Case Name: From boardrooms to prison cell: An insider trading case
Case Analysis:
Rajat Gupta passed on confidential information about Goldman Sachs Group Inc. and Procter
& Gamble Co. while he was serving as a member of the board of directors, to Raj Rajaratnam,
the co-founder of the Galleon Group Hedge Fund LLC.
He passed on confidential information regarding Warren Buffets investment of 5 Billion in
Goldman. Rajaratnam immediately bought stocks of the company and made a profit of
$840,000 in less than 24 hours
Wiretap revealed that Rajaratnam had conversation with his security analyst, a Galleon trader
and employee soon after his conversation with Rajat. He hence did play a role with his
associates in trading activities.
Gupta was arrested on 26th October 2011 and released on bail of 10 million USD
Gupta was found guilty on 3 counts of securities fraud and one count of conniving with
Rajaratnam. He was found not guilty on two other securities fraud charges.
Gupta and Rajaratnam were very close with Gupta having his own key card to Galleon’s
Midtown Manhattan office. Rajaratnam had invested 50 million in New Silk Route, a private
equity firm where Gupta was the chairman.
Goldman Sachs filed a $6.90 million of legal fees as compensation for the expenditure incurred
because of insider trading
Identification of issues in case:
Gupta shared confidential information with his friend Rajaratnam
He knew this was wrong but did this nonetheless. It was a lifestyle where inside
information was the currency of friendship and elite business relationships. Knowing
people in power and to benefit from knowledge and contacts that they possess was the
ladder of success
He believed he could get away with it; insider trading is not rampant and many times
occur behind closed doors where no one is privy to it
Case Decision
DATE:
1
He was a person who worked for the society and believed that due to this his actions
would be overlooked. During his trial Microsoft chairman Bill Gates and UN Secretary
General Kofi Annon wrote to the court in his support
He wanted to make money and enter the billion-dollar club. His desire stood higher to
his moral belief
Rajaratnam used the information gained for personal gain and within 24 hours booked a profit
of $840,000
Rajaratnam admitted to his mistake while Gupta stated himself to be not guilty. In the end he
was convicted on 3 counts of fraud.
Issues which have an ethical dimension
Individual level
Gupta used the information privy to him due to the position he held for monetary gain for both
himself and his friends. He went against his fiduciary duty.
He did not accept his mistake and pleaded not guilty.
Organizational and Society level
Such acts were prevailing in the ecosystem and were used as currency of business relationships.
The organizations didn’t have strict policies policing the same
The society believed that since he worked for social causes he should be punished lightly.
During his trial Microsoft chairman Bill Gates and UN Secretary General Kofi Annon wrote
to the court in his support
It was a lifestyle where inside information was the currency of friendship and elite business
relationships. Knowing people in power and to benefit from knowledge and contacts that they
possess was the ladder of success
Insider trading goes against the fairness theory. Not all members are at a level playing field
when they have confidential information
Process to deal with ethical dilemma highlighted in the case
Case Decision
DATE:
2
Training and importance of secrecy of certain information should be reiterated among the top
leadership of the organization. Harm to one’s reputation by indulging in such acts should be
reiterated on a regular basis
Rajat Gupta should be severely punished to deter such acts which seem to be the normal way
of functioning among the elites. He can be used as an example to deter other people who may
want to follow the same path.
People privy to such acts should be encouraged to speak up at the earliest so that corrective
action can be undertaken.
Ethical concepts understood
The business environment is a black box and nothing can be fully known until it is exposed
publicly
There is need of business ethics and the higher one is in the corporate ladder the more
importance ethics hold
Insider trading is a form of market failure as not every participant is at the same footing
There is divergence in what the role, relationship and firm demand from a person. They all
need to be equally balanced.
Managers need to think about their actions through thoroughly. Ethical failures occur because
their thinking process is limited to functioned only at level 1&2.
Managers should not only look at the immediate utility but at the long-term cost and benefit of
their actions.
Ethical standards are universal. All are expected to have certain levels of moral standing
Ethics and rights are interlinked. Many times, being unethical impinges of one’s rights.
Case Decision
DATE:
3
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