Opinion

Felix Salmon

The long arm of the Google

Felix Salmon
Feb 20, 2013 17:11 UTC

Is Google becoming a key arm of the law-enforcement complex? It certainly seems to be so with respect to art thefts. I first came across this idea back in November, when Bloomberg Markets profiled Jeff Gundlach, who was hit by art thieves in September:

The cerebral Gundlach also gave investigators a tip for solving the crime. He says that while he was at home in his family room, it dawned on him that thieves would do a Google search using his grandmother’s name to find out more about the paintings and how much they might be worth.

Gundlach told the authorities that they should check the Internet to see who might have googled the name Helen Fuchs. He says exactly two such searches were executed: one by him and one by the thieves.

Now, another man has been arrested for art theft, and was found in much the same way:

In their investigation into the art theft, [officials] found that Mr. Istavrioglou had searched the Internet for reports about the robbery after it took place but before the story became news.

Law enforcement officials, it seems, have pretty easy and routine access to Google’s search-history database, and this is surely only the beginning when it comes to sifting through huge amounts of data to find evidence of crimes. The SEC, for one, has had a large data-mining team in place for a good five years now, going through enormous quantities of data to look for signs of suspicious activity.

Even journalists are getting in on the act of using data to uncover criminal activity. The Sun Sentinel, in Florida, managed to obtain a year’s worth of SunPass toll records for cop cars. That meant that they had data on the amount of time it took cops to drive from one toll plaza to the next. All they needed to do then was measure those distances, divide the distances by the time taken to drive that length of road, and come up with an average speed, for cops who were often just commuting to or from their houses, out of their jurisdiction. The result? The Sun Sentinel found “almost 800 cops from a dozen agencies driving 90 to 130 mph on our highways” — in a state where speeding cops have caused at least 320 crashes and 19 deaths since 2004.

Part of the reason why it has taken so long to bring Libor prosecutions is that going through millions of email and IM records, looking for smoking guns, is still a laborious and time-consuming process. But as data mining techniques continue to evolve, and as databases become increasingly unified and tractable, and our lives are lived almost entirely online, it’s going to be harder and harder for criminals not to leave a discoverable data trail — especially opportunistic criminals, who break the law when they’re given a chance, as opposed to more considered criminals, who spend a lot of time plotting a crime before committing it.

It stands to reason, given advances in computer power and given the size of the networks that we all involve ourselves in every day, that the kind of data crunching that used to be solely the domain of places like the NSA and GCHQ is now going to be available to local police forces and even ordinary citizens, including journalists. The privacy implications are profound, of course: millions of innocent people are going to have their personal data combed on a real-time basis, every day. But that seems to be inevitable, insofar as it isn’t already a reality.

COMMENT

@GRRR I agree, but although “This comb is a series of algorithms and filters. It’s not a room of people parsing your personal records and finding out that you watched porn at work” is accurate, I’m not so reassured that it won’t be misused. And “who watches porn at work”, although embarrasing, isn’t the worst example I can think of.

You are certainly right about Felix’s choice of headline. Google might be the most widely used search engine, but it’s in no way the only source of this kind of information.

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How to get $12 billion of gold to Venezuela

Felix Salmon
Aug 23, 2011 01:59 UTC

Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I’ve been wondering how on earth he possibly intends to do such a thing.

There are 99 tons already being held at the Bank of England; according to the FT, the plan is to transfer other gold to the Bank of England from custodians such as Barclays, HSBC, and Standard Chartered; then, once it’s all in one place, um, well, nobody has a clue what might happen. Here’s the best guess from the FT:

Venezuela would need to transport the gold in several trips, traders said, since the high value of gold means it would be impossible to insure a single aircraft carrying 211 tonnes. It could take about 40 shipments to move the gold back to Caracas, traders estimated.

“It’s going to be quite a task. Logistically, I’m not sure if the central bank realises the magnitude of the task ahead of them,” said one senior gold banker.

I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases. The last (and only) known case of this kind of quantity of gold being transported across state lines took place almost exactly 75 years ago, in 1936, when the government of Spain removed 560 tons of gold from Madrid to Moscow as the armies of Francisco Franco approached. Most of the gold was exchanged for Russian weaponry, with the Soviet Union keeping 2.1% of the funds in the form of commissions and brokerage, and an additional 1.2% in the form of transport, deposit, melting, and refining expenses.

