Insider trading scandal rattles trust at the top

March 1, 2011

By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The insider trading scandal that began in the dark underbelly of the hedge fund world just burst through the doors of blue-chip America. The Securities and Exchange Commission accused Rajat Gupta, whose résumé stood out even in a crowd of financial luminaries, of passing along confidential information he gained as a non-executive director at Goldman Sachs.

The allegations, rejected as “baseless” by Gupta’s lawyer, will rumble far beyond Wall Street. On Tuesday, when the charges landed, Gupta was still listed on the boards of Dallas-based AMR, the parent company of American Airlines, and Cincinnati-based consumer kingpin Procter & Gamble. He’s associated with one of the world’s biggest philanthropic organizations, run out of Seattle by Bill and Melinda Gates. And then there are past or current leadership roles at McKinsey, Harvard, Yale, the Russian Sberbank, the Qatar Financial Centre and the International Chamber of Commerce.

Among its colorful accusations, the SEC says that after a telephone meeting of the Goldman board in September 2008, smack in the middle of the crisis, Gupta hung up and immediately called Raj Rajaratnam, founder of the Galleon Group hedge fund, from the same line with the still confidential news of Warren Buffett’s $5 billion preferred stock investment. The SEC also says he tipped off his since-indicted buddy about financial results at Goldman and P&G before they were announced.

Gupta made his way from India to head the world’s most renowned consulting firm, and beyond, probably not just by his wits but also by swapping information and access. It’s the currency among the corporate and political elite, which accepted Gupta as one of their own and therefore may have exempted him from critical scrutiny. But high-class gossip has its limits. Gupta, if proven guilty, wouldn’t be the first grandee to think the rules didn’t apply to him.

The case is likely to open a fresh round of reflection about how to vet executives and directors properly — a worthwhile endeavor to combat crony capitalism. But Goldman already has one of the most rigorous job interview processes in the world. It may be impossible for it or any other company to guard against the character flaws of the rich and powerful. Realizing this may deal a serious blow to the confidence and trust instilled in U.S. boards.

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