The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (32 page)

When they arrived in Lower Manhattan, Rajaratnam was fingerprinted and then handcuffed to a rail that runs along the wall in an interrogation room. Two FBI agents, one playing good cop and the other bad cop, pushed him to make a confession. Kang, the lead FBI agent on the case, started off playing him recordings of the evidence the government had amassed after wiretapping his phone for nine months. The message was clear: the government had Rajaratnam over a barrel. It had no interest in a deal. He was the big fish. The government was not going to let him get away so easily. However, Kang wanted Rajaratnam to make calls to some prominent hedge fund managers the FBI suspected of trafficking in inside information. He declined. When Kang brought up the name Gupta, Rajaratnam refused to offer up any information.

Meanwhile, a few blocks from Rajaratnam’s apartment, Chiesi was sitting in the den with the FBI agents, toying with whether to cooperate or not. The agents then presented Chiesi with the evidence the government had developed against her. They told her that the feds had been wiretapping her phone and that her friend Raj Rajaratnam already had been arrested.

The FBI agents sitting in Chiesi’s den asked her to write a telephone number on a piece of paper. It was the phone number of Hector Ruiz, the AMD chief executive. The agents wanted Chiesi to make a consensual recorded call to him: in the course of wiretapping Chiesi’s phone, they had heard calls between Ruiz and her, but there was insufficient evidence to build a case against the AMD chief. At worst, Ruiz’s behavior was reckless, but there was not enough to suggest that it was criminal. (Ruiz has not been charged with wrongdoing in the Galleon case, and there has been no evidence that he had a relationship with Chiesi.) Chiesi appeared reluctant to make the call, and in any event, it was too early in the morning to call Ruiz, who was out on the West Coast.

At about 7:30 a.m., the FBI agents, unimpressed with Chiesi’s level of cooperation, told her they were putting her under arrest and taking her downtown for processing. They found a white sweater for her to wear; they told her she could not go in her hooded sweatshirt or wear sneakers with laces. As they were leaving, Chiesi confessed to Agent Wehner that she wasn’t wearing a bra.

“Should I have one on?” she asked.

“Well your sweater’s big enough and bulky enough, you probably don’t need one,” Chiesi remembers Wehner replying. Then, about an hour later, Wehner and the other agents headed down to Twenty-Six Federal Plaza with Chiesi.

She did not know it at the time, but the agents had set a 7:30 a.m. deadline for putting her under arrest. The FBI had two other arrest teams in place that were in a position to take Moffat and Kurland into custody if Chiesi was unwilling to cooperate. The agents gave the Moffat and Kurland teams the green light to move against the two men; by the time the Moffat squad arrived at his house, he was long gone—to work. He later surrendered.

After pulling an all-nighter at the SEC finalizing the civil complaints against Rajaratnam and his ring, Wadhwa got a call at about 7 a.m. from his colleague Jason Friedman. “They are charging this guy Mark Kurland,” Friedman told Wadhwa, referring to the criminal complaint he had just seen. The SEC had been emailed a copy of the US attorney’s complaint.

“Who the hell is Kurland?” asked an exhausted Wadhwa.

Without the wiretaps, the SEC had succeeded in building civil cases on their own against Rajaratnam, Chiesi, Goel, Kumar, and Moffat. But they had missed Kurland. Now they scrambled to get the authorization to file civil charges against him.

On that very same October morning, albeit an ocean away, Dominic Barton was in the honeymoon period of his inaugural three-year term as managing director of McKinsey. He was in Madrid meeting with clients but looking forward to his allotted once-a-month weekend reunion with his family. Before his election, Barton had headed McKinsey in Asia. But as the new managing director he now had to spend more time in London, the home to the company’s worldwide headquarters. His wife remained at their residence in Shanghai while his two teenage children attended boarding school in Singapore.

McKinsey was a notoriously competitive environment, and Barton had personal experience with the company’s “up or out” employment philosophy. The first time Barton was put up for partner—each consultant has three opportunities to be nominated—word came back from the global personnel committee that he didn’t stand a chance. There were company-wide concerns about Barton’s problem-solving skills and his tendency to tell clients about his moments of indecision. The second time he was turned down, a McKinsey higher-up called him and “he started quoting these Biblical verses to me.” He finally made partner on his third and last try. “I’m sure there were splinters on my back going across the bar, because that was
close
…I said to myself then, ‘My bar will be higher than McKinsey’s.’”

