Rajat Gupta, insider trading & probes

It was a riot to read Rajat Gupta’s column on philanthropy less than a week after the US securities regulator, SEC, came out with a detailed order initiating administrative hearings against Gupta’s tipping of inside information. Was this some kind of damage control ? The saint who made some money on the side? Interestingly , the damage control seems to have begun some two weeks before the SEC order was published on March 1, 2011. In a piece dated February 16, 2011 he writes “The Public Health Foundation of India (PHFI), with which I am involved, is an innovative model of a publicprivate partnership that has evolved from these new approaches . PHFI was launched by the Prime Minister in March 2006 as an integrated and multi-pronged initiative.” Then in the piece on philanthropy on March 6, 2011 he says: “Very often, people ask me how I am able to raise such significant philanthropic donations for a variety of initiatives when these projects are not single-donor led and governed with their name on the initiative. I firmly believe in the Gandhian philosophy that says “if the cause is just, means will come” ... And so I believe credible initiatives with high integrity and leadership will attract significant philanthropic funding” and “would like to illustrate these principles by describing philanthropic ventures that I have been involved with in India.”

The timing of the Gupta’s articles to show his halo were matched only by his timings in other fields. To be sure, there is no final ruling against Gupta yet. But the initial findings are quite damning, and are backed up by wiretap phone calls, one of which is in public domain. The SEC’s order specifically mentions the line from which Gupta called the chief accused Raj Rajaratnam, the time and the time gap between his receiving inside information and passing it on. For instance, Gupta called Rajaratnam on 22nd and 23rd shortly after a teleconference board meeting of Goldman Sachs. Rajaratnam placed orders while the call with Gupta was going on and the positions were liquidated in a day once the information was made public. On another date, December 23, 2008, Gupta could not wait more than 23 seconds before calling Rajaratnam with bad news about Goldman Sachs financials and, of course, Rajaratnam sold. So, here is the bad news for people who commit whitecollar crimes.

It is much easier to be caught with damning information, particularly on insider trading and manipulation cases in the stock market. We have already seen damning telephone recordings in the Radia episodes in another context and another scam. Though the market regulator does not have authority to tap phone calls, it has used other powers quite effectively. Sebi has in at least one ruling used the location of cell phones determined through information captured by cell phone towers to nail a market manipulator — even without a wiretap. With PAN card being made compulsory , it has become more and more difficult to hide securities market transactions if made in the names of relatives or affiliate corporate entities . Couple that with the advanced surveillance system which the securities regulator , Sebi has, and it looks like you can run but cannot hide. Couple that also with modern phone technology which can track timing of phone calls and location of cell phones, and it becomes far easier to catch crooks in their acts. But , there is a catch: much of this benefit comes after painstaking work and analysis.

Getting information, collating it and then making sense of it not only requires effort, but getting the raw data itself will take time and can face legal challenges of privacy. This means that investigating agencies and regulators will never catch more than a handful of egregious conduct . This also means that such agencies will not be able to prevent such offences, only catch them subsequently and hope that the penalty will deter others from acting in such manner in the future. Given that the resources of a regulator are limited, they are best applied to big catches and also a handful of smaller catches . Big catches, because the quantum of wrongdoing is large and a single find can result in major regulatory returns besides the optics of putting big bad guys under lock. Small catches, because just because you are small fish doesn’t mean you can always get away.

The regulator wants to show that just because you are a small-time crook doesn’t mean that you will always get away. Of course, an investigative body or regulator can be stymied by the judicial process and delays, which gives the opposite signal to white-collar criminals. That they can get away if they have the right strategy in courts. Unfortunately , in a rule-of-law country, we must all live with the problems which come attached with such a due process which often protects 10 crooks at the cost of hanging one innocent. It would be interesting to end with a quote from Rajat Gupta, taken violently out of its context, in a message that would apply not only to students , but to insiders and to regulators: “In my many years of counseling clients, I’ve found that the most successful executives are those who are well-prepared to seize the initiative — especially at moments when others , immobilised by indecision , are hesitant to act.”

(The author is Founder, Finsec Law Advisors)