider Trading Conviction: One Network to Bring Them All and in the Darkness Bind Them

Henrich Greve |

Former McKinsey & Company head and Goldman and Procter & Gamble board member Rajat Gupta has been convicted of securities fraud and conspiracy for giving away confidential information from boardroom meetings. This makes him the latest in a string of convictions related to the insider trading scandal centered on hedge fund Galleon Group. The court cases since the scandal have revealed a pattern of information collection from board directors followed by quick and profitable trades, with involvement all the way to Galleon’s top. Its founder Raj Rajaratnam was convicted in October 2011, and many Galleon traders have also been convinced, as have their information sources.

An irony of Rajat Gupta’s conviction is that he appears not to have profited from the inside information he passed on. Rather, he passed on information, and Galleon traded on it, without any trades on his own behalf or (traceable) kickback. Indeed, prosecutors were quoted saying that his information leaks were “motivated not by quick profits but rather a lifestyle where inside tips are the currency of friendships and elite business relationships.” This quote sounds familiar to me, because along with Gerald Davis I have studied how boards of directors form their own norms of conduct, as reflected in the type of governance innovations they adopt. We found that they indeed determine norms through interacting with other board members, though we did not study anything illegal such as violating confidentiality.

But the investigation and conviction has another irony as well. A recent Wall Street Journal article has a map of the network of individuals implicated in the Galleon trades, as well as their current status in the court system. Of particular interest are those with status pleaded guilty (cooperating witness), because they were used (along with wiretaps) to break the case open. I study networks, and one glance at the map is enough to be impressed with the investigation. The central person they targeted, Galleon head Raj Rajaratnam, is surrounded by cooperative witnesses, and his closest associates are also nicely bracketed by cooperating witnesses. Clearly the investigators were able to follow the network of individuals involved through traces like suspicious trading patterns, phone call records, and eventually wiretaps, and once they knew who was spilling information to whom they went to work turning some witnesses in order to get at the main targets of the investigation. And hedge fund traders and leaky board members appear to be easy to turn cooperative compared with other organizations that the FBI has dealt with in the past. In Rajat Gupta’s case they did not even need a direct wiretap or cooperative witness because the other evidence from phone records and suspicious trades was so compelling.

So, this incident really deserves the Tolkien headline: One network to bring them all and in the darkness bind them.

Davis, G. F. & Greve, H. R. 1997. Corporate elite networksand governance changes in the 1980s.American Journal of Sociology, 103(July): 1-37.

Bray, C. Rothfeld, M, and R. Albergotti. 2012/6/15. Insider Case Lands Big Catch. Wall Street Journal. Interactive graphic (may require subscription):


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