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

by Anita Raghavan

  But few actually thought Henzler would win the support of the partnership and be elected to the top spot. He was a maverick who spoke his mind. When asked to evaluate McKinsey’s New York office, he rankled partners with his scathing critiques. From time to time, for instance, McKinsey would look at metrics like the number of Fortune 500 companies headquartered in big cities. New York was off the chart. Henzler would openly point to some of the large corporations in Manhattan that his colleagues in New York were not serving. The shot across the bow was on target but not a tactic that won friends.

  Historically, the person picked to lead McKinsey was a reflection of the firm’s aspirations. Before Gluck was elected, there was a broad desire among McKinsey’s directors for the firm to step up its knowledge-building efforts—the rising competition from BCG and Bain made it a commercial imperative. In 1994, when Gluck was set to step down, there was a desire that McKinsey’s new leader embody the varied complexion of the firm and be more client-centric.

  “By the end of the 80s, there was a growing group within the firm that felt the pendulum swung too far towards practice development,” says Skilling. “And that the practice development machine that Fred Gluck created outstripped the firm’s ability to channel the thinking into specific clients. I think that at that point Rajat became the model of a different balance…There was a strong sense that what Fred built in the 80s was critical for the firm and Rajat would positively modify it for the future. This created a strong following among all the partners and directors, but particularly among the younger ones.”

  Gupta’s election in March 1994 to the position of global managing director was a watershed in the history of sixty-eight-year-old McKinsey. By electing an Indian to its helm, McKinsey left no doubt that the firm was confidently embracing a diverse and global future and turning its back on a homogeneous past. Gupta always made it clear that he thought the criticism McKinsey received for being too patrician was overblown. “Did I ever find a glass ceiling?” he rhetorically asked years later. “I never found a glass ceiling partly because McKinsey is a truly meritocratic institution and partly because most glass ceilings are people in their minds, rather than true.”

  Despite the obvious symbolism of McKinsey having a non-American at its helm, Gupta’s rise was important for another less-talked-about reason. At forty-five, Gupta was a member of McKinsey’s up-and-coming new guard. Having received Marvin Bower’s blessing in Scandinavia, he was the perfect person to bridge the chasm between the two generations. His quiet, measured manner was also exactly the kind of leadership style that McKinsey was prepared to accept from its first non-American chief. Someone like the German chief, Henzler, would have been too much for McKinsey to stomach. “He got the job because two stronger personalities were competing heavily,” says Bala Balachandran, a friend of Gupta’s from Chicago. “Rajat was the compromise candidate. He was sort of a consensus developer, not an antagonizer. They liked him because he was nonthreatening.”

  Still, the old guard were blindsided by his elevation. Some of the elder statesmen who had squarely placed their chips on more traditional candidates tried to discount Gupta’s victory. They claimed that there was a campaign to elect Gupta, an effort that involved heavy lobbying and phone calls between directors in various offices. McKinsey never formally educated its voting directors about the candidates. While it was not uncommon for there to be phone calls among various offices about potential candidates, some of the old guard felt that the lobbying before the 1994 election was unprecedented. Gupta’s friends stumped hard for him.

  When Gluck got wind of the grumblings, he wondered out loud whether the organized push had been orchestrated by Gupta himself. It was eerily similar to the events in 1990, when he was all but prepared to name Dick Ashley as the manager of the Chicago office and then he got the call from Murray telling him Gupta was the office’s pick.

  What Gluck may have underestimated was the voting power of the Skilling generation. Had Skilling not left McKinsey in 1990 to join a client, Enron, he would have been part of the firm’s emerging new guard. And to his peer group, Gupta’s rise was the culmination of the exciting and wrenching changes McKinsey had undergone and was set to capitalize upon. “The candidate for Managing Director has to reflect the aspirations of the firm. I don’t think there was anyone in the running that met the test of ‘aspiration’ other than Rajat,” declares Skilling. He “pioneered a new way of leveraging the firm’s intellectual capital. I think Rajat was a shoo-in for election to Managing Director, and frankly, I don’t think anyone had a chance against him. He was that good.”

