The first part of this article Rajat Gupta - Less equal than others, published on November 6, showed how Hank Paulson, the former US treasury secretary, and other luminaries of the US investment world got away, despite clear evidence that they disseminated insider information — the same crime for which Rajat Gupta was punished with a fine and prison sentence.
Let’s get to the other American idol: Steve Jobs. In his Second Coming, he got the Apple board to grant him options (nothing wrong with that). He, however, conspired with the board to backdate the options, by forging documents that showed the options had been granted much before they actually were (in order to make the options go back to being in-the-money). This is as clear a case of forgery and fraud as can be, and for this, Jobs should have been behind bars. But the US Securities and Exchange Commission (SEC) – after investigating the matter – said it was satisfied that Jobs did this unknowingly.
In the tech initial public offering (IPO) boom, Wall Street investment banks routinely gave away IPO allocations to favoured fund managers and corporate executives (in return for corporate finance businesses). All these banks were investigated, but surprise, surprise, no white-shoe gang was charged. The investigators picked on Credit Suisse, hardly a part of the Wall Street establishment, and put Frank Quattrone out of business on the “obstruction of justice” charge. But more importantly, what was conveniently brushed under the carpet was the fact that one of the biggest recipients of such “illegal” IPO allocations was none other than Michael Dell — an American idol. Everybody looked the other way, and the story died.
The American International Group (AIG) case was even more egregious. It was proven after investigation that AIG had manipulated its accounts for something like 20 years. Hank Greenberg, another American idol, presided over AIG during this entire period. So, what happened to him? Was he arrested for accounting fraud? Or, convicted? Not a chance. Criminal charges were dropped. He settled with SEC, and merely stepped down. That was it.
Let’s talk about hedge funds now. Almost all major hedge funds pay brokers for “catalyst”-driven trades. “Catalyst” is a euphemism for inside material and non-public information. And, the exemplar of this is Steve Cohen, the supremo of SAC Capital. SAC Capital has elevated “catalyst”-driven trading to an art form… it is open knowledge on the street that one of the best ways to get a trade from it (perhaps the only way) is to tell it about an impending upgrade or downgrade of a stock by your firm’s analyst. Trading on material, non-public information? You bet. Has SAC Capital ever been charged or prosecuted? Not a chance.
And, closer to present day, it never fails to amaze me how in the entire sub-prime scam (a true scam, if ever there was one), not even a single senior executive in any Wall Street bank has been held culpable, arrested, or convicted. Even civil proceedings have been non-existent. The white-shoe investment banks have got away once again (while flimsy cases against Mike Milken brought down the upstart Drexel Burnham Lambert). All cases against the Goldman Sachs, Morgan Stanley, Merrill Lynch cabal are always conveniently “settled”. None of credit rating agencies have been prosecuted for gross negligence or outright lies, but one Deven Sharma had to resign as chief of Standard & Poor’s because he dared question Uncle Sam’s pristine rating.
As it should be clear by now, America exemplifies crony capitalism, and protects its own. And, contrary to what Indians would like to believe, Rajat Gupta was hardly part of the “rich and powerful” set. In fact, he was really a nobody in the American context. Just another former CEO of a consulting firm. That’s hardly a ticket to stardom. He was an Indian idol, not an American one. In fact, that was precisely Gupta’s problem: that he didn’t belong to the echelons of the high and the mighty and desperately wanted to belong to that club (this is revealed in Raj Rajaratnam’s transcripts), for which he was currying favours for Rajaratnam, much like the young Bud Fox supplying the Blue Star Airlines tip to Gordon Gekko in Wall Street.
This brings me to the American criminal justice system. It is hardly a justice system at all. Given that nearly 90 per cent of cases never go to trial, having been plea-bargained and settled beforehand, the courts have largely become rubber stamps of settlements between parties. This rids a court of its primary purpose: the discovery of truth and the establishment of case law. And, of course, given that hearsay evidence is admissible in US courts, prosecutors and federal agents get a free run in threatening lower level employees to rat against their seniors, to win immunity. So, while it is illegal for a normal citizen to induce or bribe somebody to give false evidence, it is perfectly legal for the government to do so.
This apart, when the Feds can’t get you on the substantive charge, they always have the favoured fall-back option “obstruction of justice” or “false statement” charge. They got Quattrone on the first. They got Martha Stewart on the second (because Stewart told investors that she was confident no charge could be brought against her in the ImClone share sale case — this was taken by the prosecutors as an attempt to lie to and mislead the public. As it turned out, Stewart didn’t go to jail on the insider trading charge at all). If giving a better-than-real picture of a company’s health is a criminal offence, as was held in the case of Stewart, it puzzles me no end why none of the Wall Street bank CEOs are behind bars, for they constantly told the public every quarter during the sub-prime crisis that the “worst was behind them”, and that they expected no more write-downs. As the story goes, Stewart was not exactly buddy-buddy with the Bush administration…
Another interesting and unnoticed fact about the Gupta trial was that the judge prevented the defence from presenting voluminous evidence to prove his innocence, saying, “Keep this short… the jury doesn’t have that much time to go into all this pile of evidence.” Such a thing would be unthinkable in Indian courts, where even if a judge is biased against the defendant, he will give him any amount of time to mount a credible, comprehensive defence.
Let us disabuse ourselves of the notion that the West is all about rule of law. US laws protect the truly rich and powerful, (a few outliers like Enron and Worldcom have to be put away, just to keep the pretence alive… but so have we, like in the case of Satyam) and selectively target small fry like Gupta. It’s also convenient that these are Indians and South Asians. There is a pattern here (and I include Vikram Pandit in this pattern), and the truly perceptive will see what the pattern is.
The writer is Vice-Chairman and Joint Managing Director, First Global
*The first part can be read at (Rajat Gupta - Less equal than others)