It’s not much of a precedent, but it’s the only precedent we’ve got; my gut feeling is that Venezuela would be do well to get away with paying 3.3% of the total value of the gold in total expenses. Given that the gold is worth some $12.3 billion, the cost of Chávez’s gesture politics might reasonably be put at $400 million or so.

It seems to me that Chávez has four main choices here. He can go the FT’s route, and just fly the gold to Caracas while insuring each shipment for its market value. He can go the Spanish route, and try to transport the gold himself, perhaps making use of the Venezuelan navy. He could attempt the mother of all repo transactions. Or he could get clever.

In the first instance, the main cost would be paid by Venezuela to a big insurance company. I have no idea how many insurers there are in the world who would be willing to take on this job, but it can’t be very many, and it might well be zero. If Venezuela wanted just one five-ton shipment flown to Caracas in conditions of great secrecy, that would be one thing. But Chávez’s intentions have been well telegraphed at this point, making secrecy all but impossible. And even if the insurer got the first shipment through intact, there would be another, and another, and another — each one surely the target of criminally-inclined elements both inside and outside the Venezuelan government. Gold is the perfect heist: anonymous, untraceable, hugely valuable. Successfully intercepting just one of the shipments would yield a haul of more than $300 million, making it one of the greatest robberies of all time. And you’d have 39 chances to repeat the feat.

Would any insurer voluntarily hang a “come get me” sign around its neck like that? They’d have to be very well paid to do so. So maybe Chávez intends to take matters into his own hands, and just sail the booty back to Venezuela on one of his own naval ships. Again, the theft risk is obvious — seamen can be greedy too — and this time there would be no insurance. Chávez is pretty crazy, but I don’t think he’d risk $12 billion that way.

Which leaves one final alternative. Gold is fungible, and people are actually willing to pay a premium to buy gold which is sitting in the Bank of England’s ultra-secure vaults. So why bother transporting that gold at all? Venezuela could enter into an intercontinental repo transaction, where it sells its gold in the Bank of England to some counterparty, and then promises to buy it all back at a modest discount, on condition that it’s physically delivered to the Venezuelan central bank in Caracas. It would then be up to the counterparty to work out how to get 211 tons of gold to Caracas by a certain date. That gold could be sourced anywhere in the world, and transported in any conceivable manner — being much less predictable and transparent, those shipments would also be much harder to hijack.

How much of a discount would a counterparty require to enter into this kind of transaction? Much more than 3.3%, is my guess. And again, it’s not entirely clear who would even be willing to entertain the idea. Glencore, perhaps?

But here’s one last idea: why doesn’t Chávez crowdsource the problem? He could simply open a gold window at the Banco Central de Venezuela, where anybody at all could deliver standard gold bars. In return, the central bank would transfer to that person an equal number of gold bars in the custody of the Bank of England, plus a modest bounty of say 2% — that’s over $15,000 per 400-ounce bar, at current rates.

It would take a little while, but eventually the gold would start trickling in: if you’re willing to pay a constant premium of 2% over the market price for a good, you can be sure that the good in question will ultimately find its way to your door. And the 2% cost of acquiring all that gold would surely be much lower than the cost of insuring and shipping it from England. It would be an elegant market-based solution to an artificial and ideologically-driven problem; I daresay Chávez might even chuckle at the irony of it. He’d just need to watch out for a rise in Andean banditry, as thieves tried to steal the bars on their disparate journeys into Venezuela.

COMMENT

What is the big deal anyway ? India imports nearly 800-1000 tons of physical gold every year and China is close to that number. All this gold is used for jewelry and hence actually travels every year. Obviously, commercial modes are well established to transport physical gold in hundreds or even thousands of tons a year.

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Adventures with CNBC anchors’ statistics

Felix Salmon
May 20, 2011 14:06 UTC

CNBC’s Joe Kernen reports the news in the morning in a fast-paced environment where it’s difficult to be 100% accurate. If you write a book, by contrast, you have the time to make sure you get things right. So it’s good to see that now Kernen is plugging his book, he has no time for baseless factoids. Oh, who am I kidding:

Q: Give us some examples of how you see business people portrayed in the media.

