The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (28 page)

Unlike the information conveyed in other wiretapped calls between Rajaratnam and his moles, the information Chiesi provided Rajaratnam about Akamai lowering its guidance actually came to pass and resulted in a monster trade. On Wednesday, July 30, Akamai Technologies unveiled a pessimistic outlook for the rest of 2008. Its stock fell 7.91, or 25 percent, to $23.34. Soon after Chiesi phoned him with the tip, Rajaratnam shorted 200,000 shares of Akamai; most of the position was allocated to the technology fund he personally ran. Even as Galleon grew and Rajaratnam’s management responsibilities swelled exponentially, he never relinquished running Galleon’s core technology fund. Over the next several days, Rajaratnam placed more bearish bets on Akamai, selling short an additional 375,000 shares. He also ramped up his negative position in the stock by buying put options—another security that allows an investor to make a bearish bet. Despite promising Chiesi that he would not tell anyone else about her tip, Rajaratnam spread the word.

“hope u shorted some akam,” rajatgalleon, the IM handle for Rajaratnam, instant-messaged Joe Liu, a trader working for him, on July 30.

“thank you, Raj. Indeed, I did some,” joeliu2003 instant-messaged back. (Liu has never been charged in connection with the Galleon case.)

In the technology fund he ran, Rajaratnam made $5,139,851 in profit from the Akamai purchases. Chiesi’s New Castle funds made $2,437,976 on Akamai. And the best part of it all for Michaelson and the Southern District was that after they both booked winnings on Akamai, Rajaratnam telephoned Chiesi to congratulate her.

“I just wanted to say, thank you,” he phoned to tell Chiesi on July 30. “You know what, I think you did it in such a classy way. In the sense you didn’t call him, you know, and that way you maintain the relationship. You don’t have to tell him that you played it hard.”

When the stock fell to $28.50, Rajaratnam confessed to Chiesi that he “banged it,” selling another 150,000 shares short.

Chiesi was on a high. “It’s a conquest,” she said. “It’s mentally, mentally fabulous for me.”

That evening, she headed to the Chinese consulate on the western edge of midtown Manhattan for a reception, which the ambassador would be attending. Like many in the financial world, Chiesi was hyped up about China—“I wanna own China as you know, I need to own them,” she told Rajaratnam. With the Akamai trade at her back, she felt more optimistic than ever about her meeting with the Chinese. “You know the coolest part?” she asked rhetorically. “I am going in there with so much confidence right now. This is big for me.”

For investigators, the coolest part was that the entire conversation was on tape. Not long after prosecutors heard the Chiesi calls, they made a new wiretap application—this time they asked a federal judge for permission to eavesdrop on her.

“Raj?” said the cheerful voice on the other end of the phone. “Hi. It’s Renee.”

Renee (pronounced “Ree-nee”) Gomes was tall, thin, and always upbeat. She was Rajat Gupta’s secretary, one of the perks that came with the position of global managing director. Even after Gupta retired from the helm of McKinsey, the firm still provided him with a secretary and an office. In Stamford, Connecticut, where Gomes was based, there was even an ample anteroom for her to sit in and attend to Gupta’s affairs. She loved working for him. She raved to others that Gupta was a true gentleman, always respectful of her and mindful of her time off.

Gomes was an “old school” secretary. Gupta rarely placed his own calls, so Gomes took care of the dialing. At times, she got to follow her peripatetic boss around the globe, accompanying him to McKinsey meetings or sometimes joining him on his trips to India. Gupta trusted her implicitly. She had full access to his correspondence and often responded to emails on his behalf.

It was early in the evening of Tuesday, July 29, 2008, and Gomes had her boss, Gupta, on the line for Rajaratnam. When Gupta traveled abroad, as he frequently did, he would call Gomes and ask her to patch him through to people he was trying to reach. Rajaratnam, who was working from Connecticut, was particularly eager to speak to Gupta. That coming Thursday at noon, he was going to be lunching with Gary Cohn, one of the top executives at Goldman Sachs. Rick Schutte, Galleon’s chief operating officer who had worked at Goldman, rising to managing director before coming to Galleon, was to join the lunch, as were a number of Goldman executives.

