Case study assignment -Galleon in CPA Australia Corporate governance case Studies Volume two page 138 in http://governanceforstakeholders.com/wp-content/uploads/2013/05/CPA-CG-Case-Studies-Vol2-0410.pdf.
CASE 1
His broad range of consulting experience make
Gupta be trusted as directors and board in several companies(Goldman Sachs,
Procter & Gamble, AMR Corporation, Genpact Limited and Harman International
Industries, Harvard Business School and the Gates Foundation, etc). Nothing
wrong with the multiple
directorship as
long as there is no conflict of interest that can harm the shareholder and
stakeholder. Here, I will comment whats wrong with this condition.
Firstly, I comment the regulation of public
listed companies in US whether they forbid such multiple ownership or not. In context of being director of
public company, there is strict regulation rom OECD (Organisation for
Economic Co-operation and Development) and SEC of US(U.S. Securities and Exchange Commission) that limit the directorship in
order to prevent the insider trading. In this case, Gupta fulfil the director
requirement for public listed company because he is only being director for 2
public company with different industry (Goldman Sach and P&G) at that time. However, SEC should think twice ‘is any case
of insider trading because of multiple ownership issue happened before?”. If
yes, it means they should do resolution in their act. Moreover, is there any special regulation related as chairman of
hedge fund management firms and leader of public company?. These two question is
so important to be analysied because it is public secret that Multiple Directorship is an opportunity to do insider trading.
Secondly,
the
most crucial point is the internal control of company and other boards. Do they have clear and strict system
that enforce the director to disclose the all companies and relatives? Or should they have system to detect all the
interest with the rationality ‘it is possible that the director do not disclose
all?’. If company has strong consciusness to
protect the shareholder, they can early detect the potency. Some company they
dont take care about it, they just care about how to gain profit for itself of
company. Moreover, the other board/director should have a sensitvity to their
partner action. In my view, it is vital for board of director to have sensitivity and
inkling about the other multiple ownership
Thirdly,
Consciousness of Gupta. With his longstanding experience as Board of
Governance, it is exactly
clear that he understand what its is accountability and integrity. With his
multiple position, if he has good intention, he will disclose. In addition,
Gupta should declare and show his objectivity when he was selected as director
of other companies. For example when Rajaratnam his best friend appointed him
as chairman of Galleon and kindly gave the ownership stake, doesnt mean he can
sell it with the trust of other companies and stakeholder. Gupta as
longstanding experience leader had to know and consider it. His ambisiuos and
greedy by accepting many benefit form Galleon is a proof of her diasbility to
embede the ethic knowledge and profesionality to his action.
Finally, this
such issue will always arise as long as no enforcement of regulation and ethical education and supporting environment because this illegal activity itself hard to be proven.
CASE 2
Based the assumption that the allegations
by the SEC are factually correct, the Gupta action is
really forbid his crucial role as director. He violate the Section 10(b) of
Securities Exchange Act of 1934 and Rule 10b-5[1] thereunder, and Section
17(a) of the Securities Act of 1993[2]. Securities Fraud and his duties to act in good faith and to act in the best interests of the corporation;
First, his action related to attend Goldman audit committee meeting
(through conference call) from interest party room (Galleon), and then always inform the board meeting
result to Rajaatnam, forbid
his duties to violate the conflict of
interest. Second,
several benefit that he got from Galleon funds (being Chairman, ownership
stake, etc) and replaced with the Goldman and P&G
secret mean he forbid his duties to not accept any benefit from third parties. Third, when he suggest Goldman sachs to buy the share.,he forbid the duties
to declare any interest in a proposed
transaction or agreement.
As director, Gupta has
fiduciary duites, which he is expected to be extremely loyal to the person to whom he owes the duty/principal such that there must be no
conflict of duty between fiduciary and principal, and the fiduciary must not
profit from his position as a fiduciary (unless the principal consents). In this case,
Gupta damage all crucial point
CASE 3
Most companies announced
voluntary resignation of Gupta, not
forced resignation. Several issue that arises is related voluntary and forced resignation.
First, should the director himself resign voluntary when he
face litigation or charge? I personally believe, a good leader should voluntarily resign although he
know the the allegation was not correct. It’s to ease the investigation process
and show his willingness to help the enforcement of regulation.
Second, should company ask the director to voluntary resign or
force it?. I argue, company should ask them
to resign whether voluntary or forcedly. It is a part to secure the stakeholder
interest and ease company to dig information about the case. But not every
director willingly resign. Therefore the board should consider adopting a "fitness to
serve" protocol, which will help to deal with cases when board's fiduciary credibility
is at stake. The board can require that the director agrees to step down at the
request of the governance committee. Such policies will help in case the
director is not willing to step aside on his/her own and they clarify the
rules.
