An investor who has an early bead on quarterly earnings can make a killing—and show up his rivals along the way. Those whose performance declines face the risk of losing customers. Knowing the earnings of a company before they are announced is the holy grail in the information-gathering game, but even nuggets like the number of computer chips a technology company like Intel sells and the price at which they are sold can be extraordinarily valuable. Production figures also provide a savvy investor with an astonishingly accurate tally of the company’s revenue.
Many investors had come to believe that someone at Intel was divulging confidential information about the company before its earnings were announced. The recipient of the information was widely thought to be a fast-rising analyst at a boutique investment bank named Needham & Co. The information the Needham analyst Raj Rajaratnam was receiving was making its way into a must-read newsletter Rajaratnam published entitled First Call. The investors were livid over the leaks. Many of them competed with Rajaratnam for money to manage, and by 1998, Rajaratnam had gone from being a behind-the-scenes research analyst who produced reports for star traders like them to being a fearsome rival. He now trolled for money in the same investing waters as they did. And he was drawing a boatload of it.
Just a year earlier, in 1997, after a decade at Needham, Rajaratnam had struck out on his own. He had been chafing for some time, tired of his job as a manager dealing with mundane matters. “I was spending two or three hours a day as a shrink dealing with people issues, organizational issues and strategic planning issues,” he remembers. He was also frustrated that the firm’s owner, George Needham, did not share his ambition to grow the company. Needham liked to say that he could see the face of every client on every dollar that the firm took in. Employees suspected Rajaratnam did not care one bit whose face was gracing the dollars flowing in. He just wanted to book more dollars.
In January, he and three lieutenants from Needham—Gary Rosenbach; Krishen Sud, his close chum from his days at Wharton; and Ari Arjavalingam—launched the Galleon Group. Galleon was yet another hedge fund, one of thousands of lightly regulated investment pools targeted to wealthy investors and institutions. The funds charge a small percentage of a client’s assets as a managing fee, but they make the real money on profits, typically charging 20 percent on the dollar for any return they provide the client.
Few knew it at the time, but Rajaratnam’s arrival would coincide with one of the hedge fund industry’s greatest periods of growth. Within a decade after he set up Galleon, assets at hedge funds would swell to nearly $1.5 trillion compared to $257 billion in 1996, and the number of hedge funds would triple to a little over seven thousand from about twenty-four hundred. Along the way, the industry would mint a whole new class of billionaires. Unlike the tycoons of bygone times, who husbanded their money discreetly, the titans of the hedge fund world were all too ready to flash their cash. One of the most visible was Steven A. Cohen, the founder of SAC Capital Advisors, who ranked fortieth in 2012 on the Forbes 400 list of richest Americans. A Wharton grad, Cohen grew SAC from $25 million in assets in 1992 to $14 billion today. He lives in a massive 1920s estate in north Greenwich, Connecticut. Cohen bought the property for $14.8 million in 1998. He then added a twelve-thousand-square-foot annex with a basketball court, an indoor pool, and a movie theater that seats twenty. The palatial property houses Cohen’s humongous art collection—an eclectic mix that includes masterworks of Cézanne, Picasso, Damien Hirst, and Jeff Koons.
When Rajaratnam started, he worked out of a cramped and shabby office on Lexington and Fifty-Seventh Street, about a block from his old company Needham, managing about $350 million that he cobbled together from close friends and family. His firm was called Galleon Group after the large ships that traded in spices and ivory with Sri Lanka, his birthplace, known long ago as the Isle of Serendip. Galleon stuck to its knitting. It drew on Rajaratnam’s expertise, technology stocks. On the walls of his new office, he hung prints of galleons, and on the sides of the room he displayed models of ships. On his desk, he had a small flag signifying his support for the Tamil cause. To kick off his new venture, he reached out to the prominent Silicon Valley executives he’d cultivated over the years.