As one of the biggest payers of stock commissions to Goldman—in 2008 Galleon shelled out $35 million in commissions to Goldman—Rajaratnam regularly received audiences with the New York investment bank’s top executives. It was one of the privileges that came from being so big and throwing so much business to the firm. Goldman was Galleon’s largest trading partner, and the hedge fund funneled the biggest volume of its transactions through Goldman.

One of the reasons Cohn was going to Galleon that day was to address the growing concern among Galleon executives about the safety of their assets during the 2008 financial crisis. Galleon, like many hedge funds, held assets at securities firms. Goldman had about $600 million of Galleon assets in custody. The near collapse of Bear Stearns a few months before had focused investors on a growing risk: the failure of a securities firm would likely result in investor assets being frozen. Galleon had about $200 million of investor assets at Bear, and had the firm been forced to file for bankruptcy protection, a surety if J.P. Morgan and the US government didn’t back up the bank, Galleon would have been one company in a long line of creditors.

Rajaratnam had heard that Goldman might be shopping for a commercial bank, and he was looking for intel.

“There’s a rumor that Goldman might look to buy a commercial bank,” Rajaratnam said to Gupta. “Have you heard anything along that line?”

Just a month earlier, Goldman’s twelve-person board of directors was in St. Petersburg, Russia, for the investment bank’s full board meeting. Almost all the Goldman board was present—even its newest director, the steel magnate Lakshmi Mittal, who was the only other Indian on Goldman’s board besides Gupta.

By the middle of 2008, Gupta was also on the boards of Procter & Gamble, AMR Corp., the parent of American Airlines, and outsourcing firm Genpact. He also held a seat on the board of the Qatar Financial Centre, and in 2009, his corporate board seats paid him more than $3.2 million, according to
Fortune
magazine.

Most of the board meetings were routine affairs that Gupta attended alone or dialed into from his office, but some involved international travel. When she could, Gupta’s wife, Anita, tried to join him for the board gatherings overseas. It was one way to catch up with her busy husband. With the Guptas’ youngest daughter, Deepali, headed to Brown University in the fall and their eldest daughter, Geetanjali, married, Anita and Rajat were empty nesters. (The Gupta girls had actually been away from home from the time they were teenagers; they chose to go to boarding school. Two attended Phillips Exeter Academy, saving them and their parents from the invariable adolescent-age fights about important issues like dating.) After years of dedicating themselves to nurturing their family, Anita and Rajat for the first time were soon going to be spending more hours with each other than they had in a long while.

On Friday, June 27, at about 4 p.m., Anita arrived in St. Petersburg on a British Airways flight from New York, changing planes in London. Her husband, who was coming in from Moscow, met her at the airport, and the two headed to the Hotel Astoria, as popular under Russia’s new capitalists as it was under its old Communist overlords. Nearly a century earlier, while in power, Lenin addressed the crowds from the balcony of the hotel’s suite 211, now ironically renamed the Royal Suite. As Gupta sat all Saturday in Goldman board meetings, which were held in a conference room on the ground floor of the hotel, Anita joined the other spouses taking in the city sights—Yusupov Palace, where the mystic Rasputin was assassinated, and the famous bronze horseman statue of Peter the Great.

Gupta told Rajaratnam that there had been a big discussion at the June board meeting in Russia about the possibility of Goldman acquiring a commercial bank. “It was a, uh, divided discussion in the board,” Gupta divulged. “I think more people saying why, because in essence it’s a low return business,” even though it could be “interesting to develop a deposit base which is a low cost source of funding.”

Goldman wasn’t having trouble funding itself or anything, Gupta assured Rajaratnam.

It’s just that “you know we should explore more global sources of funding,” said Gupta. The idea that Goldman should look at insurance or other similar businesses was broached.

“They’re an opportunistic group so if Wachovia was a good deal and they, you know, it’s quite conceivable they’d come and say let’s go buy Wachovia,” Gupta told Rajaratnam.

“Or even AIG right,” replied Rajaratnam.

“Or even AIG,” concurred Gupta.

It was Thursday, September 11, 2008, and Raj Rajaratnam was starting to feel like a boxer fighting the legend Muhammad Ali. “I know he’s stronger and he’s faster, but you’re in the ring with him,” declared Rajaratnam, weary after getting beaten up day after day in the markets. “You know, you try to survive and hope that he gets tired.”