  Chapter Thirteen

  Raj’s Edge

  In late March 1998, Intel stopped filming Roomy Khan faxing confidential financial data to Raj Rajaratnam. The internal probe got tricky for the semiconductor giant. One employee noticed the sideways hidden camera and literally tried to yank it out. There was speculation in the department that Intel was spying on its own employees to see if they were stealing paper. The rumors were not good for morale.

  Meanwhile, after receiving a poor performance review from a manager who was not briefed on the company’s investigation, Khan decided to quit. Her departure threw a spanner into the probe. Without Khan making incriminating calls and sending improper faxes to Rajaratnam, it was hard to build a case against the Galleon chief or get Khan to make consensual calls. The investigation came to a standstill and Khan found a new job.

  By 1999, the markets had recovered and the tech bubble reflated, and Rajaratnam again was flying. In 1999, his flagship technology fund posted a return of 96.3 percent. He started a new fund in June 1999, the Galleon New Media fund, to invest exclusively in Internet stocks. His assets under management swelled from $1 billion in 1998 to $5 billion on the back of spectacular returns, and on April 1, 2000, he closed Galleon to new investors. In a sign of his growing success, he threw a blowout Christmas party just before the turn of the millennium.

  About three hundred brokers and clients packed a large ballroom in midtown Manhattan with an open bar brightly decorated with balloons and streamers and waited for the star attraction: legendary disco singer Donna Summer. Though the guests arrived early, the stage was empty for hours; Summer was more than an hour late. Despite his relaxed look, Rajaratnam was livid that he was kept waiting. He needn’t have worried. When Summer appeared around 10 p.m., she electrified the crowd, belting out a mix of her old standbys, the sexy songs that made her popular—“Hot Stuff” and “She Works Hard for the Money,” and her new repertoire, gospel-like religious songs. The party went on until the wee hours of the morning. On Wall Street, where it’s the brokers who wine and dine commission-paying clients like Galleon to get them to divert more dollars their way, Rajaratnam’s gesture of turning the tables and entertaining the brokers was noticed.

  With his business thriving, Rajaratnam had opened an office in the heart of Silicon Valley, Santa Clara, California, in 1998. Not wanting to draw attention to his new beachhead in the epicenter of the tech world, Rajaratnam kept the phone number for the office unlisted. One of its new employees was Khan, whom Rajaratnam paid $120,000 plus a bonus to analyze stocks in the personal computer industry. Some of the technology world’s biggest names fell under her purview—Dell, Compaq, Sun Microsystems, IBM, Altera, and others.

  Rajaratnam told Khan that she should strive to find contacts inside companies so that they could give her “the edge.” Khan quickly came to learn exactly what Rajaratnam meant when he talked about getting “the edge.” He wanted her to ferret out confidential information about a company so Galleon could develop a view on a stock that diverged from the mainstream thinking on Wall Street. If Khan’s inside sources proved correct, Galleon would make a killing when investors finally realized that Galleon’s take on a stock was right and the market was wrong.

  Unlike her job at Intel, Khan found Galleon to be a high-stress, pressure-cooker environment. In the spring of 1999, she quit after she ran afoul of a rule Rajaratnam had exempted he
r from at first. Khan traded in her personal account—something that Rajaratnam preferred employees avoid. Setting up a personal account and making trades while working at a hedge fund was an obvious red flag for regulators. It screamed insider trading. But for Khan it was lucrative. In the bubble of the late nineties, she like everyone else was making money on Internet stocks.

  One day, months after she joined Galleon, Rajaratnam said to her, “Listen, you have to turn over your personal account to the fund. Everybody’s rule has to apply here.” Khan suspected a colleague in the small Santa Clara office whom she didn’t like had put pressure on Rajaratnam to enforce the firm practice.

  Khan talked it over with her husband and told Rajaratnam that she did not want to turn over her personal account to the fund.

  Then you have to leave, Rajaratnam said.

  The two parted ways amicably. Rajaratnam said that he respected Khan because she was very good at what she did.

  A month after her departure from the Galleon Group, on April 15, 1999, two special agents for the FBI knocked on the door of Khan’s modest home in Sunnyvale, California. The agents asked her about her dealings with Rajaratnam. She assumed they were referring to her conversations with him when she was still employed at Intel. She said that from time to time she would talk to him about coming to work for him. Once in a while, they would discuss a stock and how it was doing, but she insisted she never discussed her former employer, Intel, with him. She was adamant on the point. She never sent him any financial reports from Intel. She never disclosed any information to him and she never provided him with the company’s profit margins or production numbers.

