Third McKinsey consultant in insider trading scandal

by Vault Consulting Editors | March 10, 2011

  • My Vault

The sterling reputation of McKinsey & Company was dealt another cruel blow today as federal prosecutors in the Raj Rajaratnam insider trading case indicated that another McKinsey consultant was directly involved in the events surrounding the scandal. Prosecutors revealed the existence of recorded telephone conversations between Galleon Group's Rajaratnam and his brother, in which the pair discussed their hopes that a so-called "dirty" consultant at McKinsey would pass privileged information on to contacts at Galleon. In order to get the unnamed McKinsey mole to "play ball", the Financial Times reports, the brothers schemed to "place the person's wife on the Galleon payroll."

From a legal perspective this evidence will only hurt Rajaratnam (for now), but it’s a revelation that will have McKinsey execs scrambling to uncover just how deep the firm's participation in the Galleon fraud goes. McKinsey is quickly losing the ability to portray Rajat Gupta, its former managing director of ten years, as a lone agent of corruption. Another senior McKinsey consultant, Anil Kumar, has already pleaded guilty to Galleon-related transgressions; the addition of a third McKinsey-ite—called "dirty", no less—to the growing list of unofficial defendants will only serve to exaggerate the perception of widespread crookedness at the world's most prestigious consultancy.

Even before today's third man revelation, a Financial Times columnist reasserted the notion that McKinsey's involvement in the scandal could amount to a devastating body blow. Columnist John Gapper argued in yesterday's article that the firm "should be frightened, because the scandal goes to the heart of McKinsey's business model." Worse than previous disgraces like the collapse of Enron, for which McKinsey's "simple incompetence" was to blame, Gapper worries that the firm will now have to overcome "accusations of being untrustworthy"—a new hurdle for a firm the author calls "a serious, even dour, organization with a pronounced sense of mission."

In light of this third man revelation, Gapper's closing statement should send waves of anxiety through the McKinsey ranks. Regarding the perception of widespread corruption at the firm, Gapper writes: "it cannot afford the notion to spread that its clients’ information is not only used to amass a 'knowledge base' that is sold to others in a sanitized form, but may also be exploited for personal gain. McKinsey must devoutly hope that there is no third man."

Now, no amount of hope—no matter how devout—can alter the harsh reality of the day: there is, in fact, a third man.

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