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

by Anita Raghavan

  Mukesh Ambani was said to be fond of saying that Anil Kumar was “like God. He was everywhere.” Certainly, wherever McKinsey’s new managing partner Rajat Gupta was, Kumar made a point of appearing. Though he did not know Gupta well because they worked in different offices while they were in the United States, Kumar used his presence on the ground in India to deepen his relationship with Gupta. Colleagues in the New Delhi office would marvel at the way Kumar finagled getting booked on the same flight to Mumbai as Gupta when he visited India. In 1994, shortly after Gupta was elected managing director, he was invited into the offices of the Times of India for a meeting with its top editor, Gautam Adhikari. To everyone’s surprise, Kumar showed up for the meeting too.

  At McKinsey, a partner’s power base derives from the strength of his client relationships. As a consequence, most partners are outwardly focused and view internal politics as a chore. Not Kumar. “Anil cultivated Rajat as sort of a corporate person would fawn over a CEO,” says a partner. The two were a study in contrasts—Gupta was smooth and genial, while Kumar was abrasive and full of himself.

  Vinit Khanna, an old friend from Doon, first noticed a change in Kumar in the mid-1990s. Khanna, fresh off a round-the-world trip that he completed in thirty days, marveled at being able to travel in business class and stay in luxury hotels on his own dime. Khanna had come to the United States in the early 1980s to attend Wharton; he was a year ahead of Kumar. Upon graduating from Wharton in 1982, Khanna struck out on his own and thrived importing Indian goods—such as the manhole covers ubiquitous in city streets—to America. When Khanna ran into Kumar, he recalled how it would have been unthinkable fifteen years earlier, when the two first arrived in America as somewhat impecunious college students, to even contemplate a trip like the one he’d just taken. Kumar quickly cut short his reverie and told Khanna he’d just returned from a round-the-world trip in seven days.

  One-upmanship was a character trait of the new Kumar. In 2006, Khanna had tried to catch up with Kumar during a trip to London. Kumar told Khanna that he didn’t have time to meet but perhaps Khanna would be willing to drop by Forty-Seven Park Street, a set of upscale time-share residences in tony Mayfair that Kumar was considering investing in. It houses the two-star Michelin restaurant Le Gavroche, from which residents at Forty-Seven Park can order high-end takeaway served on bone china. Kumar said he was thinking of buying a membership in Forty-Seven Park but in the end didn’t. He told Khanna that his good friend Sunil Mittal, the Indian telecommunications mogul, and other bigwigs lived close by so he could bunk with them during trips to London.

  Khanna was impressed with Forty-Seven Park and wound up buying a number of associate memberships in the building. In 2012, Khanna ran into Kumar as attendants were escorting him to the first-class cabin on a British Airways flight to London. Sometime during the middle of the flight, Kumar walked over to Khanna’s seat.

  “How is Forty-Seven Park working out?” he asked. Khanna gushed about it, saying he was so grateful that Kumar had introduced him to it.

  Midway in the conversation, Kumar let on to Khanna that he’d bought a place in the Savoy “after its refurbishment.” Then he proceeded to regale his old friend with the superior amenities at the Savoy.

  Chapter Fifteen

  Partying and Polycom

  It was July 2, 2007, and Raj Rajaratnam was on his way to a much-needed vacation in Europe. Just three weeks earlier, he had given testimony to Wadhwa, Michaelson, and Markowitz at the SEC. Now he, his family, and a group of friends were headed to Château Grimaldi, a seventeenth-century castle in southern France with eleven bedrooms and nine baths set over twelve acres of beautiful gardens. Among the nearly two dozen taking the trip were Rajaratnam’s good friends the Goels, Rajiv and his wife, Alka, and their kids.

  Rajiv Goel and Raj had been friends since they were both MBA students at Wharton. The friendship was not always an equal one. Goel, a bumbling but good-natured sort, “was a follower [of Raj’s],” says one Wharton classmate of the two men. “Whatever Raj asked him to do, he would do it.”

  In the weeks before the holiday, Rajiv Goel bombarded Rajaratnam with calls and emails. He was tireless in his excitement. The trip coincided with the annual art and music festival in the town of Aix-en-Provence, just four miles from the château. Goel thought it might be fun to attend and catch one of the cultural events. He and his family were already in France, but Rajaratnam still had a few matters to tie up at work. He planned to join them on July Fourth.

  The trip was actually one of two vacations he was planning that summer. In August, he was going to charter a plane and take seventy of his friends to Kenya for a safari. The holidays were part of a summer-long birthday extravaganza. Two weeks earlier, on June 15, Rajaratnam had turned fifty years old, and to celebrate the milestone he rented a large boat and invited a couple hundred colleagues, friends, and family to a party he hosted on board. Dressed in jeans and a shirt that only Jimmy Buffett could love, Rajaratnam looked relaxed. In the spirit of the night, he wore a white captain’s cap as he stood on the upper deck with a few close friends and engaged in a favorite pastime: smoking pot.