  The agents then showed her printouts of photographs taken of her at a facsimile machine at Intel faxing reports to Galleon. They told Khan they had pictures of her faxing to Rajaratnam the kind of financial reports moments earlier she had attested to not having access to during her time working at Intel.

  “Okay,” Khan replied, unfazed by being caught in a lie. She told the agents she wanted to cooperate but she needed to make sure she did not have any “exposure.” It was not as if she had “made a lot of money” on the information, she told them.

  Chapter Fourteen

  Building Offshore-istan

  The new future that Rajat Gupta would forge for his country as the offshoring capital of the world had a curious start. One day in 1994 a request arrived out of the blue at the offices of McKinsey India. A German consultant wanted to set up a presentation slide production center in Kerala, a state in southern India, and was looking for some on-the-ground pointers. When Neeraj Bhargava, a McKinsey consultant in India, got on the phone with the German, he sensed his colleague was interested in Kerala because it was one of the lushest and greenest states in India, with beautiful, unspoiled beaches.

  Since independence, Kerala had been governed on and off by India’s Communist Party. The German was angling to set up the slide production center in Trivandrum, the state’s capital, but Bhargava, having grown up in Kerala, knew its unions were fearless and suggested Chennai, the capital of Tamil Nadu, the state contiguous to Kerala. And so it happened that McKinsey took its first bold step into the brave new world of offshoring.

  The story might have ended there had it not been for a young and hungry junior partner in McKinsey’s New Delhi office. Anil Kumar had been tilling over the arcane area of remote business services—consultant-speak for supplying services regardless of a customer’s geographic location. His vision was to take advantage of the declining price of global telecommunications in the 1990s and move offshore a myriad of business services—corporate research, financial analysis, legal transcription, any repeatable white-collar task—to the low-cost labor markets of the East. With a critical mass of idle but highly educated English-speaking Indians eager to work for cents on the dollar, Kumar was confident that his vision could become a reality with the right kind of backing. Fortuitously for Kumar, his mentor, Rajat Gupta, was now the head of the firm.

  Despite his great intellect and obvious knack for problem solving, Kumar had made little impression on anyone since joining McKinsey’s San Francisco office in 1986. He rarely smiled, and he hardly mixed with anyone in the office apart from a couple of South Asians there at the time or partners whose favor he tried to curry. “I do remember him coming into a conference room where we were meeting, and there was no one senior there, and he looked around the room and then walked out,” said one person who worked with Kumar. Some attributed his lack of collegiality to being an outsider. He was not weaned in McKinsey’s culture and values, having been hired into the firm out of Hewlett-Packard.

  Kumar quickly realized that the only way he would make his mark at McKinsey was by contributing to its intellectual capital. In 1988, he was tapped to help start a fledgling Silicon Valley office in San Jose during an era when tech was not sexy. Without any clients, Kumar and a partner literally pounded the pavement. They drove up and down the valley in the partner’s car as Kumar jotted down the names of companies whose signs they passed. Then he would cold-call the firms to pitch the business advisory services McKinsey could provide. His efforts paid off. Over five years, the office grew to about thirty-five people. In 1992, he was made a principal.

  Kumar would have remained a faceless consultant had he not been enlisted to work in India by Tino Puri, McKinsey’s first Indian hire and something of a legend at the firm. An intellectual tour de force, a giant among giants, Puri was fiercely respected by his colleagues, who even indulged his one weakness, chain-smoking.

  In 1988, not long after Gluck took the helm of McKinsey, Puri traveled to India with him. There the two met with the heads of some of India’s biggest business dynasties, industrial titans such as the Birlas and the Tatas. The aim of the trip was to explore the opportunities for McKinsey in India with the idea of opening an office in the near future. Gluck came away from the trip more convinced than ever that it was the right step. But he could not persuade Puri to move. In Puri’s view, no one in India knew what a management consultant actually was, making the services of McKinsey a hard sell to clients. And the advice he got during the trip was that it was too early to start a McKinsey office.