Barton had just stepped into his car when his phone rang. He was alerted that one of McKinsey’s senior partners, Anil Kumar, had collapsed at his New York pied-à-terre in the tony Time Warner Center and had been rushed to a hospital. Barton and Kumar weren’t close, but they knew each other from their time working in Asia. He was startled to learn exactly why fifty-one-year-old Kumar had been rushed to the hospital. Kumar had fainted and hit his head on the marble floor inside his home just as federal agents came in to arrest him for selling McKinsey client secrets. Kumar’s perp walk—the first time a McKinsey consultant had been arrested on the job—was at that moment split-screening on every Bloomberg terminal in the world alongside the arrest of the buyer of McKinsey’s secrets, Raj Rajaratnam.

On any other day, the trading floor at Galleon would be buzzing in the early morning, tense in anticipation of the 8:30 a.m. meeting. But on the morning of Friday, October 16, the trading floor at Galleon was eerily quiet, shrouded in a funereal silence, its mood taut, not so much in eager expectation as in deep dread. Portfolio manager Adam Smith sat in his office overlooking Fifty-Seventh Street, just a few doors down the hall from Rajaratnam’s, trying to digest the news he had just learned when a colleague strode in.

“Why is it so quiet around here?” asked the colleague.

Smith shut his door and walked back to his desk.

“Haven’t you heard?” he asked in a hushed tone. “Raj has been arrested.”

“What? For terrorism?”

As outrageous as it sounded, the question wasn’t a joke. Among Rajaratnam’s close associates there was speculation about their boss’s ties to the Liberation Tigers of Tamil Eelam (LTTE), or Tamil Tigers, as the insurgent group was known. In his early years at Galleon, Rajaratnam had fielded a fantasy football team called the Tamil Tigers, whose name he later changed to the Yankee Slayers. At the office, Rajaratnam liked to boast that he was close to Velupillai Prabhakaran, theTamil insurgent leader killed in battle, and in November 2002, he delivered a rousing appeal for Prabhakaran’s cause at an event at the DoubleTree hotel in Somerset, New Jersey.

Nearly four years later, when the government filed a complaint in federal court in the Eastern District of New York and charged ten people with providing material support to the LTTE, Rajaratnam was referenced in the matter—not directly but as “individual B,” a person who gave $2 million in donations to a US charity called the Tamil Rehabilitation Organization. TRO USA, the group to which Rajaratnam contributed money, was involved in raising funds for relief activities in early 2005 after the tsunami pummeled Sri Lanka. The group later came under scrutiny for its ties to the Tamil Tigers. Rajaratnam’s lawyer Jim Walden told the
Wall Street Journal
that his client made charitable donations to “rebuild homes destroyed by the tsunami” and asserted that he was not involved with the Tamil Tigers. There is no suggestion in the complaint that Rajaratnam and other donors knew their money was being routed to the LTTE. Rajaratnam was never charged in connection with the terrorism probe, though several of the indicted defendants entered guilty pleas.

Galleon’s Adam Smith disabused his colleague about the nature of Rajaratnam’s arrest and told him of the insider trading charges. A little earlier, Rajaratnam’s chauffeur, a stocky man with light brown hair, had telephoned with the grim news. For a long time, lawyers at the SEC had fixed their investigative lens on the chauffeur. While digging into the Galleon case, they discovered a number of calls made from Rajaratnam’s phone to a phone registered in the chauffeur’s name. At the same time, they noticed that calls were made from the driver’s phone to many of the same numbers called from Rajaratnam’s phone. After months of chasing what seemed like a promising lead, the SEC lawyers found that the phone registered to the chauffeur was in a limo, one Rajaratnam used while shuttling around town.

At 8:30 a.m., Galleon’s portfolio managers and analysts gathered in the big conference room in the middle of the office for their daily ritual: the morning meeting. Richard Schutte, who became president of Galleon’s domestic business sixteen days earlier, presided. Before heading into the meeting, he’d gotten wind from Galleon trader Ian Horowitz that Raj had been arrested, but Horowitz was sketchy on details.

Schutte ran the meeting as if it were any other morning, quizzing analysts on the companies they covered and getting a rundown of the day’s market-moving news. No mention was made of Rajaratnam. He was often on the road so there was nothing unusual about his absence. In the middle of the meeting, Schutte was pulled out by a colleague who had received a call from Rajaratnam. He didn’t return to the conference room.

Shortly after 10 a.m., stories started streaming across the newswires of Rajaratnam’s arrest. At 10:18 a.m., David Faber went on CNBC with the news. Galleon employees looked away from their trading screens and turned to the 50-inch flat-screen TV hanging above the T-shaped trading desk. Instead of market-moving news, shots of their boss, Rajaratnam, in a blue jacket, green cardigan, and white shirt, being led away in handcuffs by two FBI agents, filled the screen.