A: There was a study done of TV which looked at hundreds of hours of prime time. You were four times more likely to commit a crime if you were a CEO than if you were a drug dealer or a gang leader.

Does he mean this study, by Ray Surette, author of Media, Crime, and Criminal Justice: Images, Realities and Policies? Here’s what it found:

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Hm, no, he can’t mean that study, because it doesn’t show anything like what Kernen is talking about. Businessmen only accounted for 24% of crimes on TV even when you include crimes which were ordered by businessmen but carried out by professional-criminal flunkies. Meanwhile, it stands to reason that 100% of drug dealers on TV commit a crime — since by definition they’re being portrayed as illegally dealing drugs.

So maybe Kernen’s not quoting a study at all, and instead is quoting a half-remembered 1979 polemic by — wait for it — Ben Stein. Cecil Greek summarizes:

Ben Stein wondered why prime time crime consisted almost exclusively of white upper-class violence. After watching thousands of hours of TV crime shows, he reported never to have seen a major crime committed by a poor, teenage, black, Mexican, or Puerto Rican youth, even though in reality they account for a high percentage of violent crime.

Most likely, Kernen’s just quoting something somebody told him at dinner one evening, and which sounded too good to fact-check. After all, that’s the way that CNBC works. You just put a lot of shouty people on the TV saying things of dubious coherence, sit back, and enjoy the cacophony.

Kernen works in a world where ratings are more important than accuracy, and he’s just carrying that philosophy over to the book-publishing business. I doubt that his publishers, the “dedicated conservative imprint” Sentinel, mind in the slightest.

COMMENT

“Related to the disproportionate emphasis on the most serious end of the crime spectrum is the portrayal of the demographic characteristics of offenders and victims presented by crime fiction. Offenders in fiction are primarily higher-status, white,
middle-aged males (Pandiani 1978: 442–7; Garofalo 1981: 326; Lichter et al. 1994: 290–5; Reiner et al. 2000a and 2000b). … Apart from gender, the demographic profile of offenders and victims in fiction is the polar opposite of criminal justice statistics (Surette 1998: 47 calls this ‘the law of opposites’). (See also Pandiani ibid.; Garofalo ibid.; Lichter et al. ibid.; Barclay and Tavares 1999: chapters 2 and 3. Sparks 1992: 140–45 offers a qualitative analysis.)”

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Vericrest Financial: homicidally otiose

Felix Salmon
Apr 29, 2011 18:47 UTC

We’ve heard a fair amount about the human toll of the subprime crisis — although, frankly, not enough. So this story deserves wide play: Manuel Lopez and Christina Garcia, and their 12-year-old son Christian Garcia, died in a grisly fire Monday morning, because the building they lived in was full of illegally built walls which blocked access to the fire escape. Who was responsible for looking after the building and making sure it was up to code? The message I get from the NYT‘s Jim Dwyer is that it’s a Dallas company called Vericrest Financial.

The insouciance of Vericrest, here, is downright breathtaking:

Did Vericrest take care of the building while it was in foreclosure, or even know that it was supposed to?

“Vericrest is not going to comment,” a spokesman said.

The backstory, as pieced together by Dwyer, is that the three-family building at 2321 Prospect Avenue went into strategic default long ago, after the owner, Domingo Cedano, who bought the building with no money down, stopped making his mortgage payments.

Under New York state law, when that happens, and once foreclosure proceedings begin, the lender becomes responsible for the property. In this case, the loan is owned by a trust, Bank of New York Mellon is the trustee, and the bank in turn has hired Vericrest to handle the loans in the trust.

Here’s what Vericrest says about itself:

Vericrest Financial, Inc. is a privately held, premier financial services company primarily engaged in the servicing of residential mortgage and consumer finance loans. Vericrest Financial, Inc. is led by a seasoned team of financial services industry professionals who have over 20 years of experience in working with customers and investors. Our business operations are located in Oklahoma, New Jersey, California and Texas.

Vericrest Financial, Inc. is dedicated to providing superior customer care and maintaining the highest level of quality, integrity and trust that our customers, employees, investors and other business associates expect and deserve. Vericrest Financial, Inc. is regulated by numerous state and federal regulatory agencies and holds the requisite licenses to service mortgage and consumer finance loans and to conduct other aspects of its business in those states where it does business.

