Probing the why of Wall Street insider trading

Rajat Gupta was once worth $100 million US, a budding philanthropist and a respected member of the South Asian community. Now, he's a felon, convicted of selling insider trading secrets to Galleon hedge fund founder Raj Rajaratnam.

Journalist and London bureau chief for Forbes Anita Raghavan wanted to know why such a rich and respected man became part of the scheme, which involved insider trading on Goldman Sachs stock, a company where he was a director.

The result is The Billionaire’s Apprentice, which looks at how the best and brightest of the South Asian business community were drawn into corrupt practices on Wall Street.

Gupta to pay $13.9M US

Just a week ago, Gupta was ordered by a U.S. judge to pay a hefty $13.9 million US civil penalty and permanently barred from acting as an officer or director of a public company.

Yet Gupta had been a groundbreaker for South Asians in American business, rising to become head of McKinsey & Co. and credited with a huge turnaround at the marketing firm.

Though his personal fortune was $100 million, Gupta then began to move in philanthropic circles with the likes of Henry Kravis and Bill Gates, and suddenly did not feel he was influential enough, Raghavan told CBC News.

"Wealth, particularly enormous wealth, is increasingly encoded with power in our world and Rajat Gupta, after stepping down from the helm of McKinsey in 2003, felt a profound loss of power. And I think he teamed up with Raj Rajaratnam to try and address that problem,"  she said.

Sri Lankan-born Rajaratnam was the billionaire founder of the Galleon Group hedge fund, but he felt he was losing his edge in an environment where rules against insider trading were getting tighter. He recruited Gupta to give him boardroom tips about Goldman Sachs, including Warren Buffett’s $5-billion investment in the bank during the financial crisis.

"Rajaratnam was clever at inducing information out of all his informants and he particularly played Gupta," she said.

Loss of power

"He sensed that Gupta felt this loss of power when he stepped down from McKinsey and he also picked up on the fact that Gupta was looking for a way to reinvent himself and offered himself as the solution to Gupta’s problem."

Galleon collapsed after Rajaratnam was arrested on insider trading charges in 2009. Authorities had used wiretaps in the investigation. He is now serving an 11-year sentence.

Ironically, it was New York state attorney Preet Bharara, the son of Indian immigrants, who led the prosecution against Wall Street insider trading.

In The Billionaire’s Apprentice, Raghavan tries to puzzle out why such wealthy and powerful people think they can get away with insider trading.

Sense of impunity

"I think they convince themselves it is OK. They tell themselves that everybody on wall street is doing it," she said.

But she says healthy markets rely on wiping out such corruption.

"If retail investors feel that one player has an advantage over another, then they are less eager to participate in the market,"  she said. "It’s important because the greater transparency you have, the greater sense of fairness you have in markets, the greater participation you have."