by Rajat Gupta
An Ill-Advised Relationship
I met Rajaratnam in the late 1990s, when I was working on creating the Indian School of Business (ISB), a world-class business school in India. Of course, I knew him by reputation before then. Among the South Asian community in the US in the late 1990s, Rajaratnam was something of a legend. A Sri Lankan native, he’d worked as an analyst at the investment bank Needham & Co. before striking out on his own in 1997 and forming Galleon Group, a New York hedge fund that would grow to manage around $5 billion in assets. By focusing on the tech sector, his area of expertise, just as the bubble was beginning to inflate, Rajaratnam became one of Wall Street’s rising stars, with Galleon’s main fund rising 93 percent in 1999 and its founder joining the ranks of the billionaires.
Our lives might never have intersected had it not been for the small world that is the South Asian immigrant community and ISB, a project that was close to my heart. We didn’t move in the same circles—Rajaratnam liked the company of hard-partying trader types while I favored a much quieter lifestyle. But he stayed connected to several of his fellow South Asians from Wharton Business School, one of whom was a guy named Anil Kumar, who worked with me at McKinsey.
Kumar was based in the firm’s Silicon Valley office. A young Indian who, like me, had attended the Indian Institute of Technology (IIT), he had naturally seen me as a role model and sought my advice and mentorship. When I began trying to raise funds to start the business school project, Anil eagerly offered his help, and his connections. Soon, he excitedly announced that he had convinced his wealthiest classmate to make a million-dollar donation. Thus, I made the acquaintance of Raj Rajaratnam, and when we were both invited to a dinner at the house of another mutual friend, Ravi Trehan, I was glad to have the opportunity to thank him in person. A million dollars was a large sum for an individual to contribute to the school, especially when the individual in question was not even Indian.
My first impression of Rajaratnam was of a larger-than-life figure, both in body and in personality. He was charming and engaging, with a booming laugh and an infectious sense of humor. His wife, Asha, was Punjabi, like my mother, and he captivated guests with tales of their unconventional courtship. He was a great storyteller who came across as disarmingly honest. He seemed well acquainted with my life and career and expressed great enthusiasm for the business school project. I enjoyed his company that evening, but left with no expectation that I’d ever see him again. As it turned out, however, Ravi, our host, had other ideas. He had been trying to get into business with the billionaire for a while, and he hoped to get me involved.
Ravi was a family friend and neighbor who lived next door to us on weekends, renting a house we owned. Our children grew up together and we shared holidays and vacations. Ravi worked in investments, first at Goldman Sachs, and then at Japanese and European banks. He’d already made a couple of unsuccessful attempts to get into business with Rajaratnam, but in 2005 he had an idea he thought was a winner. He proposed to create a highly leveraged structured fund, for which Rajaratnam would put up $40 million, and Ravi and I would each contribute $5 million (with an option to put in another $5 million at a later point). Rajaratnam was intrigued by the structured nature of the investment vehicle, and Ravi was eager to build his own investment record. They would manage half each.
I gave Ravi’s proposal serious consideration and concluded it was a good investment opportunity. I would be an entirely passive investor. We named the fund Voyager, and it was initially very successful; in our first six months it was up more than 50 percent.
People ask me all the time, why did you go into business with a guy like Rajaratnam? In hindsight, it seems like a more than fair question. It’s easy to look back and say I should have seen the trouble coming. He did have a certain arrogance, an above-the-rules air that should have been a red flag. However, it’s also easy to forget that at the time he was being celebrated as one of the most talented traders on Wall Street. His record was incredible and his work ethic was legendary. His flamboyant confidence looked like brilliance to a lot of very smart people. In fact, one of those people was Hank Paulson, then CEO of Goldman Sachs and a very good friend who I’d known and worked with for more than a decade. I knew that Rajaratnam’s Galleon hedge fund was a Goldman client—one of their most important “Tier 1” clients, in fact—so when I was considering the Voyager idea, I asked both Hank and Goldman president Gary Cohn their opinion of him, and they both gave their enthusiastic endorsement. To this day, there are few people I would trust more than Hank, so when he made a point of affirming Rajaratnam’s generosity, that meant a lot. I also trusted Ravi deeply, so if Rajaratnam was okay in his eyes, I was inclined to trust him too.
