Rajat Gupta’s Insider Trading Conviction: One Network to Bring Them All and in the Darkness Bind Them 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 and leaky board members appear to be easy to turn appears not to have profited from the inside cooperative compared with other organizations that information he passed on. Rather, he passed on the FBI has dealt with in the past. In Rajat Gupta’s information, and Galleon traded on it, without any case they did not even need a direct wiretap or trades on his own behalf or (traceable) kickback. cooperative witness because the other evidence Indeed, prosecutors were quoted saying that his from phone records and suspicious trades was so information leaks were “motivated not by quick compelling. profits but rather a lifestyle where inside tips are the currency of friendships and elite business So, this incident really deserves the Tolkien relationships.” This quote sounds familiar to me, headline: One network to bring them all and in the because along with Gerald Davis I have studied how darkness bind them. boards of directors form their own norms of conduct, as reflected in the type of governance innovations Davis, G. F. & Greve, H. R. 1997. Corporate elite they adopt. We found that they indeed determine networksand governance changes in the 1980s. norms through interacting with other board American Journal of Sociology, 103(July): 1-37. members, though we did not study anything illegal such as violating confidentiality. Bray, C. Rothfeld, M, and R. Albergotti. 2012/6/15. Insider Case Lands Big Catch. Wall Street Journal. But the investigation and conviction has another Interactive graphic (may require subscription): irony as well. A recent Wall Street Journal article has a map of the network of individuals implicated in the http://online.wsj.com/article/SB10001424052702303 Galleon trades, as well as their current status in the 822204577468470878668722.html?KEYWORDS=rajat court system. Of particular interest are those with +gupta#articleTabs%3Dinteractive%26project%3D status pleaded guilty (cooperating witness), GALLEON0211_timeline 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 Find article at the investigation. The central person they targeted, https://knowledge.insead.edu/blog/insead-blog/rajat-gu Galleon head Raj Rajaratnam, is surrounded by ptas-insider-trading-conviction-one-network-to-bring- cooperative witnesses, and his closest associates are them-all-and-in-the-darkness-bind-them-2741 also nicely bracketed by cooperating witnesses. Clearly the investigators were able to follow the Download the Knowledge app for free 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 Visit INSEAD Knowledge http://knowledge.insead.edu 01 Copyright © INSEAD 2021. All rights reserved. This article first appeared on INSEAD Knowledge (http://knowledge.insead.edu). Powered by TCPDF (www.tcpdf.org).