As an analyst, Rajaratnam had written copious research reports on their fledgling firms, which had long been neglected by big Wall Street investment banks. It was he who exposed their companies to institutional investors in the first place. Emboldened by the success he had managing their money in the small hedge fund he ran on the side at Needham, he went back to the same people to seed Galleon. Many of his early investors were familiar names in the tech space—men like Ken Levy of KLA Instruments, Neil Bonke of Electroglas, and Kris Chellam of Xilinx. Just as he did at Needham, he would rely on some of them, such as Chellam, to serve as his eyes and ears on the industry. He was not shy about the role they played in Galleon’s success. In marketing tours and early pitch books, he highlighted the fact that around seventy-five officers of tech companies were also investors in Galleon.
Like many South Asians, Rajaratnam was close to his parents. Impressed by his hot streak, his father—a soft-spoken and conservative businessman who loathed risk—invested in his new hedge fund. He and his wife lived with their son and daughter-in-law in a postwar building at Sutton Place, a tony enclave of apartments overlooking the East River. At one time Marilyn Monroe lived at the address with her then husband playwright Arthur Miller, and today it counts among its famous residents former New York governor Mario Cuomo. When Rajaratnam first moved in, he was hardly a bold-faced name on Wall Street. Neighbors suspected his lack of stature accounted for his buying into one of the community’s least desirable buildings. But that didn’t stop him from making the most of his purchase. In 2000, when he moved to combine the two apartments he owned at 60 Sutton Place, he told city officials that he needed two kitchens for religious reasons. Typically, only one kitchen per unit is allowed. The reason cited in his application was “adherence to Jewish traditions,” whch seemed a stretch for a Hindu. Rajaratnam liked to game the system—not just at work but even at home.
He could not have picked a better moment to pour money into technology stocks. The industry was on the cusp of an intoxicating bubble that would make brash young kids—the exuberant entrepreneurs of the tech world—wealthy overnight. The surge began on August 9, 1995, when Netscape, the brainchild of Marc Andreessen, then a twenty-three-year-old computer prodigy, went public. Netscape made Web browsers that ordinary people could use. It transformed the Internet, making it accessible to millions and millions of consumers. It spawned a virtual world with a revolutionary new business platform where in time hundreds of billions of dollars in commerce would flow. Between 1995 and 1999, 435 technology companies debuted on the stock market, start-ups including Yahoo!, Amazon, and Akamai Technologies, raising a little over $21 billion in capital.
Rajaratnam had a vision and the experience analyzing tech companies to understand the potential of the Internet. He believed it would eclipse the first revolution in tech—the personal computer—as an economic force. Many thought he was crazy, but his reasoning was sound. “It took the personal computer industry about six years to reach ten million users,” Rajaratnam told Antoine Bernheim, the publisher of Hedge Fund News, in an interview in April 1997, just four months after he set up shop. By contrast, the Internet had 10 million users in only ten months.
He knew it was not enough to be investing in a hot area. If Galleon was to be huge, it needed cachet. So he stacked its board of advisers with impressive names including hedge fund titan Stanley Druckenmiller and Paine Webber chief Don Marron. Druckenmiller and Rajaratnam had gotten to know each other when Druckenmiller was at Soros and Rajaratnam was at Needham. Druckenmiller had a clutch of Wall Street analysts he trusted for insightful research, and Rajaratnam, the number one semiconductor analyst on the street, was one of them. When Rajaratnam launched Galleon, Druckenmiller and his mentor, George Soros, threw some money his way. He had made mo
ney for them as an analyst at Needham. They had no reason to believe he wouldn’t make money for them again as a hedge fund trader.
Rajaratnam quickly moved to staff his new firm with analysts and portfolio managers from Wall Street’s Ivy League, Goldman Sachs and Morgan Stanley. The Needham name was simply not going to bring in investor dollars, so he created his own A-team. He hired Prem Lachman, a health-care analyst from Goldman; David Slaine, a trader from Morgan Stanley; and, as Galleon grew, he brought on board Rick Schutte and Rick Sherlund, the Goldman software analyst who helped take Microsoft public.
