The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (10 page)

Rajaratnam was excited about the new fund, but not everyone at Needham shared his enthusiasm. A number of executives started fielding complaints from brokerage clients who were worried about the many hats Rajaratnam now wore: he was president of the company, he was a banker, and he managed money for the very same executives whose companies he covered as a banker. The risks were obvious. Rajaratnam was in a position to get information from his banking clients that he could then use to trade on for his hedge fund. To avoid any impropriety of this kind, it is common at investment banks for there to be a Chinese wall separating investment banking from trading; this forbids bankers who are advising companies on deals from discussing the transactions with colleagues on the trading floor.

Between 1993 and 1996, at least five Needham executives told George Needham that they were concerned about Rajaratnam’s business practices. In November 1996, amid growing tensions between Rajaratnam and the firm he helped build, George Needham told employees, “I greatly regret that Raj Rajaratnam, my friend and partner,” was quitting the firm.

Soon after Rajaratnam left, Theodore O’Neill, a semiconductor analyst, moved into Rajaratnam’s old office. Along one wall, he found row after row of spiral-bound logs of inbound calls from tech executives all over Silicon Valley.

How do I get these guys to call me?
O’Neill thought.

After arriving at McKinsey’s offices in September 1973, Gupta by his own account struggled. He was assigned to share an office with Karl Wyss, who came to McKinsey with experience in the corporate world and an impressive résumé. The two could not have been more mismatched. Gupta was young and callow. Wyss was mature and wise to the ways of business. Gupta came to McKinsey fresh out of business school. By contrast, his office mate was a ten-year veteran of the computer giant IBM with the experience of managing two thousand people before becoming a consultant. Wyss advanced very rapidly. Within nine months, he started managing projects and was handed numerous responsibilities.

Gupta, meanwhile, was on a slow learning curve, simply treading water. At a company like McKinsey, which evaluates its consultants almost as rigorously as it does the companies it counsels, Gupta was constantly reminded of his shortcomings. In reviews, he was upbraided for being too quiet in team meetings, the routine gatherings of a group of consultants working on a specific project. Always the academic all-star, Gupta found the transition from carefully prepared written responses to off-the-top-of-the-head verbal statements difficult.

“I was sitting there and wondering,
Am I in the wrong place, am I really falling way behind?
” said Gupta years later. “I was very late in almost everything I did.” Unlike his office mate Wyss, Gupta took four years of incremental progress before he managed his first project.

Whatever Gupta’s own insecurities about his early time at McKinsey were, they slipped past his office mate, Wyss. “Rajat did not seem overwhelmed at all,” says Wyss. Often, when he finished his work, Gupta would pack up and head home at 2:30 in the afternoon to be with his family. “He was his own man,” says Wyss. “You could tell if someone asked him to do something he didn’t want to do, he knew how to say no.”

In the two years that Wyss and Gupta shared an office, Wyss remembers Gupta as being “very private,” rarely divulging much over their morning coffee. Gupta never mentioned the death of his parents even though it would have been fresh in his mind. Then and to this day, “he is a hard guy to pull out,” says Wyss. Though he left McKinsey before Gupta’s real rise at the firm began, he saw in Gupta a quality that would help him climb in later years. “He was not a partner who made enemies,” says Wyss. “He was a partner who tried to build bridges. If you know McKinsey from the inside, becoming managing director is a highly political process. Rajat was a good politician.”

In his early years, while Gupta got solid reviews for his analysis of consulting problems, he was so quiet that he didn’t stand out or make a serious impression. Tom Peters and Robert H. Waterman Jr. thought of Rajat as a “sweet little kid,” recalls Waterman, the coauthor with Peters of the best-selling management bible
In Search of Excellence
. Waterman first encountered Gupta in the late seventies when Gupta attended one of the training sessions for the Excellence Project. “Rajat didn’t strike me as more ambitious than any other McKinseyite,” Waterman recalls. In fact, Waterman saw Gupta as “possibly less” ambitious because he was a “little bit shy and quiet at the time.” His work, though, was fine—so quietly exceptional that his contributions earned him a spot as an “Excellence” trainer.

Gupta did not know it at the time, but he joined McKinsey during one of the most perilous periods in its history. “The 70s was a lost decade for McKinsey,” says Jeffrey Skilling, who started at McKinsey in 1979 when it was emerging from its dark days. “After growing at breakneck speed through the 50s and 60s, the firm hit the skids in the 70s. The ‘big ideas’ of the 50s and 60s, divisionalization, product management and quantitative decision-making (the ‘McNamara-like’ whiz-kid thinking), had clearly run out of steam by the early 70s. The onslaught of Japanese competition in the 70s in some ways repudiated the American management model that was McKinsey’s stock in trade. Probably even more threatening was the rise of BCG [the Boston Consulting Group] and its offshoot Bain.”