It’s fair to assume that Vericrest, as the holder of all the requisite licenses to do what it does in New York state, is indeed cognizant of any legal obligation it had to maintain 2321 Prospect Avenue, since it was “abandoned by the mortgagor but occupied by a tenant.” Assuming that somewhere along the line foreclosure proceedings were initiated, the law is clear:

For the purposes of this section “maintain” shall mean keeping the subject property in a manner that is consistent with the standards set forth in the New York property maintenance code… provided, however, that if the property is occupied by a tenant, then such property must also be maintained in a safe and habitable condition.

What we’re seeing here is a particularly tragic instance of something that has been happening a lot over the course of the subprime crisis — the way in which mortgages, once they become transmogrified into purely financial instruments, lose all connection to real-world buildings and humans. When my credit union makes a mortgage loan, we know the borrower and we know the building and we have relationships there. When Vericrest Financial takes on responsibility for loans in an investment trust, there’s no relationship at all, and there’s precious little incentive for the company to send someone out to the Bronx to find out what it’s responsible for.

If the law was indeed broken by Vericrest in this case, I hope that it and its principals face criminal prosecution. Only that will make these “premier financial services companies” wake up and realize what their real-world responsibilities can mean.

COMMENT

Or if there is no receiver, Vericrest probably would have hired a management company.

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McKinsey’s corrupted culture

Felix Salmon
Mar 10, 2011 02:25 UTC

John Gapper makes a good point: management consultants in general, and McKinsey consultants in particular, have made their entire business out of exploiting the moral grey zone surrounding confidential information.

The reason you hire McKinsey is that its consultants have seen strategic business issues like yours before, and therefore might have developed good insights into how to approach them. But the reason they’re familiar with those issues is that they’ve been given highly confidential information about your competitors. So when you hire McKinsey you’re essentially trying to acquire, for a very high hourly fee, the kind of corporate intelligence that can only be built up through long exposure to highly-sensitive commercial information.

Here’s Gapper on McKinsey:

The accumulation and sharing of privileged knowledge is integral to how it works…

The calculation every client makes is, in the words of Christopher McKenna, a professor at the Oxford university’s Saïd Business School who studies professional services firms, that “consultants will carry information in and information out. The client has to decide which of those flows is worth more.”

Indeed, one of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised “best practices”. The consultant is a broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels.

In this sense, a management consultant is a bit like an art dealer, or anybody else who traffics in valuable information asymmetries. The consultant knows more than the client, when it comes to strategic issues within the industry in question. If the client wants access to that knowledge, he has to open his own kimono to get it, thereby putting the consultant at yet more of an information advantage.

For pretty much Rajat Gupta’s entire career, then, he was trading in information that he obtained in confidence by dint of his position. When it comes to corporate intelligence, management consultants are pretty much unique in this regard: while other professionals like lawyers and accountants certainly encounter a great deal of confidential corporate information, they don’t trade in it in the same way — no one ever feels the need to hire Ernst & Young just because they audit a major competitor. The only profession which might come close to consultants, in this regard, is M&A bankers, and maybe a handful of extremely senior lawyers like Rodge Cohen.

None of this remotely explains or excuses what Gupta is accused of doing, of course. But as Gapper notes, there’s a long history of management consultants violating the spirit of the confidentiality agreements they enter into — he tells the tale of Booz Allen Hamilton’s John Burns taking lots of IBM knowledge with him when he took a job as president of the computer maker’s fiercest rival.

In any case, McKinsey can and should find itself in serious reputational jeopardy here. Gapper concludes his column portentiously, saying that “McKinsey must devoutly hope that there is no third man” in addition to Gupta and Anil Kumar, the McKinsey partner who has already admitted giving confidential information to Raj Rajaratnam.

And, predictably, it now looks as though there is just such a third man after all. Three McKinsey consultants all channeling confidential information to a single hedge-fund manager who wasn’t even a client? That’s not bad apples, it’s a culture of corruption. At this point it’s unimaginable that it wasn’t happening elsewhere as well.

COMMENT

First, FrancineMcKenna is most definitely correct, regarding the concentration of available audit firms, and the consequences both good and bad.