On the surface, Galleon had the veneer of a respectable hedge fund whose returns flowed from Rajaratnam’s undeniable expertise as a technology analyst. And Rajaratnam, its captain, exuded the aura of an upstanding money manager. After having breakfast with his family, he generally walked to his office on Fifty-Seventh Street, a short walk from his apartment on Sutton Place. Every day at 8:30 a.m. sharp, Galleon’s analysts and portfolio managers and traders gathered to review the companies that were reporting earnings that day and discuss other market-impacting developments. Rajaratnam would sit like a general at the head of a long conference table and fire a barrage of questions. He was a stickler for punctuality. At a firm that shelled out multimillion-dollar bonuses every year, analysts and portfolio managers routinely tripped over each other to make it to the meeting on time to avoid Rajaratnam’s $25 fine for latecomers.
Even as the firm grew, Rajaratnam made it a point to know if an analyst had recommended buying the stock of a company that later posted abysmal profits or selling a stock about to surge. Whenever that happened, Rajaratnam was legendary for his public floggings. He liked to reduce grown men to quivering sacks of jelly, but only when appropriate. A keen leader, Rajaratnam also knew when it was best to be ice-cold.
When Galleon’s restaurant analyst predicted that McDonald’s would report disappointing same-store sales only to watch in horror as the company posted better-than-expected sales and its stock price rose, Rajaratnam confronted the analyst: “Tell us what happened.”
“People ate a lot of burgers this month,” the analyst deadpanned.
No one laughed.
Though it didn’t appear that any Galleon funds had taken a position based on the analyst’s call, Rajaratnam was livid. He couldn’t believe the analyst had the nerve to make a joke about something so serious. Rajaratnam knew it was not the time for showing explosive rage. Displays of anger signaled a loss of control. Instead, a week later the analyst was let go in a collective culling.
Rajaratnam told prospective investors that the fund’s returns were driven by “bottoms-up research” carried out by a team of analysts who visited more than three hundred companies a month. Analysts were urged to travel as much as they wanted and to visit as many companies as they could. Rajaratnam had only one requirement: at the end of the day, the analysts had to email or fax an explanation of what they learned during their company visit. If they didn’t, their travel expenses were not reimbursed.
When Galleon started, eight of its ten analysts were engineers by training and worked in the technology industry. David Blaustein, the manager who ran Galleon’s health-care fund for a time, got his start as an emergency room/trauma doctor at Yale University before arriving on Wall Street in the mid-1990s. Rajaratnam liked to boast that his analysts weren’t “blindsided by the marketing hype.” An engineer by training himself, he often said it was easier to teach an engineer how to pick stocks than to teach engineering to a stock picker.
Rajaratnam imbued Galleon with his playful and fun-loving personality. On Thursdays, employees could sign up for massages at the office. He would hold job interviews at the topless club Scores. And in the hothouse culture of the Galleon trading floor, he indulged his passion for pranks. Traders who made bets and lost would be required to spend the day wearing lingerie. He would offer $5,000 to anyone who would drink ten tequila shots or $1,000 if they could eat a whole loaf of bread without drinking a glass of water. Even as the firm grew and his stature rose, he acquiesced in the freewheeling culture.
In the summer of 2008, as the economy was quickly sliding into a recession, Rajaratnam gave a junior female employee an interesting assignment: he supplied her with a budget to buy clothes and accessories from retailer Lululemon Athletica. At the morning meeting, Rajaratnam, feigning sincere analysis, remarked that he thought few consumers would pay for the pricey gear in a recession. Then Rajaratnam pushed the woman to explain to the mostly male analysts and portfolio managers the reason the company’s clothes resonated with consumers. As part of her presentation, she donned a black Spandex outfit and did a turn around the room. When someone suggested she should stand up on the conference table and model the outfit as if she were a fashion show runway model, Galleon’s chief operating officer, Rick Schutte, pressed for the display to stop.
In many traditional ways, Rajaratnam conducted business at Galleon just as he had done at Needham. Like his mentor, George Needham, he pinched pennies, hounding assistants about the amount of money the office spent on essentials like paper. Employees were required to fly economy, and when they stayed in hotels they were not allowed to use the minibar. A budget for travel had to be approved before the trip was taken. He also adopted the fast-and-loose operating style that had worked so well for him at Needham. In early marketing materials, pitching his new fund to investors, he laid out his historic returns even though Galleon had come into existence only in January 1997. In making his claim, Rajaratnam relied on the performance he had generated at the small hedge fund he ran at Needham.
