It was “values” day in many McKinsey offices on Friday – the annual occasion when staff take a break from client work to reflect on the principles underpinning the management consultancy. Rarely can they have had before them a case study as timely and as dramatic as that of their former head, Rajat Gupta, who was convicted that day of conspiracy and three counts of securities fraud related to trading in Goldman Sachs’ stock by Raj Rajaratnam’s Galleon hedge fund.
At “the Firm”, the impact of Gupta’s decline and fall is still felt deeply. As I wrote last year in my analysis of how McKinsey was handling the scandal, “what shocks staff and alumni is that Rajat Gupta should stand accused of precisely [the] sins of self-enrichment and self-aggrandisement” that its legendary former chief Marvin Bower abhorred.
One former partner told me on Friday that “the most aggrieved groups are alumni and senior partners who knew Rajat Gupta and continue to be somewhat baffled by what led him to do this”. Another ex-McKinseyite, Roger Parry, now chairman of UK pollster YouGov, admitted to feeling “a little bit devalued and diminished” by the scandal.
But my sense is that while the trial brought punishment and humiliation for Gupta (who will appeal against the verdict), it did not add much to McKinsey’s embarrassment. The firm will not comment but no doubt it hopes the trial has drawn a line under the affair.
The conviction of Rajat Gupta, the former managing director of McKinsey & Co, the management consultancy, on insider trading charges is an extraordinary event – not just because it was a hard case to prove but because of his status at the apex of the business establishment.
The man who ran McKinsey and went on to become a board member of Goldman Sachs and Procter & Gamble, is very likely to receive a jail sentence in October. That makes him the most senior establishment figure to be convicted by a jury since the 2008 crisis.
He had already lost his reputation – silently disowned by McKinsey and discarded by Goldman. Lloyd Blankfein, Goldman’s chairman and chief executive, testified at his trial that leaking information from Goldman’s board – as Gupta was caught on tape doing to Raj Rajaratnam, was wrong.
Monday was only the opening day of the trial of Rajat Gupta, the former head of McKinsey and board member of Goldman Sachs, on charges of conspiracy and insider trading. But one thing is already clear: he is not a crowd-pleaser.
Compared with some other recent trials of Wall Street figures, such as Bernie Madoff and Raj Rajaratnam, the turnout was modest. The man that Reed Brodsky, the prosecutor, described as “the ultimate corporate insider” was mainly surrounded by friends and family.
Judge Jed Rakoff’s courtroom on the 14th floor of the court building filled up sufficiently to require some of the press and lawyers to decamp to an 11th floor overflow room (in which the sound quality was abysmal).
In general, however, it felt like a private affair in relation to other landmark Wall Street cases. Given the status of Mr Gupta – the most senior figure from the US corporate establishment to face charges since the 2008 crisis – that is odd.
The conviction of Raj Rajaratnam for insider trading means McKinsey can breathe again. For now, the drip-drip of courtroom revelations about what Rajat Gupta, ex-head of the consulting firm, or Anil Kumar, a former partner, told the hedge fund billionaire, has stopped.
Mr Kumar has already pleaded guilty to insider trading. Mr Gupta, who denies wrongdoing, faces Securities and Exchange Commission civil charges. (A third McKinsey partner, David Palecek, who died last year, was mentioned in the trial, but his widow’s lawyer has said that he never agreed to “play ball” with Rajaratnam.)
Pending any action against Mr Gupta, the consulting world is wondering what will be the fall-out from the case – and not just for McKinsey.
If you read anybody on the reputational threats facing McKinsey, it should probably be Walter Kiechel. As author of the definitive history of strategy consulting, The Lords of Strategy, he knows a lot about what goes on inside consultants’ heads.
On the Harvard Business Review blog, he’s used his knowledge and the latest revelations from the Galleon insider trading trial to explore “the beguilements…. beckoning to consultants over the last two decades”, in search of a better understanding of how Rajat Gupta, former head of McKinsey, “could have gotten himself into the current mess”.
(Gupta, who left McKinsey in 2007, is accused of sharing information, acquired in 2008 when he was a director of Goldman Sachs and Procter & Gamble , with Galleon founder Raj Rajaratnam. His lawyer has said the Securities and Exchange Commission’s civil charges of insider trading are “baseless”.)
The vagaries of print deadlines can produce odd results. On Wednesday morning in New York, I concluded my column on McKinsey by writing that the firm had better hope that no “third man” came to light in the insider trading scandal.
Lo and behold, on Wednesday afternoon, the prosecutor in the trial in Manhattan of Raj Rajaratnam, the former Galleon Group hedge fund manager, said in his opening statement that Mr Rajaratnam had talked of there being just such a figure inside McKinsey. This is Kara Scannell’s report from the FT:
Jonathan Streeter, a federal prosecutor, told the jury that they would hear a recording of a phone conversation Mr Rajaratnam had with his brother “talking about plotting to get inside information from a consultant at McKinsey”. He said Mr Rajaratnam tried to get the person, described by the hedge fund trader as “dirty”, to “play ball” by possibly placing the person’s wife on the Galleon payroll.