Schutte returned to the trading floor and said lawyers would brief anxious employees in the coming days on the next steps. Then he met with a smaller group of portfolio managers, Leon Shaulov, Adam Smith, and others, to give them their marching orders.

“We need to liquidate the portfolios,” Schutte said. Rajaratnam’s arrest was sure to prompt nervous investors to pull cash out of Galleon. It was still early in the day, but already Galleon was being bombarded with phone calls. One investor who lived in Rajaratnam’s building had actually telephoned the office early in the morning after seeing the Galleon chief being led out of the high-rise in handcuffs. There were other issues to consider. Rajaratnam was the “key” man at the hedge fund—the star trader who was so critical that investors had to be told if for whatever reason he was no longer calling the shots. If the surviving managers kept running money, they stood the risk of exposure to legal liability.

Every man in the room knew that Wall Street rivals would rush to exploit the news of Rajaratnam’s arrest even as they feigned sympathy on the phone. Competitors would make a calculated bet that Galleon would have to dump stocks at fire-sale prices; then, as they did in 1998 when high-flying hedge fund Long-Term Capital Management got in trouble, they would hammer stocks they suspected were in Galleon’s portfolio, making money as the stocks tumbled amid Galleon’s indiscriminate selling and creating a death spiral that fed upon itself. Galleon had not capsized amid the financial tsunami of 2008, but the arrest of its founder was sure to torpedo it.

As the portfolio managers scrambled to reduce the risk in their trading books, they got their own taste of Wall Street’s gallows humor. It was the kind of adolescent ribbing they normally found funny. Not long after the arrests hit their Bloomberg screens, traders started emailing a song that had a chorus set to the 1934 Shirley Temple hit, “On the Good Ship Lollipop”:

The catchy ditty was uncannily on the money. It even touched on companies like Intel—“our first trade was 100,000 warrants of Intel”—that were now at the center of the government’s allegations against Rajaratnam.

Not long after the perp walk footage hit airwaves, the Southern District’s two criminal complaints (one against Rajaratnam, Kumar, and Goel; and the other against Chiesi, Moffat, and Kurland) were unsealed, and the SEC’s civil action was filed. Though the SEC and the US attorney’s office carry out parallel investigations, their complaints—civil by the SEC and criminal by the US attorney’s office—are generally unveiled simultaneously.

Rajaratnam was charged with trading on inside information in a raft of stocks—Akamai, AMD, Clearwire (the company in which Intel Capital was invested), Google, and others. Two of his tippers were identified. They were Goel, the Intel Treasury executive; and Kumar, the McKinsey consultant.

But the complaint also referred to a CC-1, or coconspirator 1, and a CW, or cooperating witness, as providing information to and receiving information from Rajaratnam. It was not immediately obvious that CC-1 was Danielle Chiesi, named in the separate complaint.

The legal actions raised as many questions among Galleon employees as they answered. It was clear the government’s case was built on recorded telephone calls made by the CW, the cooperating witness, also known as Tipper A in the SEC action. Though the complaints offered some details about the person—the individual had worked for Galleon in the late nineties, said the SEC filing—no one was exactly sure who it was. Paranoia set in.

As Galleon traders and analysts read the criminal complaint, they were shaken to see that it was filled with unedited excerpts of conversations between Rajaratnam and his alleged coconspirators. The feds said in the criminal filing that the government had intercepted calls on Rajaratnam’s cell phone and the landlines and cell phone of CC-1. It also noted that the CW made consensual recorded calls for the government. With nerves fraying and everyone on edge, traders began to speculate that their friends were spying on them, recording conversations for the government.

“We would say, ‘Is the person in the next room an informant?’” recalls a Galleon trader who was at the office that day. It was smart to be wary. The weekend after Rajaratnam’s arrest, FBI agents began knocking on the doors of his associates to see if they could persuade them to cooperate. They visited Michael Cardillo, a Galleon portfolio manager, in the lobby of his building in November 2009. Not long after, in an effort to save his skin, Cardillo, who burst into tears when he heard of Rajaratnam’s arrest, began to cooperate. In January 2010, just ten days before he was set to attend the wedding of Galleon analyst Michael Fisherman, Cardillo wore a wire and secretly recorded a conversation with Fisherman in an unsuccessful effort to get him to admit to trading on inside information. On another occasion, the FBI instructed Cardillo to lie to his friend Fisherman, who has not been charged.