It was 7:30 in the evening, and to say it had been a hellish week was an understatement. Rumors of impending financial doom had roiled the stock market, taking investors like Rajaratnam on a scary roller-coaster ride. Rajaratnam, an eternal optimist, had spent the summer buying stock whenever the market dipped. Now he was getting killed. His flagship Galleon Technology fund was being pounded, whipped by the temperamental market. The stock of Lehman Brothers, which had opened on Monday at $18 a share, was hovering somewhere between $3 and $4 by Thursday, its swift fall an ominous portent of events to come. He needed a win.

“You know, look, it’s very stressful,” Rajaratnam confided, trading in his usual bravado for a rare display of vulnerability. Investing in stocks was starting to seem like gambling, no different from placing chips on the roulette wheel in Las Vegas. “You know, you go to the casino,” said Rajaratnam, “you say okay, you know Schlumberger, which is a great company, was at 100, it’s 82, right?…And you just don’t know whether it’s gonna go to 70.”

“Exactly,” replied Anil Kumar. He may have said the word, but there was no sign the consultant had any sense of the pain that the trader was feeling in September 2008. Kumar was actually calling from Dublin, where he was huddled in a retreat with members of the Young Presidents’ Organization, a collection of up-and-comers who liked to gather every once in a while to gab. He was too preoccupied with his own hobnobbing to be distracted by a financial market pileup.

“Anand Mahindra’s got 50 people meeting in Montauk in New York” in October. “I guess it’s some suburb or something of New York,” Kumar told Rajaratnam. (Actually, the event was in a far less glitzy part of New York—Mohonk.) Mahindra was one of the most respected figures in Indian business, having studied at Harvard College and Harvard Business School before returning to India to oversee his family’s industrial conglomerate. Mahindra has invited some of India’s biggest business tycoons to “talk about the future of India kind of thing,” said Kumar.

“He’s invited me to it,” he added.

Rajaratnam knew Kumar too well to take the bait. He’d once remarked to their mutual friend Gupta that Kumar was constantly “scheming is not the right word, but constantly trying to figure out what other people’s angles are.” It was astonishing, but “he seems to know what everybody else is worth, you know he leads with, ‘Oh Sunil Mittal is worth $20 billion.’” Presciently, Rajaratnam pointed out that there were pitfalls to viewing the world through Kumar’s prism.

“You know, when he starts thinking like that,” said Rajaratnam, not finishing his sentence. He didn’t have to complete it; it was obvious to Gupta or anyone else what he meant, and if there was any doubt, he added: “You build the business and the money will come, you know?”

Unlike Kumar, the salaried consultant who got paid simply for showing up, Rajaratnam was an entrepreneur who built an investment empire with his very own blood, sweat, and tears. The ebullient markets in recent years made people forget about the hard work, long hours, and risks he had taken to create Galleon. But September 2008 was a vivid reminder that there was a reason he was a billionaire. Every day that he ventured into the treacherous waters of investing, he stood the chance of getting wiped out. Three years earlier, after the tsunami devastated his native country, Sri Lanka, Rajaratnam, who had been vacationing there at the time and had witnessed the havoc firsthand, hosted a fund-raiser at the Stone Rose Lounge on the fourth floor of the plush Time Warner Center with its spectacular views of Central Park. As beautiful women in slinky dresses gathered by the sleek rosewood bar and sipped cocktails, Rajaratnam delivered a powerful and moving speech. He likened Sri Lanka’s fishermen to hedge fund managers. “Every morning they go out to sea and try and catch as many fish as they can,” he told the thousand who had gathered. “And every night, just like hedge fund managers, they come back to port and eat what they catch.” Yes, and every once in a while, just like the Sri Lankan fishermen, hedge fund managers faced financial tsunamis that were as violent and humbling as the natural ones. Kumar, the consultant, just didn’t get it.

Sitting in Dublin, Kumar was completely out of touch with Rajaratnam’s world, clueless to the minute-by-minute pressures traders like him were facing. He wasn’t even up on the news. KDB, the Korea Development Bank, had pulled the plug on its talks to buy a stake in Lehman Brothers earlier that week. In Manhattan, it was the only thing players in the financial markets were buzzing about.