The challenge McKinsey faced was that even as the market for the firm’s product grew more saturated, “the new markets were blocked by the new guys [BCG and Bain],” Skilling recalled in a series of emails from federal prison in Englewood, Colorado. (He is serving a twenty-four-year sentence for his role in the collapse of energy giant Enron, a McKinsey client.) “Staff levels and number of offices actually DECLINED in the early 70’s.” Compared to fast-growing BCG and Bain, McKinsey was unattractive to new recruits. With little corporate growth, the chance for an associate to be elected into the partnership diminished dramatically.

Accustomed to the chaos and scarcity of India, Gupta was little bothered by the problems facing McKinsey. He was more excited by the array of new opportunities the firm offered its associates. Soon after joining the firm, Gupta met with Bud Miles, a Yale graduate and a McKinsey institution. Miles was the “staffing coordinator,” who matched McKinsey consultants and their interests with the assignments that were flowing into the firm. Visiting Miles was like going to the candy store—there were all kinds of candies to be had, complex consulting jobs for some of the biggest companies in the world and small assignments that specialized in a certain arcane area, such as operations.

“You got this feeling that the world was there for you to pick and choose what you wanted to do,” said Gupta years later. Most young consultants tried to latch on to important assignments for well-known companies that promised to burnish their careers. When Gupta met with Miles, Miles offered him about half a dozen assignments and gave him a few days to decide which ones he wanted to pursue. Gupta wasted no time in performing his due diligence. He talked to the partners responsible for some of the assignments in the hope of learning a little bit more. He tried to handicap which ones would be good for him and his career, and he tried to figure out what kind of experience he would get from working on each.

One day while he was mulling it all and pacing along the corridor deep in thought, a partner called him into his office. Gupta was toying with signing up for a study that the partner was about to launch. But it was clear to the seasoned partner that Gupta was swamped by the choices before him and could not decide which to pursue. He gave him some advice.

“You should just not worry about what is going to be good because you will never be able to tell,” the partner told him. “I have been in consulting a long time, and whenever I try to figure out what is good for me, it always turns out differently.” Projects you expect to learn the most from, the partner explained, often turn out to be disappointing, and assignments that have seemingly little promise can often turn out to be invaluable, offering a consultant a new insight or expertise. The important thing is to have “a learning mind-set” so that you learn from anything you do and everything you do, the partner advised.

The insight resonated with Gupta, a man who grew up in a land where deferring gratification was a way of life. While others jockeyed to get on teams that worked on what seemed like the most promising consulting projects, Gupta took a Zen-like approach to getting new assignments. Whenever he visited Miles, he would say, “Bud, I don’t want to know what’s available. Just tell me what I should do and that’s fine with me.”

One of the first big clients he worked for was the phone giant AT&T Corp., a relationship McKinsey owned because of a formidable consultant, Frederick W. Gluck. An electrical engineer by training, Gluck arrived at the firm in 1967 after a stint at Bell Labs, where he was program manager for the Spartan missile.

It was an era before people owned their phones. Rather, customers picked phones of their choice out of a catalog and paid AT&T a monthly fee to rent them. A persistent problem came with that system: disappearing phones. When people moved, they took the phones that AT&T provided. In one of its less glamorous assignments for AT&T, McKinsey was hired to figure out how to prevent AT&T from losing so many phones to its customers.

Gupta dived into the project, going on field visits with low-level AT&T employees to get a grasp of the issues. During one visit, Gupta got stuck with more than he gambled for. When he removed a phone from the wall, a swarm of cockroaches crawled out. “The whole place moved,” says Chatterjee, Gupta’s IIT friend and McKinsey colleague. The consulting firm’s prescription was classic McKinsey: AT&T had defined the problem incorrectly. In many cases, it was spending more money to recover the phones than they were worth.

Despite its genteel bearing and ivory tower reputation, McKinsey is a notoriously competitive place. Gupta was keenly aware of its legendary “up or out” employment philosophy—either you moved up in the organization or you were asked to leave. Though McKinsey partners loathe describing the underpinnings of the company’s philosophy this way, “up or out” is an intrinsic part of the firm’s business model, a key ingredient to the profitability of the partnership. It allows the firm to stick to the bedrock of keeping the pay of its directors, or senior partners, as steady as its principles.