  As eager as Gluck was to plant the McKinsey flag in India, his hands were tied. Historically, McKinsey was willing to entertain opening an office almost anywhere as long as there was a partner who would relocate and set it up. But even as recently as 1987, India was too iffy a proposition for a consulting career. A plan to open an office was put on the back burner.

  * * *

  One day in August 1990, Paresh Vaish, a twenty-nine-year-old associate at McKinsey, was sitting in his apartment in Pasadena, California, packing his bags, when his phone rang. Vaish, the son of an Indian Railways executive in New Delhi, had come to the United States twelve years earlier on a scholarship to Dartmouth College. After graduating, he worked at Intel, earning enough money to pay his way through Harvard Business School.

  For years, he had been angling to be sent to India by McKinsey. Homesick and longing for his rice and lentils rather than steak and potatoes, Vaish had finally decided to leave McKinsey and return to India on his own when Puri called.

  As the number of South Asians at McKinsey had swelled, Puri had turned into a well-placed Sherpa to many of them, a father figure helping them navigate the sometimes treacherous inclines of the firm. It was well known that Puri was a mentor to Rajat Gupta, an up-and-coming McKinsey director whose star by 1990 shone brightest of all South Asians’ at the firm, even more so than Puri’s.

  Vaish was excited to hear Puri on the other end of the phone. “When Tino calls, it is a bit like God calling,” he remarked to friends. Puri had an interesting proposition for Vaish. McKinsey, he said, was just hired to work for Hindustan Motors, the flagship company of Indian conglomerate CK Birla Group, in Uttarpara, on the outskirts of Calcutta. The company was one of India’s preeminent concerns, but its Hindustan Motors division was flailing, beset by a host of problems—low productivity, l
abor issues, and obsolete technology and fraying facilities.

  In an era of rising oil prices and diminishing protections against foreign competition, its big, gas-guzzling Ambassador cars were an anachronism. With their recurring snafus, such as carburetor problems, they stood to lose out to a hot new arrival in the Indian market: the mass-produced and far cheaper Maruti Suzuki, which was being manufactured in India through a joint venture with Japan’s Suzuki Motor Corp.

  Knowing the country and its challenges, Puri did not sugarcoat the risks to Vaish. “We don’t know what will happen,” he said. The assignment was expected to last between three and six months. After that, no one could tell. It was an unsettling and promising opportunity at the same time. If Vaish was interested, he could be one of the engagement managers and lead a small McKinsey team in India. For a Delhi boy like Vaish, Calcutta was not home, but it was close enough.

  Over the next six months, Vaish and a team from McKinsey’s New York office decamped to a huge mosquito-ridden bungalow—a guesthouse of CK Birla’s—that was on the premises of his sprawling and crumbling factory. During the course of its work, McKinsey made a slew of recommendations, some big and some small. To address the quality control issues, it proposed a questionnaire for dealer feedback so the company would have a systematic way of knowing about snafus. And to address some of its long-term strategic challenges, McKinsey recommended that Hindustan Motors revamp the Ambassador model and upgrade other vehicles, speed up delivery of cars, and boost productivity by reengineering the factory floor and reducing its workforce at the Uttarpara plant.

  The McKinsey contingent was overwhelmed with work, its six-month project for Hindustan Motors turned into a three-year contract, and CK Birla became what McKinsey calls a radiating reference. Other assignments in India quickly followed. Big industrial conglomerates such as Larsen & Toubro, Mahindra & Mahindra, RPG Enterprises, and the Oberois, who run an eponymous chain of hotels, hired McKinsey. Many were less interested in McKinsey’s services; indeed, some did not even know exactly what management consulting was. Rather, what they sought was the firm’s cachet. They wanted to be able to broadcast to others—their customers and their friends—that they had the wherewithal to hire the US consulting giant. The McKinsey name had become a status symbol in one of the world’s largest and fastest-growing markets. Yet the firm still did not have an office in India, and convincing Puri to move and set up one was turning into slow water torture. Herb Henzler, the McKinsey Germany head, asked Gupta with characteristic bluntness: “Can’t you lean on Tino because Tino is too indecisive?”