Deep analysis and a lean expense ledger were not the only core competencies at Galleon. Rajaratnam’s secret sauce was that he was an expert manipulator. He knew just the right way to push corporate insiders to pass along confidential financial information long before it was publicly released. And with his own money riding on Galleon, he squeezed them harder than ever before.
James Bagley met Rajaratnam in the early 1990s when he was president and chief operating officer of Applied Materials, a Santa Clara, California, maker of silicon-chip-manufacturing machines. “He was always just a little bit slick for me,” says Bagley. “He was always kind of pressing you for information.” He wanted details about customers and other companies that Bagley declined to answer. Often, Bagley says, Rajaratnam would present him with a nugget of information and “then he would want you to confirm it.” “Several times,” particularly after Rajaratnam moved to Galleon, he would suggest trades of information, but Bagley says he stayed clear. “I didn’t want to have anything to do with him,” he says.
Not everyone felt that way. In his decade in the banking industry at Chase and then at Needham, Rajaratnam had developed close ties to Silicon Valley’s expatriate South Asian community. Like Rajaratnam on Wall Street, many of them started in Silicon Valley in the early 1980s, when South Asians were rare. Segregated from their Wonder Bread colleagues, the new arrivals from South Asia bonded easily, forging intimate friendships in the workplace.
Unusual alliances arose—even between Hindus and Muslims—more often out of mutual need than real kinship. To get ahead, one needed connections. Besides the Atmel Corp. executive Kris Chellam, one of Rajaratnam’s best “friends” in Silicon Valley was a thirty-nine-year-old product-marketing engineer at Intel named Roomy Khan.
Like other South Asians, Khan, who traced her roots back to New Delhi, came to America in the fall of 1982 to study. She was twenty-four years old, past the perfect age to find a suitable boy. But Khan had never been the kind to hew to convention. Even as a young girl, she was plucky, vivacious, and every bit as driven as the men around her—not exactly the best résumé for marriage in a country like India, where arranged unions were still commonplace. When Khan got a scholarship to study in the United States, she jumped at the opportunity. She told her parents that if they didn’t give her the money for the plane ticket, she would borrow it and go.
Rajaratnam and Khan first got to know each
other in 1995, when Khan was working in Intel’s microprocessor group and Rajaratnam was still at Needham. As part of her job, Khan tracked expert analysts in the semiconductor industry, and there was no one as well regarded in the tech space as Rajaratnam. One day, Khan telephoned Rajaratnam about Advanced Micro Devices, Intel’s rival in semiconductor production. The two hit it off and found they had a lot in common; Rajaratnam’s wife, a Sikh, was from Punjab just like Khan. When the two women met some time later, they spoke in their native language, Punjabi.
“I wish I had spoken to you a few months ago,” before joining Intel, Khan joked to Rajaratnam. Her dream, she confessed, was to work on Wall Street, not to be carrying out boring market research for a semiconductor company.
“Oh, you can still do that,” replied Rajaratnam.
As it happened, when Khan approached him, Rajaratnam was in the market for a semiconductor analyst and Khan fit his hiring profile. She was highly educated—after Kent State, she got a master’s degree in electrical engineering from Columbia University and an MBA from Berkeley—and, more important, she’d worked at a number of companies in the tech space, including the biggest player, Intel. Later in the year, Rajaratnam met her in Menlo Park and, just as he had promised, he offered her a job. The only condition was that she would have to move to New York to train.
Khan was torn. She wanted to break into Wall Street, but she knew if she accepted the offer it would probably mean the end of her marriage. Her husband, Sakhawat, was a traditional Asian Muslim man who liked to have his wife by his side, not burnishing her career three thousand miles away. She turned down the job, but Rajaratnam kept her in mind. From time to time, he would help her get interviews for analyst positions at brokerage firms such as Prudential Securities and Robertson Stephens. Unlike other analysts Khan knew, Rajaratnam was more of a friend than a business acquaintance. The two would have dinner together, sometimes with their spouses, when Rajaratnam visited California.
The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund Page 12