More recently, jwu217′s comments are consistent with my impressions. I worked as a consultant, not quite a “management” consultant, rather, as an engineering consultant for several years, after earning a specialized degree. The era of management consultancy seems to have passed, other than for the big firms like McKinsey, who were the first in the field to begin with.

My recollection of my consulting work was of producing very specifically designed models for our client, under terms of strict confidentiality and non-compete agreements. The models could not be easily adapted for other companies in the same industry anyway. I recall that the group of us, as consultants, were kept sequestered in our own work area, with strictly enforced security protocols. Our access to online data was limited to need-to-know, and the same was true for access to client work areas and interactions. It was rather dreary, difficult work, and once our engagement was completed, I did wonder how well the regular staff were able to maintain our deliverables (production software).

This was utterly different from my later experience in finance, often investment bankers and corporate counsel. I worked with the same people on many deals, with broad access to all sorts of potentially valuable information. But that didn’t mean that fraud and abuse was rampant. The small upside gain of acting unethically wasn’t even worth considering, when balanced the certainty of a good job, done honestly.

Additional research would have been a good idea for the journalist who wrote this post.

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Why isn’t Rajat Gupta facing criminal charges?

Felix Salmon
Mar 8, 2011 14:29 UTC

Andrew Ross Sorkin examines the weirdnesses surrounding the Rajat Gupta case today, and comes to the conclusion that the government “appears” not to have recorded any of Gupta’s phone calls after all. That’s a reversal from what things looked like on Friday, but the one thing we can be sure of in this case is that the whole thing is very murky.

Sorkin also raises the question of criminal charges:

Given the seriousness of the claims — insider trading by an executive who had reached the upper echelons of corporate America — why not bring criminal charges against Mr. Gupta? …

Not only has the Justice Department not brought a criminal case, at least not yet, but the S.E.C. decided to bring its case in front of an administrative law judge instead of in a Federal District Court, where a defendant has full discovery rights. The S.E.C. is using a new provision in the Dodd-Frank Act to bring the case this way…

Statistically, it is notable: of the 26 Galleon-related cases the S.E.C. has brought, all have been brought in federal court. None have been brought in front of an administrative judge.

I think the question of discovery rights is a bit of a red herring here: I doubt they’re all that important to Gupta’s defense. And personally I like the fact that the SEC is making use of new provisions in Dodd-Frank. Fully-fledged lawsuits are time-consuming and expensive things to put together, and if it’s easier to bring something in front of an administrative law judge instead, let’s see more of that. I mean, no one has suggested that Gupta will get anything other than a fair trial.

Of course there’s a question as to why Gupta in particular got this treatment, rather than anybody or everybody else. It’s a good question, and I look forward to getting the answer. But someone needs to be first.

More generally, if Gupta is guilty, it’s in the public interest that we be able to convict him. One of the problems with insider trading is that it’s so hard to prove, people do it with impunity. Maybe a few more cases like Gupta’s will help on that front.

Where I disagree with Sorkin is when he says that the SEC case doesn’t make Gupta look “much like a sinner.” Actually, that’s exactly what it makes him look like. It’s true that Gupta might not have made money personally on these trades. But that’s clearly not the only reason he’d pass on information to Rajaratnam. It might, on the other hand, be the reason the SEC is going to an administrative law judge. Maybe they reckon that insider dealing for purposes of showing off is somehow a lesser crime than insider dealing for personal profit. After all, if Gupta had just shown off to Sorkin instead of Rajaratnam, he probably wouldn’t have committed a crime at all.

Update: John Carney reckons that there are tapes, but that the SEC wasn’t entitled to have access to them.

COMMENT

Worth looking back at Texas Gulf Sulphur case in 1964. Circumstances almost identical: a director of TG (Thomas Lamont, retired Vice-Chairman of Morgan Guaranty) left a TG board meeting and called Longstreet Hinton, then head of MG’s pension investment to tip him off that rumors of a huge multi-mineral strike by TG in Ontario were true. Hinton then bought stock for various accounts (including his own). SEC did not bring criminal charges, and the issue bled away in a dispute, largely terminological, over what news about itself TG had made public when. Regarding motive in the Gupta matter, Naftalis, G’s lawyer, pointed out that his client had lost $10 million with Raj. Might there have been an agreement involving a make-whole? $10 million was probably real money to Gupta.

