Rajat Gupta, a former McKinsey director, is the latest high profile casualty after being arrested on insider trading charges in the Galleon hedge fund fraud earlier this week. The clampdown has lessons for India’s market regulator, Securities and Exchanges Board of India, which has hardly any notable victories when it comes to nailing insider trading. In a stock market where share prices demonstrate a high level of irregular trading, the biggest securities fraud investigation in US history offers simple lessons.
Work with other agencies that target crime. The crackdown on the Galleon Hedge Fund, unraveled as a result of several agencies working in tandem. That included the US Attorney’s office, the Federal Bureau of Investigation as well as the new body to uncover financial crime, the Financial Fraud Enforcement Task Force, along with the Securities and Exchange Commission.
Start investigating early and keep it thorough and strictly under wraps. A criminal probe into Galleon was registered in 2007. Investigators went through thousands of instant messages that went back to 2006, between Raj Rajaratnam, the Galleon chief, and his network. The details though were made public only in 2009 after all the evidence had been collected and the key accused had testified. There were no press leaks and no Chinese whispers. Investigators scanned 10 million documents, and 8,000 call records were reviewed before framing charges.
Get government to spend more to track crime. The US Congress in early 2009 approved some $165 million on vigilant fraud enforcement, spooked by the massive financial crisis off 2008 where risky bad trade went unsupervised. Everything from offences in stock trades to gas pricing is being examined using the fund.
Wiretaps are useful only as long as they are focused. US federal agencies wire-tapped not just the phone lines of Rajaratnam, but his friends, employees and associates. Several co-accused have pleaded guilty after the transcripts of conversations were used to book charges. India’s most talked of phone-tap, though related to stock markets, between a lobbyist and her sympathisers that later leaked to the public is a hit-and-miss sham with no tangible fallout.
Swift trials, high penalties and jail terms are good deterrents. US agencies nailed the accused in the hedge fund fraud with scary determination. The trial was swift. Rajaratnam is readying for 11 years in jail in a fight that lasted eight months. His friend Gupta is staring at a century in jail if the charges against him are proved. So of the more than 50 people charged, several have pleaded guilty, all in a single case. In India, no one has served a long jail term for friendly stock tips from insider knowledge. Typically, accused are slapped with a limited-period ban from trading that is often circumvented and a paltry fine. Gupta’s bail money ran into $10 million, only a tad lower than the value of his lavish family home in Westport estimated at about $12 million.
No one is above the law. Gupta in 1994 said, when he was appointed director to McKinsey, that it all about “meritocracy’’, arguably a great American quality. Some 17 years later, it’s the same rule principle and merit of a case that’s put him in the dock. His blue-chip pedigree in corporate America hasn’t helped him escape scrutiny and arrest.
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Until Gupta’s trial begins next year, it will be hard to say whether he will face a lifetime in jail. But what’s clear is the case has restored faith in SEC and its ability to punish corporate crime effectively. In all this, SEBI should realise it’s never too late and aim for its moment of triumph
Anjana Menon is a Delhi-based writer