As I got to know Raj myself, I thought I’d got the measure of him. I felt a certain respect for a fellow immigrant who had fought hard to get to the top of an industry that had never made it easy for him. It quickly became clear that he had a penchant for exaggeration, name-dropping, and self-aggrandizement, but I judged it to be more bluster than dishonesty. Our relationship was strictly business—I was never invited to the lavish parties he threw, like the infamous birthday when he flew seventy friends to Kenya for a safari. This was fine by me—his social scene didn’t appeal to me. Anita was also hesitant about me getting too involved with the financial industry in general. “These aren’t our people,” she would say. “You’re too trusting, and you think everyone will be nice to you. Financial people are different than consultants!” It was one of many moments when I wish I’d trusted her instincts. But Rajaratnam was always respectful to me, and I concluded, perhaps naively, that it would be interesting to work with him.
I’d always had an unusual ability to get along with all kinds of characters—even those whose rough edges or more obvious egos were off-putting to others. I tried to treat everyone well and not be too quick to judge, and I had been rewarded many times with surprising generosity and goodwill. People would do things for me that they wouldn’t do for others. In fact, this approach was central to my leadership capacity: Expect the best from people, and they often live up to that expectation. Treat people as if they are worthy of trust and respect, and they will prove themselves to be so. I wasn’t always right, but I’d been right so many times that it had become a point of pride—perhaps more so than I realized.
Looking back, I can see that in a strange way I became convinced that my own goodwill could override less wholesome motives, and that my very lack of defenses was a protection against betrayal. It wasn’t that I thought I’d never get hurt; rather, I thought that the hurt couldn’t ever be that bad, and the rewards of all the times I was right outweighed the risk of being wrong occasionally. So I overrode my wife’s misgivings and entrusted a substantial amount of my money to Raj Rajaratnam, without even requiring signature authority.
Not long into the life of Voyager, Ravi and Raj began to quarrel over who was in charge of the fund. I tried to mediate, but with little success, and in 2006 Ravi decided to exit. I was pleased with the fund’s performance, however, so I kept my money in. In fact, at the end of 2006 I decided to exercise my option to put in another $5 million before it expired in the new year. I was taken aback when Rajaratnam balked, insisting that I could only put the money in at the current valuation, not at the original rate, as we’d agreed.
Frustrated, I consulted with my eldest daughter, Sonu, a fund manager herself. She, too, had misgivings. “It’s a risky, highly leveraged investment anyway, Baba,” she advised. “Why would you put more money in? It’s better to diversify.” The deadline passed, and I let it go, though not without some annoyance. I had turned my attention elsewhere, caught up in the ongoing busyness of my life, when Rajaratnam abruptly changed his mind a month later and told me I could put in my extra $5 million at the original valuation. It never occurred to me to question why he’d changed his mind; I just felt glad he was honoring our agreement.
In the spring of 2008, I got a call from Ravi. His accountant, who also did the Vo
yager books, had mentioned something about a large withdrawal from the fund by Rajaratnam more than a year earlier. “Did you receive a distribution?” Ravi asked. I told him I knew nothing about any withdrawals, and if any had been made, I had not received my percentage.
“How much did he take out?”
“About $23 million,” Ravi replied, “plus $25 million in fees and commissions.” I was shocked—if Raj had withdrawn that much money, I should have received several million. Plus, we’d never agreed that he would be paid fees or commissions. Surely Ravi was mistaken—or just trying to stir up discord between me and Raj to get me on his side. When he insisted it was true, I asked him to get me a statement from the accountants so I could see for myself.
