McKinsey shocked by insider-trading allegations

NEW YORK (Reuters) - McKinsey & Co, long known for a button-down culture and priding itself on playing by the rules, is not looking so squeaky clean any more.

The management consulting firm’s strict standards and law-abiding ethos have been called into question after a director was charged with taking part in the largest hedge-fund insider-trading scheme ever.

Sources within and without the company said they were shocked and appalled to think such a thing could happen there.

Anil Kumar has been placed on indefinite leave after he was charged along with the founder of hedge fund Galleon Group, Raj Rajaratnam, and four others in a scheme that prosecutors say generated profits of more than $20 million over several years.

McKinsey declined to comment aside from a statement saying it was “distressed” by the arrest of Kumar, 51, a California-based director.

McKinsey has strict standards barring its consultants from trading stocks or funds that relate to the companies they are advising, a source close to the company said. The company’s partners sign off each year on the policies.

Still, Kumar is accused of providing information about Advanced Micro Devices, a company he advised, to Rajaratnam. At the same time, Kumar owned a stake in certain Galleon funds.

“I have the information you wanted,” Kumar said in a voicemail message for Rajaratnam on September 29, 2008, according to prosecutors.

Kumar was a friend of Rajaratnam, both having attended the Wharton School of the University of Pennsylvania. Kumar also served on the executive board of the Indian School of Business.

The source close to McKinsey said the firm has not formally reminded employees of their obligations in light of the charges against Kumar. The allegations, if true, represent an isolated incident, the source said.


But others suggested that the line at times might have been blurred.

In 1999, Kumar told the New York Times that McKinsey was aggressively recruiting college graduates by offering them new investment options, including getting a stake in a pool of McKinsey clients that gave the firm equity instead of cash for their consulting services.

Lawrence White, a professor at the New York University’s Stern School of Business, said those kinds of policies might have been the beginning of a “slippery slope.”

“It is like saying it is OK to take advantage of information you are learning,” said White, a former regulator. “It may have been too short from there to unacceptable insider tipping and investing.”

Former employees who left within the past year and others familiar with the company’s thinking said they were in disbelief that a company so concerned with walking the straight and narrow could find itself immersed in such a scandal.

The company was especially tight-lipped when it came to the names of its clients, one former employee said.

“We would never say Company X is doing this,” the former employee said. “We would use code names.”

Boasting a culture that recruits the brightest and best, McKinsey has produced many of the biggest names in industry -- including incoming Morgan Stanley CEO James Gorman, former International Business Machines Corp CEO Louis Gerstner and Harvey Golub, the former CEO of American Express.

But the business of consulting has sometimes been portrayed as having a sinister underbelly, and not even McKinsey has always been immune from that kind of accusation.

Its name surfaced during the probes into Enron Corp earlier this decade. Newspaper reports said McKinsey was integral in Enron’s so-called “asset-lite” strategy” that allowed it to become such a large company when it had only a limited amount of hard assets.

And former Enron chief executive Jeffrey Skilling, who was sentenced to prison for his role in the scandal that brought down the energy company in 2001, started his career at McKinsey, after graduating from Harvard Business School.

Editing by Gary Hill