At the time of the arrests, though, there were no moles in Galleon’s New York office. The Galleon informant—the mysterious CW—was one thousand miles away. It was Roomy Khan, sitting in a house far smaller and shabbier-looking than the mansion she once owned in Atherton, California. During her two years cooperating with the FBI, she had not told her husband she was moonlighting for the feds. One day, not long after Rajaratnam’s arrest, her husband was reading an article in a newspaper about the case, which mentioned the cooperating witness who helped crack it. He looked at his wife and declared, “This is you.”

Amid the Friday morning frenzy, as Galleon’s executives fielded calls from investors and dumped stocks, they noticed one Galleon employee on a singular mission. Raj’s brother Rengan spent most of the morning running back and forth to Raj’s office gathering up papers.

Shortly before noon, Adam Smith saw Rengan walk “dramatically” into his big brother’s office and collect a bunch of notebooks. Even in his days at Needham, Raj Rajaratnam was a feverish note taker, capturing his conversations with companies like AMD and Atmel in great detail. Over the years, Smith himself saw Rajaratnam carry around notebooks with handwritten scrawls about stocks. They looked much the same as the notebooks he saw Rengan lift out of his brother’s office that morning. In the afternoon, Rengan left carrying a big file, a Galleon employee noticed. Rajaratnam’s lawyers would later argue that the papers Rengan retrieved were simply “documents reflecting Rajaratnam’s charitable donations and real property holdings” for “assisting counsel” during Rajaratnam’s first appearance in court and his bail hearing. The papers Rengan was seen taking have not been identified.

But the file grabbing stuck in Smith’s mind. More than a year after Rajaratnam’s arrest, Smith was confronted by criminal authorities after being caught receiving inside information on a wiretap. Smith did not know it, but at the time of Rajaratnam’s arrest he was on the government’s radar; he had been captured giving inside information to Rajaratnam during 2008 when the FBI was wiretapping Rajaratnam’s phone. In the summer of 2010, the government obtained court authorization to wiretap a cell phone used by Smith, and on July 28, it picked him up receiving information from a source in Taiwan who said that Nvidia Corp.’s quarterly revenue would fall short of expectations. That same day, Smith sold 100,000 shares of Nvidia and, after the market closed, Nvidia, as Smith’s source had told him, revised downward its revenue.

In December 2010, Smith told the criminal authorities of the file sweeping and a subsequent encounter he had with Rengan. Earlier that year, around springtime, Rengan telephoned Smith and asked to meet. The two were not close, so Rengan’s overture was odd. When they got together at a Starbucks in Manhattan, the purpose of the meeting quickly became clear to Smith. Rengan wanted reassurance from Smith that he had not seen Rengan leaving Galleon’s offices with Rajaratnam’s notebooks on the day of his brother’s arrest. Then Rengan sought to confirm that the reference during a May 2008 wiretapped call to someone with the same first name as Smith’s Morgan Stanley source was not a reference to the banker who had tipped off Smith on the merger of two technology companies whose names started with the letter
I
. Rengan wanted to clarify that the person Smith had mentioned in the call was another person with a similar first name, an analyst who worked for a Wall Street brokerage firm and, unlike the Morgan Stanley banker, this person would not be considered a corporate insider. It was important because the wiretaps had picked up Smith referring to information that he received from his Morgan Stanley source. But if the source was an analyst rather than a banker, he could hardly be viewed as relaying inside information. It appeared that Rengan was trying to use the coincidence of names as a way to get Smith to cover Galleon’s tracks if authorities ever asked him about some information he passed along from his Morgan Stanley source on a wiretapped call.

Before leaving, Rengan told Smith that Raj sent his regards and wanted Smith to know that he had nothing to worry about. Smith had always held the elder Rajaratnam in high esteem. During the morning meetings, like a teacher’s pet, he made a point of sitting at the head of the table, near Rajaratnam. Like his boss, Smith took his own fastidious notes and learned to develop corporate insiders.

Naturally, he was more anxious than most in the wake of Rajaratnam’s arrest. He kept a stack of small notepads in his office containing corporate information and his conversations with analysts. After he learned that Rajaratnam was in custody, he threw a full notebook in the trash. That evening when he left work, he brought home a personal laptop that he kept in the office. For years, colleagues had warned Smith that keeping a personal laptop at work was a recipe for disaster—a clear sign that he needed to keep some of his communications off the firm’s servers. When he returned to his house in rural upstate New York, he threw away the laptop in the garbage. Sometime later, an IT worker at Galleon asked him for the laptop. Rather than confessing he had tossed it out, he said he’d lost it.