Why Rajat Gupta goes to prison, but not Steve Jobs or Hank Paulson

The conviction and sentencing of Rajat Gupta , former boss of McKinsey, on charges of securities fraud and insider caused much favourable comment in India-thanks largely to our well-established inability (or is it refusal?) to nail our own law-breakers and send them to prison.

However, Shankar Sharma, Vice-Chairman and Joint Managing Director of First Global Securities, offers a useful corrective to the rose-tinted view in India about the “speed” and “fairness” of the US justice system in two hard-hitting articles in Business Standard (Read here and here). He gives several examples of how the rich and mighty were treated with kid gloves.

[caption id=“attachment_518151” align=“alignleft” width=“380”]  Hank Paulson got off without even an investigation. AP[/caption]

Among them: Warren Buffett’s No2 man David Sokol, Steve Jobs, Michael Dell, Hank Paulson, and Hank Greenberg.

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In the first part, Sharma shows how Hank Paulson, Treasury Secretary under George W Bush at the time of the Lehman crash, had told a bunch of hedge fund managers on 21 July 2008 that he was going to seize Fannie Mae and Freddie Mac, two government-sponsored mortgage institutions, so that these two tottering entities could be kept going even while wiping out the equity holders.

Paulson’s disclosure would have sent this message clearly: it is time to short the stocks of these companies. Whoever did that would have made a killing when Paulson made good on that promise.

In short, Paulson gave them non-public insider information they could have profited from-the same way Rajat Gupta gave insider information on Goldman Sachs board meetings to Raj Rajaratnam. But Paulson got off without even an investigation.

Then there’s Warren Buffett, that iconic billionaire investor. David Sokol, his expected successor at that time, bought shares in a company called Lubrizol even while trying to convince Buffett to buy the stock. But Sokol (apparently) told Buffett about his purchases only after Buffett did the deal.

When the stuff hit the fan, Sokol resigned and Buffett himself was not called to account. Why did Buffett, who likes to talk on good governance and philanthropy, not bring this to the notice of the Securities and Exchange Commission (SEC), when Sokol was probably trading on non-public information?

Next, let’s look at Steve Jobs. When he returned to Apple, the company’s board gave him stock options-but, surprisingly, the options were back-dated. Sharma says this was done through forgery and fraud, but guess what the SEC said after its investigations: Jobs may have done this unknowingly!

As for Michael Dell, he too received “illegal” IPO allocations from Wall Street investments banks-obviously in lieu of future business possibilities. Many others were rapped on the knuckles for receiving similar favours, but not Dell.

The fifth case relates to AIG-the insurance company run by another corporate idol, Hank Greenberg, for over 20 years. An investigation showed that the accounts had been manipulated, but he was allowed to “settle” with the SEC and no criminal action was brought against him.

The last major case Sharma mentions is that of Steve Cohen’s SAC capital-which routinely traded on “catalyst”-driven stocks, a form of insider information based on early tipoffs about potential stock ugrades or downgrades. But SAC has never been charged or prosecuted, he says.

Sharma’s dismal conclusion: “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 (Rajat) 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.”

A truly great read. (Read here and here)