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The Gupta-Rajaratnam tapes

Felix Salmon
Mar 7, 2011 14:31 UTC

I missed this on Friday:

Prosecutors intend to introduce audiotapes showing that Rajaratnam got inside tips from his friend Rajat Gupta…

Prosectors’ use of wiretaps has been a hallmark of the U.S. hedge fund insider-trading probe, which has resulted in more than two dozen arrests and at least 19 guilty pleas.

Rajaratnam is the central figure in the probe. Prosecutors have said they may present 173 intercepted phone conversations as evidence in the trial.

I find this fascinating, because there’s no indication in the complaint that the phone conversations were recorded at all. There’s lots of information which could have been obtained from phone-company records, about exactly when phone calls were made, what phones they were made from, and how long they lasted. But the big weakness of the complaint seemed to be that it included nothing about the contents of those calls.

Prosecutors of course don’t need to lay out their hand in full when they file their complaint — but if they’re going to come out a few days later and say they have wiretaps, what’s the purpose in keeping that information secret?

It’s possible, I suppose, that those 173 intercepted phone conversations don’t include any of the calls from Gupta, but I doubt it. It’s almost as if the Gupta investigation took place entirely separately from the Rajaratnam investigation, and that only after Gupta was charged could his investigators have access to the Rajaratnam tapes. In any case, it’s all a little odd, to say the least.

COMMENT

It is a little odd, isn’t it.

It is also extremely odd that Rajat Gupta was not criminally charged at all despite the fact that his conduct more egregiously violated the letter and spirit of the insider trading laws than than any other defendant in the probe. Indeed, the conduct of the “expert network” defendants, whom Preet Bharara is trying to put in federal prison for 10-20 years, was child-like in comparison.

It is also odd that Gupta was charged by even the SEC in only an administrative proceeding unlike ALL of the other two-dozen defendants, who were instead charged by the SEC in federal court. As lawyers who work in this area know, an administrative proceeding is the lightest possible thing Robert Khuzami could do to Gupta while still doing “something.” That extraordinarily, inexplicably light treatment was reserved for him and him alone.

Yes, the behavior of Bharara and Khuzami is quite odd. It is odd simply because they are setting the stage to give Gupta, as a member of the protected elite, a pass.

And Bharara and Khuzami will give Gupta a pass because they are quite aware that their future millions in pay-offs from white-shoe law firms (disguised as “compensation” for their inexpert but well-connected representation of future members of the protected elite) depends on it.

Sadly, disgracefully, corruptly odd.

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Be careful who you show off to, Rajat Gupta edition

Felix Salmon
Mar 1, 2011 22:26 UTC

John Carney asks why Rajat Gupta might have done what he’s accused of doing:

Gupta ran McKinsey. He sat on the board of Goldman. He is the ultimate insider.

One of the reasons we rarely see insider trading charges against people who have the stature and wealth against Gupta is that insider trading makes so little logical sense for such people. There’s really no reason Gupta should leak confidential information to a hedge fund manager. He doesn’t need money, access, prestige or any favors at all.

If he did tip off his hedge fund manager friend, it was something darker than greed or ambition. It was something close to sociopathic narcissism—perhaps a belief that he was somehow above the law, immune to the rules that govern the rest of us.

“Sociopathic narcissism” is one way of putting it, but I think there’s something very human here. And John and I see it every day, at CNBC and Reuters: reporters get phoned up by very rich and important individuals, and get told information which can’t conceivably benefit the person doing the leaking, except psychologically. It doesn’t matter how rich or how important you are, the idea of being able to show off like that — to demonstrate that “I know something you don’t know”, to be cultivated and praised and effusively thanked — is very appealing.

Gupta, if he did give inside information to Raj Rajaratnam, wasn’t doing it for the money. He was doing it to feel important, to get the respect of his friend, to demonstrate just how plugged in he was to some of the most important decisions being made at the height of the financial crisis.

The moral of this story, then, is that if you ever feel that human need for validation and need to unburden yourself of a valuable secret, make sure you phone a journalist, rather than a hedge-fund manager. That’s not illegal, and it’s just as gratifying.

