If you’ve been following the Raj Rajaratnam trial at all, you know there’s one firm besides Galleon that’s having its one-vaulted name dragged through the mud: McKinsey.The consulting behemoth was long thought of as the golden child of the business world; financial insiders think of it — or at least, thought of it — as a bastion of corporate morality and trust.
“McKinsey is the closest thing the business world has to a confessional,” a former managing director at Salomon Brothers and business school dean told Bloomberg.
A former Goldman Managing Director described McKinsey “as the psychiatrist-in-chief for corporate America.”
But the insider trading trial of Raj Rajaratnam continues to deliver blow after blow to McKinsey, because two of Raj’s alleged co-conspirators, were high-ranking McKinsey executives. Rajat Gupta ran the company, and his protege, Anil Kumar, was an executive consultant for years. Another McKinsey executive, David Palecek, who has since died, is also implicated in the case.
Both have been charged with insider trading, and Kumar has already plead guilty, and continues to testify for the government, unloading anecdote after anecdote of hushed conversations during which he passed tips to Raj about McKinsey’s clients like AMD; federal prosecutors play wiretap after wiretap that document Kumar and Gupta passing along material, non-public information to the Galleon chief, like Berkshire Hathway’s $5 billion investment in Goldman Sachs, in return for handsome monetary rewards.
One of the wiretaps that juror’s heard yesterday chronicles a conversation between Raj and Kumar from October 3rd, 2008. They talk about Palecek getting unnerved because he’s passed on tips about his McKinsey clients to Raj, and people are talking. It’s 7.25 am in the morning.
A minute later, Kumar calls Raj again. This time with news of layoffs at one of McKinsey’s clients.
AK: Her Raj, Anil.
RR: Hi, Anil.
AK: Ah Raj, eBay is gonna do massive layoff on Monday.
RR: They’re gonna do what?
AK: Layoffs on Monday.
The broadcasting of these wiretaps shows no sign of abating, and every single one seems more damaging than the next — perhaps because the pile of damning evidence in support of an ethics problem at the top echelon of McKinsey, just gets bigger and bigger with each one.
It was big news for McKinsey when Kumar was arrested. But when Gupta was charged by the SEC a few weeks ago, suddenly the name was tainted in a different way. Gupta was a Goldman Sachs board member and a 34-year veteran of McKinsey, who oversaw the consulting empire for almost 10 years as Global Managing Director.
Since McKinsey’s ‘the psychiatrist-in-chief for corporate America,’ if he’s found guilty of his alleged crimes, “it means you can trust no one” the former Goldman director explained. If McKinsey is “the closest thing the business world has to a confessional,” then Gupta “was the high priest,” according to the ex-Salomon employee.
That’s why we’re not surprised to hear that at a McKinsey partners meeting in Washington this week, there may be some hashing out of a response. A spokesperson for the firm told the WSJ that the Raj trial “is not a formal part of the agenda but, as is know, our firm is monitoring the matter and taking it seriously, as you would expect.”
Already, the firm has had internal reactions. It’s reviewing it ethic policies, and has established “a mandatory professional standards learning program” for employees, Fin Alternatives reported. The head of the firm, Dominic Barton, has reportedly reached out to former partners to outline “concrete reactions” and to say he was “saddened” by the details of Kumar and Gupta’s involvement, which he called “shocking and disappointing.”
People on Wall Street are smart; two bad hens don’t contaminate every egg in the coop. But it certainly looks bad.