There are so many financial scandals. In our series of the biggest financial scandals in recent history, we cross continents, borders, ethnicities, and different industries. Some were financial scandals involving average Joes being scammed out of their hard-earned cash, others involved corporate fraud, insider trading, some of the biggest names on Wall Street and Ponzi schemes. A number of them have even been turned into documentaries and movies, such as the Wolf of Wall Street, Madoff, and Nick Leeson who brought down Baring bank. Some scandals involved big names such as Martha Stewart and Bernie Madoff, whereas others are less well known among the wider public. Nonetheless their impact on the financial world and corporate governance was equally significant.
So in our series of biggest financial scandals, scandal number 4 involves one of the biggest hedge fund managers, IBM and Intel executives, as well as McKinsey partners.
The case of Raj Rajaratnam
Raj Rajaratnam. Does this name ring a bell? In case you have never heard the name before, Raj Rajaratnam was involved in one of the biggest financial scandals Wall Street had ever seen. His case involved a maid, McKinsey partners and inside information on some of the biggest companies aiding the hedge fund manager Rajaratnam to cash in big time. Aftermath: He is currently serving the longest prison sentence for insider trading ever handed out to anyone in the USA. In fact, as of time of writing this article he's still incarcerated at a prison in Massachusetts.
Who was Rajaratnam?
Raj Rajaratnam, born in Sri Lanka, educated in the UK and the USA, he graduated from Wharton before joining Chase Manhattan Bank. In 1992, Rajaratnam founded a hedge fund as a side arm of his then employer Needham & Co. Over the next twenty five years he grew the hedge fund, that is now called Galleon, to $ 7 billion dollars. This was just before the financial crisis in 2008. Over the years the fund produced returns north of 20% on an annual basis. In 2009, however, Raj Rajaratnam went from enjoying a lavish lifestyle to serving 11 years in prison.
So how did Raj Rajaratnam go from being one of the top dogs on Wall Street to being the biggest inside trader ever caught in the USA?
A well connected individual, Rajaratnam saw an opportunity to cash in on some insider information provided by a number of McKinsey employees, namely Anil Kumar, Rajat Gupta, and former senior executive at IBM Robert Moffa. The scam also involved Rajiv Goel, former Intel executive, and a fifth culprit by the name of Roomy Khan, who had previously already been convicted for sharing insider information. A nice ensemble of powerful men who played the ball between them to cash in big time on the back of information that should have only been known to management and employees of the respective companies.
His accomplices, who had access to information because they either sat on company boards or were involved in the decision-making processes, strategies, and potential acquisitions, kept Rajaratnam informed about future developments. For instance, when Warren Buffett invested a massive $ 5 billion in Goldman Sachs, Gupta reportedly shared this precious piece of insight with Rajaratnam prior to any public knowledge of this influential trade. This was particularly fruitful for Rajartnam given the timing of Buffett's purchase of the shares, September 2008, that is in the midst of the near collapse of the global financial system.
Rajaratnam was fed information from multiple sides. Robert Moffat, the then IBM executive, provided the hedge fund manager with insider information on deals and strategies at IBM as well as the, at the time still part of IBM, laptop subsidiary Lenovo.
Rajiv Goel, then treasury group manager at Intel, provided Rajaratnam with confidential information about Intel's strategies and business developments. This including the billion dollar deal between Sprint and Clearwire that Intel had a $ 1 billion stake in. Goel, who claimed to be outsmarted by Rajartnam, avoided jail, as he collaborated with the authorities and in exchange received two years probation.
Some of the wiretapped conversations that led to his conviction were similar to the one reported by thenation.com that took place during his trial:
“Uh… no,” Kumar replied, explaining that AMD would likely see an “11 to 15 percent reduction in revenues.” While the investment was going to move forward, he warned that “they’re gonna declare a completely - shitty…quarter.”
“Right,” Rajaratnam said after a brief back-and-forth. “So, I think if the market goes up, what we have in that, uh… fund, I will sell it.”
“If the market goes up,” Kumar concurred, “you sell it, because we can fine-tune the transactions a lot…better than anyone else can, right?”
The End: Convicted of securities fraud and conspiracy. The former hedge fund manager was found guilty of nine counts of securities and five counts of conspiracy charges. The court subsequently fined Raj Rajaratnam with the largest ever individual penalty for insider trading: $ 92.8 million in civil penalty, $ 53.8 million in forfeiture, and $ 10 million in criminal fines, bringing his entire monetary penalty to a whopping $156.6 million. Rajaratnam is currently serving 11 years after having been found guilty of 14 counts related to insider trading.
In case you are wondering what happened to the McKinsey partners: Gupta and Kumar served two years imprisonment and two years of probation respectively. The lower sentence for Kumar was handed down in response to his testimony against his accomplices. If the two names sound familiar, it is because they are the co-founders of the highly ranked Indian School of Business in India.
Robert Moffat served six months in prison while Rajiv Goel spent two years on probation.
The entire episode led US financial firms to be more rigid in their hiring and compliance including monitoring employee emails, disclosure of personal portfolios, using legal counsel to ensure employees remain within legal boundaries and even compliance coaching.
Who was involved in the Financial Scandal?
Raj Rajaratnam, founder of hedge fund Galleon
Rajat Gupta, Goldman Sachs and Procter & Gamble board member and Managing Director of McKinsey
Anil Kumar, partner at McKinsey
Robert Moffat, senior executive at IBM
Rajiv Goel, senior executive at Intel
Victims of the Financial Scandal:
There weren't really any victims as in other financial scandals such as Maddoff or Ponzi, as the case was a pure insider trading scam. However, Manju Das, Kumar's housekeeper went from being a millionaire to living in poverty. How come Kumar's housekeeper was also a millionaire, you might ask?
Kumar opened and used accounts in her name to transfer millions. In principal he abused her name to open accounts that would allow him to hide millions of dollars from the insider deals he made with Rajaratnam. Manju Das, who moved back to India after the scandal broke, now apparently lives on less than $ 1.90 per day going from one of the richest housemaids – at least on paper – to a shockingly poor food stall owner in India