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Post Leadership
Posted at 10:07 AM ET, 10/27/2011

Why would Rajat Gupta have wanted to share information at all?


On Wednesday, Rajat Gupta pleaded not guilty to sharing insider information to hedge fund investor Raj Rajartnam, who has already been sentenced to 11 years. (ALESSANDRO DELLA BELLA - ASSOCIATED PRESS)
The U.S. government’s wide-ranging effort to catch insider traders has reeled in its big fish. On Wednesday, federal prosecutors alleged that Rajat K. Gupta, while a board member for Goldman Sachs and Procter & Gamble, shared inside information about those companies with Raj Rajaratnam, a hedge fund investor who has already been sentenced to 11 years in prison for trading on company secrets. Gupta, a three-term chief of McKinsey & Co. and a famous consigliere to corporate leaders, pleaded not guilty to the charges after surrendering to the Federal Bureau of Investigation on Wednesday morning.

In a statement, Gupta’s lawyer, Gary Naftalis, called the government’s allegations “totally baseless,” saying that Gupta “did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo.” He also added that Gupta “has always acted with honesty and integrity.”

Much of the debate surrounding Gupta’s charges seems to be focused on whether or not Gupta received any benefit from the alleged information leaks. “The idea,” wrote Wall Street Journal blogger Joe Palazzolo, “is that absent some personal gain, there has been no breach of duty to stockholders.” If Gupta didn’t get anything in return for the allegedly shared information—whether economic or reputational rewards—was it really an illegal exchange?

For the lawyers and prosecutors (and for Gupta, of course), this may very well be the most important question. “It’s the main area of defense,” former federal prosecutor Douglas Burns told Bloomberg News. But for anyone examining the issue from a leadership or corporate governance perspective, it’s not the central one.

Rather, the leadership question at hand is why Gupta would have been motivated to share any information at all. Despite what appear to be some very coincidentally timed calls—within seconds of hanging up on two board meeting calls with Goldman Sachs directors, Gupta allegedly phoned Rajaratnam, who profited off of subsequent trades in the company—the government does not have recordings for these conversations. It did, however, wiretap a call in which it recorded Gupta sharing details of a Goldman Sachs board meeting with Rajaratnam, confirming a rumor that the board had considered buying a commercial bank and which one it might be, naming both Wachovia and AIG.

 That is undeniably the sort of information that most directors and company leaders wouldn’t want shared with outsiders. People who join a board take on the responsibility not only of looking out for shareholders’ best interest, but of keeping business strategies and plans proprietary until they are prepared for public knowledge. Staying true to that obligation is a mark of a good director and leader, even if it is not shared and traded upon for beneficial gain.

More from On Leadership:

Is it a bad sign if boards are ‘looking for a woman’?

How to be a great boss

Mr. Schmidt goes to Washington

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By  |  10:07 AM ET, 10/27/2011

 
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