Unfortunately, in this case, although in April 2010, The Wall Street Journal revealed
that Gupta was under federal scrutiny, no one company reacted. The resignation happened after US SEC in March 2011 filed the administrative complaint against
Gupta. Moreover, Genpact limited and Indian School Business still trust him. It
is rationale and nothing wrong because it was just limited company and non profit
organisation. The fact
of the insider trading will not influence their shareholder, but it still effect to reputation of
company.
CASE 4
Diiferent companies reactions to the SEC’s accusations towards Rajat Gupta should be questioned. Whether it is the
really in the best interest of shareholders or not? I highlight the
most different reactions from PG and Mc. Kinsey.
First PG Reaction to announce the voluntary
resign but not disclose the SEC accusation is not based
the interest of shareholder .There is possibility it to protect the trust from shareholder because it is so sensitive issue and can
influence the company. For several case, it is so rational to not disclose sensitive
information to shareholder/public in order to internally solve the case first. If there is something wrong,
company should do due diligence and reactively act to reduce the effect. After
company could solve the problem and the condition come back normal, they could disclose the fact and any prevention
and action they have done, so shareholder can trust them. Although
theoretically, Public companies should be more open and honest with investors
and shareholders by providing full disclosures.
Board
responsibilities: Board members should act on a fully informed basis, in
good faith, with due diligence and care, and in the best interest of the company and the shareholders
(OECD, 20004)
However , they
should be smart to understand when the best time. It is totally not right to hide that information,
but it is not wrong
to postpone until find the best time as long as it will not harm the interest of
stakeholder. However,
P&G Board of Directors’ reason
that not to reveal it to shareholders because of not material one should be
questioned. Such
information is crystal clear ‘material’ but there should be announced in the
right time and right place.
Secondly, McKinsey Company published
an official statement that end of professional relationship with Rajat Gupta. As
a
consulting firm it so
crucial to announce such information to protect their reputation.
CASE 5
Raja gupta case insider
trading is so possible happend in other country include my county in Indonesia. Although no
one case has existed since 1995 regulation. In Indonesia, Inside trading forbid
Capital Market Act
No.8 years 1995;
and Corporate Governance 2003.The actor would be punished for 10 years and pay compensation
or administrative charge (penalty Rp 10 M) which is so low sanction.
CONCLUSION: AN OPINION
After doing elaboration and several justification for above cases, I
conclude that environment that provide Ethical Regulation and Ethical
Education from its surrounding is clue to solve that rootcause. Insider Trading
issue will always arise as long as no enforcement of
regulation related corporate governance; no ethical education and no supporting
environment because this illegal activity itself hard to
be proven. Gupta story learn us that knowledge, profesionality and integrity that
he show in business life, not necessay mean that such person has ethic. Ethic
is not ‘a school subject’, but it is something that influenced by his
surrounding environment and then the value become his way of thinking and doing
right/wrong.
REFERENCES
https://www.sec.gov/about/laws/sa33.pdf
OECD Corporate Governance Standard
Appendix 1
Securities Exchange
Act of 1934
Section
10 Manipulative and Deceptive Devices
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of interstate commerce
or of the mails, or of any facility of any national securities exchange--
- To effect a short sale, or to use or
employ any stop-loss order in connection with the purchase or sale, of
any security registered on a national securities exchange, in
contravention of such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public interest or for the
protection of investors.
- Paragraph (1) of this subsection
shall not apply to security futures products.
- To use or employ, in connection with
the purchase or sale of any security registered on a national securities
exchange or any security not so registered, or any securities-based swap
agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative
or deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe as necessary or appropriate in
the public interest or for the protection of investors.
Rules and
Regulations promulgated
under the Securities Exchange Act of 1934
Rule
10b-5 Employment of Manipulative &
Deceptive Devices
It shall be
unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility of
any national securities exchange,
a.
To employ any device, scheme, or artifice to defraud,
b.
To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not misleading,
or
c.
To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any person,
in
connection with the purchase or sale of any security.
Rule
10b5-1 Trading "on the Basis
of" Material Nonpublic Information in Insider Trading Cases
Preliminary
Note to Rule 10b5-1:
This provision defines when a purchase or sale constitutes trading "on the
basis of" material nonpublic information in insider trading cases brought
under Section 10(b)
of the Act and Rule 10b-5 thereunder. The law of insider trading is otherwise
defined by judicial opinions construing Rule 10b-5 . . .
a.
General. The "manipulative and deceptive devices" prohibited by
Section 10(b) of the Act and Rule 10b-5 thereunder include, among other things,
the purchase or sale of a security of any issuer, on the basis of material nonpublic
information about that security or issuer, in breach of a duty of trust or
confidence that is owed directly, indirectly, or derivatively, to the issuer of
that security or the shareholders of that issuer, or to any other person who is
the source of the material nonpublic information.
b.
Definition of "on the basis of." Subject to the affirmative defenses in
paragraph (c) of this section, a purchase or sale of a security of an issuer is
"on the basis of" material nonpublic information about that security
or issuer if the person making the purchase or sale was aware of the material
nonpublic information when the person made the purchase or sale.
c.
