McKinsey & Company - Galleon Insider Trading Scandal

Galleon Insider Trading Scandal

McKinsey senior executives Rajat Gupta and Anil Kumar were among others convicted in an ongoing government investigation into insider trading for sharing inside information with Galleon Group hedge fund owner Raj Rajaratnam. Gupta and Kumar were close friends of each other and of Rajaratnam, as well as the co-founders of the Indian School of Business and (with Rajaratnam) of New Silk Route. Though McKinsey was not accused of any wrongdoing, the convictions were embarrassing for the firm, for which integrity and protecting client confidentiality is a major premise of its business. Following the initial allegations McKinsey no longer maintains a relationship with either senior partner, though the manner in which it severed ties attracted controversy.

Senior partner Anil Kumar, described as Gupta's protégé, left the firm after the allegations in 2009 and pleaded guilty in January 2010. While he and other partners had been pitching McKinsey's consulting services to the Galleon Group, Kumar and Rajaratnam reached a private consulting agreement violating McKinsey's policies on confidentiality.

During Raj Rajaratnam's trial, a wiretap recording showed Rajaratnam and his brother had also contacted McKinsey junior partner and Kumar protégé David Palecek (now deceased), saying he was "a little dirty." Palecek's widow claimed he was approached but refused to be a part of the incident.

Former managing director (CEO) Rajat Gupta was convicted in June 2012 of four counts of conspiracy and securities fraud, and acquitted on two counts, resulting from his board memberships at Goldman Sachs and Procter & Gamble while a senior partner emeritus of McKinsey. In October 2011, he was arrested by the FBI on criminal charges of sharing insider information from these confidential board meetings with Rajaratnam. Among other crimes, Gupta was convicted of passing information to Rajaratnam within 4 minutes of the completion of a special Goldman Sachs board meeting to approve a capital injection by Warren Buffett during the height of the financial crisis in 2008. He stood to profit as the chairman of Galleon International and as the chairman of New Silk Route. At least twice, Gupta used a McKinsey phone to call Rajaratnam and retained other perks — an office, assistant, and $6 million retirement salary that year — as a senior partner emeritus.

After the scandal McKinsey performed an independent review of its policies and procedures, including investigating other partners' ties to Gupta. There is no evidence of any damage to McKinsey's brand, though the firm has came under controversy for having former leading senior partners (Gupta and Kumar) as well as a junior partner (Palecek) all implicated with the Galleon Group and insider trading. The firm's revenues grew 10% during the same period, though its long term impact remains unknown.