Every six months during Gupta’s early years at McKinsey, a body called the Principal Candidate Evaluation Committee met to elect new partners. On average, it took about six years in the seventies for associates to make it to principal, the term McKinsey gives its junior partners. Some stars made it to principal far earlier; in the case of former head of McKinsey Germany Herbert Henzler, in just four and a half years.

As with almost everything in his early days at McKinsey, Gupta was characteristically late in being named a principal. Every time the partner elections took place, Gupta’s friends would ask, “Oh, what happened? You didn’t get elected.” Gupta would try to shrug it off, saying, “I don’t know.” He watched as others in his class made principal before he did. It was a nerve-racking time, though Gupta didn’t let on to anyone. In January 1980, after almost seven years at the firm, he was elected a junior partner.

Even as Gupta struggled to find his footing at work in the 1970s, home provided comfort. Gupta and Anita married in New Delhi in the summer of 1973. The newly wedded couple rented a studio apartment near Columbia University, where Anita had been accepted to study for her PhD. Gupta’s annual salary of $25,000 was generous, but household finances were still tight. Like many immigrants from India at the time, Gupta scrimped and saved so that he could help support his brother and sister back home. He bought $2 shirts at Filene’s Basement; he had only two, one to wash and one to iron for the next day. Within a year, he’d sent enough money to his siblings so they could build their own house.

Still, Rajat and Anita’s first few years in Manhattan were among their happiest. Their apartment, while small, was perfect for the young couple to get to know each other. On weekends, the two took to the streets of New York, exploring the city together for the first time. Friends from India, who had also come to the United States to study, often visited on weekends, cramming into the Guptas’ spartan accommodations. “I spent my first night in the US in that apartment,” says Anjan Chatterjee, Gupta’s IIT Delhi pal. When Chatterjee settled in Washington, DC, he and his roommate would often drive up on weekends to visit the Guptas. By day, the visiting friends toured New York City landmarks such as the Empire State Building and the Statue of Liberty. At night they camped on the Guptas’ floor. Often they would while away the evenings smoking and playing bridge or Scrabble. It was a simple life among trusted companions, much like the one Gupta observed growing up in New Delhi among his parents and their friends.

When Gupta was first approached about going to work for McKinsey in Scandinavia, the assignment was billed as a single study. The hope, however, was that Gupta would find enough to like in Scandinavia that he would want to decamp for a while. Since McKinsey had opened its fledgling Copenhagen office in January 1972, it had lost money—not unlike most of McKinsey’s overseas offices in the early years—but unlike the other outposts it hadn’t entirely righted itself. Gupta worried that if he were sent overseas, he would be too far from New York, the center of McKinsey power. It was well known that McKinsey partners toiled in the hinterlands for years in the hope of getting to New York from the consulting firm’s satellite offices.

Gupta was already in New York. Why would he take on a job that would move him away? It didn’t make any sense. Nevertheless, Gupta said he would consider the Scandinavian opportunity, but, like the others before him, he had every intention of rejecting the overture, suspecting that his wife, Anita, would give him the corporate cover to turn down the job.

After finishing her graduate studies at Columbia, Anita took a job working at prestigious Bell Labs doing research at its Holmdel, New Jersey, complex. To make things easier on her, the Guptas bought a house and moved to New Jersey in March 1977. The $75,000 purchase in Middletown, New Jersey, was about five minutes away from her new place of work. When he wasn’t at a client’s offices, Gupta took the train every day into New York, commuting an hour and a half each way. A year after they moved, the Guptas had their first daughter, Geetanjali. In a nod to his Bengali heritage, they named her after the Nobel Prize–winning epic
Gitanjali
, written by the Bengali poet Rabindranath Tagore. After a short break, Anita returned to work. Her career was flourishing, but like many working women, she was having a tough time juggling it all, balancing the demands of her professional life with raising a child.

To his surprise, when Gupta told Anita about the opportunity to go to Scandinavia, she jumped at it. Since starting her job and having their first child, she felt tugged from all sides. It would be difficult for Anita to leave her job voluntarily; after all, she would be leaving a good company where she had a promising future. But when Gupta was offered the chance to go to Scandinavia, she thought it was an elegant way to quit Bell Labs.

Though he dreaded the transition at first, the more Gupta thought about it, the more he realized he had little to lose by going to Scandinavia. When his IIT friend Chatterjee, who by now had joined McKinsey too, asked if he had any choice about moving, Gupta replied, “I don’t think I do.” Then he said he thought it would be much harder climbing the ladder at McKinsey in New York. “Let’s see what Copenhagen gives,” he told Chatterjee.