Mark Twain is quoted to have said “Laws control the lesser man; right conduct controls the greater one”. It is unfortunate that Mr Rajat Gupta, former CEO of McKinsey, came out the lesser man in the insider trading swoop by US regulators.
A jury of eight women and four men convicted Mr Gupta of conspiracy and three counts of securities fraud related to trading in Goldman Sachs stock by Mr Raj Rajaratnam’s Galleon Hedge Fund.
They found that Mr Gupta told Mr Rajaratnam that Mr Warren Buffett was investing $5 billion in Goldman, and that the bank was losing money for the November 2008 quarter.
There was too close a coincidence between the phone-calls made and the trades placed by Mr Rajaratnam for the jury to ignore.
Over-enthusiastic reporters are already labelling this as the greatest victory for US prosecutors since Ivan Boesky was convicted in 1987. The debate on racism in the US never seems to die; some enthusiastic supporters of the former head of McKinsey said he became a victim of racism, and that there were scores of others who had made the phone calls similar to the one that proved to be costly for Mr Gupta but were let off.
Whatever the merits or otherwise of this argument, the US legal system seems to be the only victor in this episode.
The Securities and Exchange Board of India (SEBI) drafted insider trading regulations for India in 1992 and has been amending them at regular intervals.
It defines an insider as a person who is, or was, connected with the company, or is deemed to have been connected with the company and is reasonably expected to have access to unpublished, price-sensitive information in respect of securities of a company, or has received, or has had access to such unpublished price-sensitive information.
Price-sensitive information means any information that relates directly or indirectly to a company and which, if published, is likely to materially affect the price of securities of the company.
SEBI says instances of such information are periodical financial results of the company, intended declaration of dividends (both interim and final), issue of securities or buy-back of securities, any major expansion plans or execution of new projects, amalgamation, mergers or takeovers, disposal of the whole or substantial part of the undertaking and significant changes in policies, plans or operations of the company.
The Regulations provide detailed guidelines on codes of conduct to be followed by all the players in the market. In the tumultuous world of the bourses, where everyone enters with an eye on the gains that can be made, it is natural that one succumbs to the guiles of price-sensitive information.
While Harshad Mehta and Ketan Parekh made a name for themselves by working around market regulations, there has been no high-profile case of insider trading.
Some companies and their promoters were proven guilty but the punishment meted out was either banning them from the market for a period of time, or a monetary penalty.
The Consent Orders that SEBI introduced were gleefully accepted by many a wrong-doer. For instance, in mid-May, SEBI passed a consent order in favour of Educomp Solutions settling a violation of Code of Corporate Disclosure Practices for Prevention of Insider Trading in Schedule II under Regulation 12 (2) of SEBI (Prohibition of Insider Trading) Regulations, 1992, for Rs 10 lakh.
SEBI should rethink on settling serious cases of insider trading by accepting a cheque from the accused, as this takes away the impact of the offence.
A clear-cut rule in the recently amended Consent Order rules, capping a limit at which offences such as insider trading could be settled through consent, could be a useful start. To critics of SEBI, this would prove that it means business.
In the Galleon insider trading episode, it is apparent that the amounts involved were colossal and the players were not mom-and-pop entities in the markets. The jury probably wanted to prove that no one in the US is larger than the law.
In hindsight, Mr Gupta must be regretting making those phone-calls to the owner of the Galleon hedge fund. As for the other offenders, it appears only a matter of time before the law catches up with them.
(The author is a Bangalore-based chartered accountant)