All of this was taking place during one of the busiest times of my life. I was transitioning out of McKinsey, where I’d worked since I was twenty-four years old. I was involved in numerous humanitarian causes, including a major global initiative to reduce malaria deaths that was launching later that year. And I was planning my eldest daughter’s wedding, for several hundred guests. Nothing moved quickly, because I simply didn’t have the time to follow it up. However, I finally got the audited statements in June or July, and there it was, hidden in the fine print. Raj had indeed taken almost $50 million out of the fund without my knowledge. Not only that—he’d done it right before telling me I could put in my extra $5 million. I felt betrayed by his actions, and his continued evasiveness when I tried to clarify the matter with him. I kept hoping there was some simple explanation, but I could not get a straight answer.
This dispute defined my relationship with Rajaratnam during the second half of 2008 and was reaching a crisis point right around the period that Palm had mentioned in his call: late September 2008. Of course, that personal crisis was overshadowed by the much greater crisis that was gripping the financial markets during that period. On September 15, 2008, Lehman Brothers had announced its bankruptcy, sending the markets into a tailspin. As a Goldman Sachs board member, I had a front row seat to the panic that gripped Wall Street. Who would be next? On September 23, at 3:15 p.m., Goldman’s CEO Lloyd Blankfein called an emergency board meeting to announce some surprisingly good news in the midst of all the doom and gloom: Warren Buffett’s Berkshire Hathaway had agreed to make a $5 billion investment in the bank. The board approved the deal, and by the time the evening’s papers went to press, it was official—a huge win for Goldman in the midst of the surrounding turmoil, and one that gave the stock price a boost the following day.
This was the event that Palm was referring to in his call—the “something good” that Rajaratnam claimed to have heard about from someone at Goldman before the news broke. And he seemed to be suggesting that that someone was me. I was shocked that anyone who knew me might think that I was capable of that kind of crime. And the nature of my relationship with Rajaratnam at the time only confirmed how implausible the idea was. Why would I be doing any favors for a man who was proving to be untrustworthy and duplicitous? If I had called Rajaratnam during September 2008—and I had done, repeatedly—I wasn’t calling him to give him tips, I was calling him to try to figure out what had happened to the Voyager money.
Arrest
Rajaratnam might not have played fair in his dealings with me, but I had no idea that he was at the center of a criminal conspiracy until news of his arrest broke in October 2009. I was in Santiago, Chile, where I’d been invited to speak to the South America conference of the International Chamber of Commerce (ICC). I’d gotten up early to prepare for my speech when the call came from Jean Molino, McKinsey’s legal counsel.
“Rajat, have you heard? Anil Kumar and Raj Rajaratnam have been arrested and charged with insider trading.”
I was stunned. I’d had nothing to do with Rajaratnam for almost a year at that point. The Voyager drama had escalated in the midst of the 2008 financial crisis. Not only had Raj lied to me but his withdrawals had left the fund without a cushion in the turbulent markets, and eventually the banks shut it down. My entire stake looked like it was gone. Rajaratnam, meanwhile, had not suffered much of a loss, having taken out almost as much as he had put in, between the redemptions and the fees. He continued to be evasive, telling me that he was working with the banks to try to recoup the equity, but by early 2009 it was clear that all such attempts had come to nothing. I was forced to accept that the money was gone, and that was the last I heard of Rajaratnam until the news of his arrest.
Given what Raj had done to me, I cannot say I was entirely surprised to learn that his corruption ran much deeper. Anil Kumar was another matter, however. I knew him much better than I knew Raj, and his involvement in the affair shocked me.
Anil was a McKinsey man, and as such I had expected him to act honorably. The firm’s culture was built on principle, integrity, and discretion, and Anil was someone I’d personally mentored, helping him out countless times. I had trusted his integrity and his sense of loyalty. He was effective at serving clients, although not popular among his colleagues. People didn’t like working for him, and his reputation was that he was good at “managing upwards”—impressing his superiors—but not at managing downwards. As head of the firm, perhaps I only got to see his best side, but I liked Anil well enough. He always seemed honest in his dealings with me, although he had a habit of using my name more often than was really appropriate to advance his own career.