“I asked my guy there if KDB is gonna buy and he sort of gave this slightly, he said, don’t believe everything you read in the press kind of reply,” said Kumar.

“When did you ask him?” asked Rajaratnam.

“A week ago,” replied Kumar, not realizing that by September 11 the markets were moving so quickly that even news that was minutes old was stale.

“You know, the thing is, a week ago they were negotiating very hard,” said Rajaratnam. “Right?”

“Hm,” said Kumar.

“On Tuesday they announced that they were not interested,” continued Rajaratnam. “They couldn’t come to terms, right?”

“Hm,” said Kumar again. It was all he could say. As always, Rajaratnam had the last word.

A month earlier, shortly after 11 a.m. on August 15, Kumar had telephoned Rajaratnam to tell him that after months of negotiations, AMD and a Middle Eastern sovereign wealth fund called Mubadala had finally reached an agreement for the fund to invest between $6 and $8 billion in a manufacturing facility to make computer chips.

“So yesterday they agreed on, at least they’ve shaken hands, and said they’re going ahead with the deal,” Kumar told Rajaratnam. A transaction was set to be announced the week after Labor Day.

Minutes after Rajaratnam hung up with Kumar, he started spreading the good news. He first called Danielle Chiesi, who he knew had an “edge” on AMD because of her close ties to the company’s chief executive, Hector Ruiz.

“Have you spoken to Hector?” Rajaratnam asked.

Chiesi said she had had a brief conversation with Ruiz and he was expecting a deal to be inked in “mid September or something like that.” With markets as volatile as these, it was always safe to have a second source.

Rajaratnam passed along what he had heard minutes earlier: “Right so yesterday we had ummm shake hands,” he told Chiesi using the very same phrase Kumar had used to signal that an agreement was in place.

A few hours later, Rajaratnam called his brother Rengan to tell him that he had heard that AMD had a tentative agreement with the Arabs. He had already bought some shares of AMD for himself and was snapping up some for his brother.

“Alright, thanks a lot, man, I appreciate it,” Rengan replied. Swapping tips from insiders was a family business in the Rajaratnam clan. Three and a half hours later, Rengan called his brother back. He had just spoken to an old classmate of his from Stanford Business School, another McKinsey consultant named David Palecek, who headed McKinsey’s semiconductor group and worked for Kumar.

Rengan said he asked Palecek, “What do you think of AMD?”

“He’s like buy it, buy as much as you can as soon as you can,” reported Rengan. “He finally spilled his beans” and said the Arabs were putting some money in. “He thinks the stock’s gonna rip.”

Always looking for new recruits to their network of insiders, Rengan told his brother that his old business school pal was someone worth enlisting.

“You know, he’s a little dirty,” said Rengan. “I’ll tell you why, ’cause because he…kind of volunteered ’cause when I said AMD, kind of volunteered the information on the investments.” When Palecek said that all of his best ideas were inside information, Rengan assured him that was a workable problem. Galleon could hire Palecek’s wife, Melissa, as a consultant. (This characterization did not sit well with Palecek’s wife or her attorney, Catherine L. Redlich. Palecek died in 2010 at the age of thirty-seven of complications from a staph infection, and Redlich says, “Mrs. Palecek has authorized me to state on her behalf that she was never offered a consultant position at Galleon and never discussed such a possibility with her husband. Rengan may have hoped that his old Stanford classmate would prove to be ‘a little dirty,’ or more likely he was simply promoting himself to his brother, but he was incorrect.” McKinsey agrees and adds that it has seen “no convincing evidence” indicating Palecek actually shared or agreed to share any confidential client information.)

By the end of that day in August, Galleon’s technology funds had quadrupled their position in AMD stock to 4 million shares. Rajaratnam was making a big bet that AMD’s tie-up with the Arabs was going to yield a huge payday, much like the deal between AMD and ATI Technologies two years earlier. But as the dog days of summer wore on, AMD’s stock kept trending lower. Even though the tie-up with Mubadala was positive news, spelling an end to rumors of AMD having to file for bankruptcy court protection, the company’s stock slid in the weeks preceding the expected deal. Rajaratnam and Chiesi were flummoxed; whenever they talked they griped that the stock was behaving badly. They were not the only ones disappointed.