Affirmative defenses.
i.
Subject to paragraph (c)(1)(ii) of this section, a
person's purchase or sale is not "on the basis of" material nonpublic
information if the person making the purchase or sale demonstrates that:
2.
Instructed another person to purchase or sell the
security for the instructing person's account, or
1.
Specified the amount of securities to be purchased or
sold and the price at which and the date on which the securities were to be
purchased or sold;
2.
Included a written formula or algorithm, or computer
program, for determining the amount of securities to be purchased or sold and
the price at which and the date on which the securities were to be purchased or
sold; or
3.
Did not permit the person to exercise any subsequent
influence over how, when, or whether to effect purchases or sales; provided, in
addition, that any other person who, pursuant to the contract, instruction, or
plan, did exercise such influence must not have been aware of the material
nonpublic information when doing so; and
Appendix 2
Section 17(a) of the Securities Act of 1993.
FRAUDULENT
INTERSTATE TRANSACTIONS
SEC. 17. (a) It
shall be unlawful for any person in the offer or sale of any securities
(including security-based swaps) or any security-based swap agreement (as
defined in section 3(a)(78) of the Securities Exchange Act) by the use of any
means or instruments of
transportation or
communication in interstate commerce or by use of the mails, directly or
indirectly—
(1) to employ any
device, scheme, or artifice to defraud, or
(2) to obtain money
or property by means of any untrue statement of a material fact or any omission
to state a material fact necessary in order to make the statements made, in
light
of the
circumstances under which they were made, not misleading; or
(3) to engage in
any transaction, practice, or course of business which operates or would
operate as a fraud or deceit upon the purchaser.
(b) It shall be
unlawful for any person, by the use of any means or instruments of
transportation or communication in interstate commerce or by the use of the
mails, to publish, give publicity to, or circulate any notice, circular,
advertisement, newspaper, article,
letter, investment
service, or communication which, though not purporting to offer a security for
sale, describes such security for a consideration received or to be received,
directly or indirectly, from an issuer, underwriter, or dealer, without fully
disclosing the receipt, whether past or prospective, of such consideration and
the amount thereof.
(c) The exemptions provided
in section 3 shall not apply to the provisions of this section.
(d) The authority
of the Commission under this section with respect to security-based swap
agreements (as defined in section 3(a)(78) of the Securities Exchange Act of
1934) shall be subject to the restrictions and limitations of section 2A(b) of
this title.
(May 27, 1933, ch.
38, title I, Sec. 17, 48 Stat. 84; Aug. 10, 1954, ch. 667, title I, Sec. 10, 68
Stat. 686; Pub. L. 106-554, Sec. 1(a)(5) [title III, Sec. 302(b), (c)], Dec.
21, 2000, 114 Stat. 2763, 2763A-452;Pub. L. 111-203, title VII, Sec. 762(c)(2),
July 21, 2010, 124 Stat. 1759.)
REFERENCES IN TEXT
The Securities
Exchange Act of 1934, referred to in text, is act June 6, 1934, ch. 404, 48
Stat. 881, as amended, which is classified generally to this chapter (Sec. 78a
et seq.).
57 SECURITIES ACT
OF 1933 Sec. 18
AMENDMENTS
2010 — Subsec. (a).
Pub. L. 111-203, Sec. 762(c)(2)(A), inserted ‘‘(including security-based
swaps)’’ after ‘‘securities’’ and substituted ‘‘(as defined in section 3(a)(78)
of the Securities Exchange Act)’’ for ‘‘(as defined in section 206B of the
GrammLeach-Bliley
Act)’’. Subsec.
(d). Pub. L. 111-203, Sec. 762(c)(2)(B), substituted ‘‘3(a)(78) of the
Securities Exchange Act’’ for ‘‘206B of the Gramm-Leach-Bliley Act’’ 2000 —
Subsec. (a). Pub. L. 106-554, Sec. 1(a)(5) [title III, Sec. 302(b)], amended
subsec. (a) generally. Prior to amendment, subsec. (a) read as follows: ‘‘It
shall be unlawful for any person in the offer or sale of any securities by the
use of any means or instruments of transportation or communication in
interstate commerce or by the use of the mails, directly or indirectly
‘‘(1) to employ any
device, scheme, or artifice to defraud, or
‘(2) to obtain
money or property by means of any untrue statement of a material fact or any
omission to state a material fact necessary in order to make the statements
made, in the
light of the
circumstances under which they were made, no misleading, or ‘‘(3) to engage in
any transaction, practice, or course of business which operates or would
operate as a fraud
or deceit upon the
purchaser.’’
Subsec. (d). Pub.
L. 106-554, Sec. 1(a)(5) [title III, Sec 302(c)], added subsec. (d).
1954 — Subsec. (a).
Act Aug. 10, 1954, inserted ‘‘offer or’ before ‘‘sale’’ in introductory text.
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