Holding confidential information is second nature to every McKinsey partner—it’s something we do every day. It was hard to fathom that Anil would have deliberately betrayed his clients and his partners. Perhaps he had let something slip by accident in his eagerness to make a good impression on his powerful friend, I reasoned. Raj had a way of fishing for information—he’d throw out something he’d heard, casually looking for confirmation or further details while implying that he already knew the facts. I considered myself adept at dodging these hooks, but maybe Anil had not been careful.
Anil was always trying to impress Raj. For a while, he was hoping to land Galleon as a McKinsey client, which would have been good for an ambitious partner. Later, he became dissatisfied with his McKinsey career, feeling like he wasn’t getting the recognition he deserved, and he was eager for his far more successful classmate to hire him to work for Galleon. He kept boasting that Raj had promised him a job, although it was unclear how true this was. Either of these motives might have led him to be less discreet than he should have been, I told myself, but surely he hadn’t deliberately conspired to commit a crime.
Anil called me a few days after the arrest, clearly in shock and full of denials and justifications. He insisted he was innocent, and was panicking about what this all meant for his family’s future. In particular, he was worried about his son Aman—a bright boy who suffered from severe physical disabilities as a result of being born prematurely. I did not yet know the details or the extent of Anil’s involvement with Rajaratnam—that would become clear in the weeks and months ahead. But I knew that no matter what the outcome, Anil’s career at McKinsey was over, and there was nothing I or anyone else could do to change that. There was one matter on which I felt some sympathy for him, however: he was about to lose the firm’s health coverage, which was critical for Aman getting the care he needed. McKinsey had a policy that if a partner’s age and duration at the firm added up to seventy-five or more, that partner could keep the firm’s insurance for life, no matter what. Anil fell just a year short of qualifying for this policy, and the loss of coverage could be devastating for his family. He begged me to intercede on his behalf and ask the firm to make an exception, which I reluctantly agreed to do. I felt a certain loyalty—if not to Anil, to Aman, for whom I’d become something of an honorary uncle.
“Why on earth are you trying to help this guy?” was the only response I got. As the details came out over the next few months, I was forced to realize the degree to which I’d been blind to the duplicity of both Anil and Raj. Their conversations, captured on the government’s wiretaps, were far
from accidental slips; they were part of a carefully orchestrated conspiracy. Not only was Anil getting paid for his tips to the tune of several million dollars, he had set up a convoluted system to hide the payments offshore in a Swiss bank account in the name of his Indian maid. It was a harsh and humbling lesson for me, one that left me disoriented and questioning my own judgment of character.
Gathering Shadows
Just a few weeks later, this sorry tale had taken a turn for the worse. As soon as I got through security that day at the Detroit airport, I called Palm back, anxious to learn more about the vague allegations against me and to set the record straight. The Goldman lawyer repeated what he’d said about representing the firm, not me—clearly he wanted me to know that I was not protected by attorney–client privilege during our conversation. I recounted briefly the key facts about my relationship with Rajaratnam, and explained the Voyager debacle. “Why would I be giving information to the guy who cheated me out of millions of dollars? It simply makes no sense.” I tried to get him to tell me more details about the specific allegations, but he was frustratingly vague. I assured him that I’d be happy to provide as much information as he needed, but my flight was boarding, so we arranged to speak the next day.
I tried not to let the matter weigh too heavily on my mind as I took my seat and settled in for the short flight. Whatever they thought, they were wrong, and I’d be able to set matters straight once I knew all the facts. It was a grave accusation, but nothing was official yet. Surely it was just a mix-up. I’d never been involved in Rajaratnam’s web of informants, so I had nothing to be concerned about. It was hard to take it too seriously. Lawyers are trained to look for problems, I reasoned, and they were just doing their job in giving me the heads-up. We’d get it all straightened out tomorrow.