Sitting at his desk at the US attorney’s office at One St. Andrew’s Plaza, Michaelson too was waiting patiently for the AMD deal. When he first heard Kumar tell Rajaratnam that the two parties had shaken hands, he was excited, as eager for the deal as Rajaratnam but for different reasons. For Michaelson, here was another tip—a potential deal on which to build an insider trading case. But by the second week of September, the prospects of a profitable inside trade appeared to be dimming. The announcement that Kumar pegged for after Labor Day was being pushed back. Now sitting with his headphones listening to Kumar and Rajaratnam speak, and watching the financial markets convulsing, Michaelson was pessimistic that AMD would turn out to be a winning trade for either Rajaratnam or him.

“It’s not September 15th,” Kumar told Rajaratnam. “It’s gonna be October first week, but it’s all on track.”

Kumar tried to sound reassuring. “I think all the approvals and all have kind of happened, it’s now most of, most of the details.”

“Right,” replied Rajaratnam, sounding skeptical.

The deal eventually was announced on October 7, but it wasn’t the home run either Rajaratnam or Michaelson were seeking. Galleon lost money on its investment in AMD. Technology stocks, like much of the market, got clobbered in the wake of Lehman Brothers’ move to file for bankruptcy on September 15.

Geetanjali Gupta vividly remembers the weekend after the collapse of Lehman Brothers. She was coming home from Boston to celebrate her thirtieth birthday. The Guptas were actually preparing to celebrate two birthdays that weekend. Her mother’s was on September 21, a day after hers. On Saturday, September 20, Geetanjali was in the library, lined on two walls with books and overlooking a swimming pool, at her parents’ home in Westport talking to her father.

Earlier that year, in June, Gupta had shared one of the most important moments between a father and a daughter: he’d given his daughter away in marriage. In most Indian families, Geetanjali’s nuptials to a Nigerian would have caused a stir. Indeed, Geetanjali’s own cousin watched in awe when she first introduced her then boyfriend to the family at one boisterous Thanksgiving. “Many Indian parents (mine included) forbade dating and, and would never sanction relationships with non-Indians…That my ‘perfect’ cousin Sonu, Rajat’s oldest child, was not only allowed to date a Nigerian, but to do so out in the open with her parents’ blessing, was literally unheard of in the Indian community,” says Geetanjali’s cousin. “I was so, so proud that it was my uncle who made it clear (not by any explicit words, or drawing undue attention, but by his gentle, obvious inclusiveness) that he supported” the union.

For the wedding, which was held at the Gupta estate in Westport, Gupta wanted everything to be perfect. He spent hours planning and refining the landscaping arrangements for the outdoor affair. He even got involved in the minutiae like the placement of flowers. On the day, as his daughter stood in a red saree under the canopy of a wedding pavilion bedecked with flowers, the normally stoic Gupta could not hide his emotions. In his speech giving Geetanjali away, Gupta spoke of his respect for his daughter’s integrity. Before each of his actions, he would ask himself, What would Geetanjali think? Then, for the first time, guests noticed something they had never seen in Gupta before: tears in his eyes.

Three months later, on the weekend of Geetanjali’s birthday, Gupta was very upset and stressed. It was unlike him to be visibly agitated. Both at work and at home, he was normally calm and collected. He rarely got angry, mainly because he felt there was almost nothing that important to get angry about. Sometimes his family would say that his apparent detachment was too extreme. It seemed like he didn’t care at times—he didn’t get angry enough or worked up about an issue. He was never good at deep psychoanalysis, but he wondered whether it was because he’d lost his parents at a young age. “At that point, nothing seemed to matter that much,” he said years later.

Gupta told his daughter that he was upset about the performance of an investment called Voyager that he had partnered with Rajaratnam on and was having difficulty getting information about it. Geetanjali did not know Rajaratnam; she had met him only once, when Rajaratnam went with her father to Harvard to pitch New Silk Route, the fund they were starting. Geetanjali is an investment analyst at Harvard Management Company, which oversees the university’s endowment, a potential investor in the fund. Gupta told his daughter he was angry because he had reason to believe that Rajaratnam had pulled money out of the fund without telling him. If he had, he wanted to know why he was not allowed to withdraw his money too.