McKinsey in uncomfortable Rajaratnam trial glare

Reuters

By Grant McCool and Dena Aubin

At least twice he called his hedge fund manager friend Raj Rajaratnam from a 27th floor McKinsey conference room, providing what prosecutors contend were leaks of boardroom secrets about Goldman Sachs Group Inc . Gupta, well-known in the business world after his 34 years at McKinsey, had won a seat on the board of the powerful investment bank in 2006.

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Barely a day has gone by at Rajaratnam's insider trading trial that Gupta and McKinsey have not been mentioned by prosecutors seeking to prove that the Galleon Group founder received leaks from well-connected friends.

The trial has punctured McKinsey's prized reputation for closely guarding client confidentiality. It has not been accused of wrongdoing, but civil charges against Gupta and the guilty plea of another former McKinsey executive to criminal charges have shaken one of the world's most prestigious firms.

The jury has seen Gupta's picture pinned to a display board in Manhattan federal court and heard his voice on an FBI wire tap of Rajaratnam's mobile phone. Gupta, accused by market regulators of giving Rajaratnam illicit stock tips, insists he did nothing wrong and will fight the charges.

"It's beyond shocking frankly, when you're talking about a guy like Rajat ... it's a little bit like finding out the pope was an abortionist on the side and had six wives," said a former McKinsey consultant who asked not to be identified because of legal sensitivities.

Just as shocking was the admission of Anil Kumar, 52, a former McKinsey consultant who had been influential in his own right at the firm. A star trial witness for the government, he testified that he violated client confidentiality, a cardinal sin at McKinsey. He faces prison time after leaking secrets about chipmaker Advanced Micro Devices .

"APPALLED AND DEEPLY DISMAYED"

The job of leading the 9,000 McKinsey consultants and thousands of other employees amid the massive trial publicity is held by global managing director Dominic Barton. Barton has tried to allay concern over the insider trading case, reaching out to clients and former McKinsey employees in conversations and alumni website postings.

The company has said it has launched a review of all of its confidentiality practices, ethics and firm values, according to former McKinsey consultants who are active in the company's alumni network.

"We remain appalled and deeply dismayed by the entanglement of former colleagues in the Galleon matter," a McKinsey spokesman said in a statement. "The types of behaviors disclosed in court are completely antithetical to our values, our policies and our culture."

McKinsey's clients have included Pepsi, the National Aeronautics and Space Administration, General Electric Co and General Motors. It advises some of the world's leading businesses, institutions and governments.

In interviews, several people knowledgeable about McKinsey said the firm's valuable brand might be tarnished by the Rajaratnam case, but that it would not be fatal.

This isn't the first time McKinsey has been linked to scandal.

SHIFT IN APPROACH

Like many at McKinsey, Gupta and Kumar are alumni of elite business schools. Gupta graduated from Harvard Business School; Kumar attended the University of Pennsylvania's Wharton school, where he met Sri Lankan-born Rajaratnam in the early 1980s.

It was Kumar, a technology specialist steeped in Silicon Valley, who helped McKinsey pioneer outsourcing of business in the 1990s, particularly to their native India.

Critics say that during this period the firm and other consultancies shifted from being general strategists to marketing specific industry expertise, using knowledge gained from one company to help competitors. McKinsey backers say it did not share specifics about any company.

Kumar, who spent more than 23 years climbing the firm's ranks, went so far as to invest in the technology-oriented Galleon hedge fund and personally traded in certain stocks.

The courtesies offered to Gupta at McKinsey when he retired were the same as those made to other former global managing directors at the end of their tenure.

At Rajaratnam's trial, prosecutors introduced McKinsey phone records showing that Gupta dialed into Goldman Sachs board meetings on September 23, 2008 and October 23, 2008 from a conference room phone at the consultancy.

Then, within seconds after the board meetings ended, Gupta was connected to Rajaratnam's phone via his McKinsey assistant, the records show.

"Our firm no longer has a professional relationship with Rajat Gupta," a McKinsey spokesman said in a statement.

(Reporting by Dena Aubin and Grant McCool, editing by Dave Zimmerman)