I've been getting a lot of calls about the recent decision by the SEC to pursue insider trading charges against Rajat Gupta, a Goldman Sachs board member who was also the former head of McKinsey, one of the most important corporate consulting firms in the world.
It's been very interesting to watch the media reaction to this case. The spin, overwhelmingly, has been that this is proof that the SEC is more serious than ever. Business Week came out with an article whose headline blared, "The SEC Goes After Big Game." CNBC's take was "Rajat Gupta: Bigger than Madoff?" I'm sure by the time this news cycle ends, Rajat Gupta will be the single most important figure in the history of Wall Street.
There's no doubt that Gupta is a big fish and this is a good case. The evidence is remarkable and is eerily similar to the non-case that was non-made against Morgan Stanley chairman John Mack years ago. In that case, a hedgie named Art Samberg bought the hell out of a company called Heller Capital shortly after a call from Mack, who had just had a meeting with CSFB, Heller's investment banker, which was in a position to know that Heller was about the bought by GE.
In this case, Gupta, among other things, telephoned his buddy Raj Rajaratnam less than one minute -- literally -- after learning in a Goldman board meeting that Goldman was about to receive a $5 billion capital injection from Warren Buffet's Berkshire-Hathaway company in 2008. In September 2008, Gupta disconnected from a Board conference call, in which he learned about the Buffet deal, at 3:56 p.m. By 3:57, he was on the phone with Rajaratnam, who in turn waited less than a minute to buy 175,000 additional shares in Goldman.
It's great that the SEC is moving against a figure like Gupta. But I'll be a little disappointed if he's the top of the food chain here. If the Gupta/Hathaway case is the only one they make with regard to the rampant insider trading that went on during that critical bailout period, it won't be enough, unfortunately. How many of the executives and officials involved with the various rescues and bailouts made investment decisions based upon information they got during those negotiations?
My sense of what happened in 2008-2009 -- and many of the Wall Street people I talk to regularly say the same thing -- is that all the big banks were trading massively on inside information about bailouts, interest rate changes, and announcements about government programs like the PPIP and the TALF. In a way, the whole rearranging of the economy behind closed doors -- the backroom deals in which companies like Merrill and AIG and Bear and Washington Mutual and so on were wedded to buyers in taxpayer-aided shotgun weddings -- this was all one giant insider trade. Clearly there were individuals who knew about these deals and acted on them before the rest of the world's investors did. If you look at it like that, one lonely Rajat Gupta isn't going to cut it, I don't think.