The conviction of Rajat Gupta in a Wall Street insider trading case has sent shock waves through the corporate universe. Mr Gupta embodied the Indo-American dream: an orphaned immigrant with a stellar academic record, he reached the top at McKinsey. Side by side, he built a reputation as a philanthropist. He was also a prime mover in establishing the Indian School of Business, Hyderabad. He also served on many boards, including at Goldman Sachs and Procter & Gamble. Wiretaps indicate he passed on sensitive information about those two companies to Raj Rajaratnam of Galleon Group. Mr Rajaratnam is now serving an 11-year sentence for the transactions Galleon made. Mr Gupta did not profit financially but, as a convicted “tipper”, is liable for a maximum prison term of 25 years. He has filed an appeal, but will likely trade his pinstripes for a prison uniform.
If he goes to jail, Mr Gupta will join some 40-odd insider traders who have been successfully prosecuted in the last three years by Preetinder Singh Bharara, the US attorney for the Southern District of New York (which includes Wall Street). Mr Bharara, yet another immigrant success story, has been very aggressive in investigating white-collar crimes, cultivating informers and requesting wiretaps. In fact, the case against Mr Gupta rested almost entirely on wiretaps. Mr Bharara’s methods are in line with an American tradition of putting securities manipulators, and other white-collar criminals, in jail. Americans know that an indictment of securities trading violations by the Securities and Exchange Commission is likely to be followed by criminal prosecution and, very likely, a prison sentence. This raises the bar for financial crimes and probably has a deterrent effect.
Contrast that with the prevalent tradition in India. Insider trading, price manipulation and rigging have always been rampant on Dalal Street. In the past three fiscal years alone (until December 2011), the Securities and Exchange Board of India (Sebi) investigated 282 cases, of which 57 pertained to insider trading, while another 181 concerned price rigging or manipulation in either the primary or secondary markets. Of these, 28 insider trading cases were solved, along with 112 price-rigging cases. There were some suspensions and prohibitions. Some warnings were issued. In 63 cases, Sebi ordered the disgorgement of issue proceeds, and it issued many consent orders. But nobody went to jail. Sebi’s orders were not followed by criminal prosecution — as should be automatic. The market regulator has recently made it more difficult for somebody accused of insider trading to use consent orders to escape. However, there are still loopholes. It is also learnt that Sebi may finally be allowed to access telephone call records (though not wiretaps). A previous request for access to call data was refused in 2009 by the Department of Telecommunications. Allowing Sebi to access telephone calls should considerably aid investigations. Insider trading and price manipulation vitiate market action and act as negative inducements for the mass of legitimate investors. It is to be hoped that the Gupta-Rajaratnam cases and the American example of best practices in this regard will inspire an overhaul of the Indian treatment of white-collar crimes.