COMMENT

Worth looking back at Texas Gulf Sulphur case in 1964. Circumstances almost identical: a director of TG (Thomas Lamont, retired Vice-Chairman of Morgan Guaranty) left a TG board meeting and called Longstreet Hinton, then head of MG’s pension investment to tip him off that rumors of a huge multi-mineral strike by TG in Ontario were true. Hinton then bought stock for various accounts (including his own). SEC did not bring criminal charges, and the issue bled away in a dispute, largely terminological, over what news about itself TG had made public when. Regarding motive in the Gupta matter, Naftalis, G’s lawyer, pointed out that his client had lost $10 million with Raj. Might there have been an agreement involving a make-whole? $10 million was probably real money to Gupta.

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When Goldman’s board meetings leaked

Felix Salmon
Mar 1, 2011 17:37 UTC

Back in April of last year, I was indignantly informed by Rajat Gupta’s PR people that he wasn’t being investigated by the SEC, just examined. “This is an important distinction,” they told me. Well, it seems that either the examination subsequently turned into an investigation, or else that the distinction wasn’t that important after all:

The SEC’s Division of Enforcement alleges that Rajat K. Gupta, a friend and business associate of Rajaratnam, provided him with confidential information learned during board calls and in other aspects of his duties on the Goldman and P&G boards. Rajaratnam used the inside information to trade on behalf of some of Galleon’s hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms. The insider trading by Rajaratnam and others generated more than $18 million in illicit profits and loss avoidance. Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Rajaratnam.

The insider dealing seems to have been pretty blatant: minutes or even seconds after getting off board conference calls with Lloyd Blankfein, Gupta would pick up the phone and call Rajaratnam, who would then make huge trades in Goldman stock:

A Special Telephonic Meeting of the Goldman Sachs Board was convened at 3:15 p.m. on September 23, during which the Board considered and approved a $5 billion preferred stock investment by Berkshire in Goldman Sachs… Gupta participated in the Board meeting telephonically, staying connected to the call until approximately 3:53 p.m. Immediately after disconnecting from the Board call, Gupta called Rajaratnam from the same line. Within a minute after this telephone conversation, at 3:56 p.m. and 3:57 p.m., and just minutes before the close of the markets, Rajaratnam caused the Galleon Tech funds to purchase more than 175,000 additional Goldman Sachs shares…

Gupta dialed into the October 23, 2008, Board meeting around the time it was scheduled to start and remained on the call until 4:49 p.m. Just 23 seconds after disconnecting from the call, Gupta called Rajaratnam… The following morning, just as the financial markets opened at 9:30 a.m., Rajaratnam… explained that Wall Street expects Goldman Sachs to earn $2.50 per share but that Rajaratnam had heard the prior day from a member of the Goldman Sachs Board that the company was actually going to lose $2 per share.

It wasn’t just Goldman, either: the SEC complaint says that Gupta did substantially the same thing with inside information about P&G, where he was also on the board.

This is just a civil complaint at this time, but if the SEC wins I fully expect criminal charges to be forthcoming. And the question must be asked: is it fair to blame Goldman for hiring Gupta to its board? I’m not sure about that. On the one hand, it’s impossible to catch all criminal tendencies of potential board members. On the other hand, Goldman historically didn’t seem to care much about its board, which seems to have existed largely to rubber-stamp the decisions of management. I think it cares more now, however. It’s learned its lesson.

Update: Gupta’s counsel has released a statement.

Statement of Gary Naftalis, Counsel for Rajat Gupta

The SEC’s allegations are totally baseless. Mr. Gupta’s 40-year record of ethical conduct, integrity, and commitment to guarding his clients’ confidences is beyond reproach. Mr. Gupta has done nothing wrong and is confident that these unfounded allegations will be rejected by any fair and impartial fact finder. There is no allegation that Mr. Gupta traded in any of these securities or shared in any profits as part of any quid pro quo. In fact, Mr. Gupta had lost his entire $10 million investment in the GB Voyager Fund managed by Rajaratnam at the time of these events, negating any motive to deviate from a lifetime of honesty and integrity.

COMMENT

of course he’ll walk away freely

the movie ‘Inside Job’ is a very accurate indicator of where we are in corporate society..

Posted by erniej2011 | Report as abusive
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