  Rajaratnam enjoyed kicking back with a toke. In the early days of Galleon, he used to have rolled joints delivered to the office, which he would share with a few trusted lieutenants. But as Galleon got bigger it was harder to indulge the habit. In the middle of the passing, the boat’s real captain appeared. As the sweet stench of pot hung strong in the air, the captain issued a stern warning: if the group did not stop smoking at once, he would dock the boat. Rajaratnam and his friends laughed loudly, oblivious to the no-nonsense look on the captain’s face.

  “I could buy this boat if I wanted,” Rajaratnam boasted.

  The captain was unimpressed and repeated the threat. Only when the group realized that he was preparing to steer the boat back to land did they put out their joints. (Rajaratnam denied that he smoked pot in an article in Forbes magazine in October 2010 and said he helped the boat’s crew in getting some guests to stop smoking.) As the vessel with the rowdy revelers circled the island of Manhattan, it passed the southern tip of the city and Three World Financial Center. Inside, hard at work at the SEC’s offices on the sixteenth floor, were Wadhwa and his team.

  During the summer of 2007, the SEC lawyers combed through thousands and thousands of pages of Galleon emails, instant messages, chat room posts, and trading records. As part of the SEC subpoena it received, Galleon turned over more than 4 million documents: trade blotters recording Galleon’s purchases and sales of securities, personal trading and investment information for Rajaratnam, calendar and scheduling information for him and others, trading data for a number of specific securities, and emails and IMs, among other things. Wadhwa and Michaelson suspected the avalanche of information was designed to confound them rather than cooperate with their investigation. For a while, Galleon succeeded.

  When the SEC examiners were on-site at Galleon’s offices earlier in the spring, they took two lists of investors in the company’s funds. One list was organized on an electronically searchable, user-friendly Excel spreadsheet. The other list was a hard copy of investors that ran into the hundreds of pages. This list could be searched only manually. But for some reason when Michaelson, who was looking for investors in Galleon that were possible sources of inside information, punched in the name Anil Kumar, a contact in Rajaratnam’s Rolodex, nothing came up in the electronic list. He eventually found Kumar’s name, alongside that of an account holder, Manju Das, in the hard-copy list of investors. Next to Kumar’s name was his address in California and his phone number. To Michaelson, Kumar and Das were nothing more than a couple of Indian-sounding needles in a haystack of data. Kumar, it appeared, was simply an investment adviser or stockbroker acting as a custodian for Das’s account.

  While Michaelson found the difference between the two lists curious—Kumar was on a printout but not the Excel sheet—there was no sign that Kumar was an informant of Rajaratnam’s. When Micha
elson asked Rajaratnam point-blank at the June deposition to identify “any investors in Galleon who are consultants” to publicly traded companies, Rajaratnam said he knew of none. He also could not think of any investors in Galleon who worked for Advanced Micro Devices, the company whose stock Rajaratnam so masterfully traded. Buried in a mountain of paper, Michaelson moved on, skipping over Kumar’s name to the next investor on the list. Only in hindsight would he discover that pulling on the Kumar thread was a first step in unraveling a tapestry of information swapping that led all the way to the top of some of the nation’s most respected firms, including McKinsey.

  Jason Friedman almost went into journalism. As an undergraduate at Cornell University, Friedman, nearly six feet tall and well built, with an obvious sincerity, wrote for the Cornell Daily Sun. But after a stint as a trial preparation assistant in the Manhattan district attorney’s office, Friedman decided to become a lawyer. He was in the same Harvard Law School class as Michaelson, but the two met for the first time when Friedman joined the SEC from the New York law firm of Simpson Thacher & Bartlett. On July 9, Friedman’s first day at the agency, Michaelson sat down with him in a spacious common area in the SEC’s offices—the space was originally supposed to have a spiral staircase connecting the sixteenth floor with the seventeenth floor. Surrounded by breathtaking views of the water, Michaelson walked Friedman through the Sedna case, which had now morphed into an investigation of Galleon. For three straight hours Michaelson described the links between Rengan Rajaratnam and his big brother Raj as well as the stocks in which they were suspected of trading on inside information. Then Friedman started on a “deep dive” into the phone records of Rajaratnam and some of his suspected informants.

  Over the next several weeks, he dispatched subpoenas to the phone companies. By August, thousands of pages of phone logs arrived, yielding about eight thousand “interesting” phone numbers. Every one of them had to be examined. It was painstaking grunt work—the kind of labor that would be done at a private law firm by an associate. Law firms also owned sophisticated software programs that allowed a user to load phone logs and search them electronically. Sanjay Wadhwa checked with his tech support team and discovered that the SEC did not have the money to buy the software. So Friedman spent hours and hours scouring hard copies. With a ruler in hand, he would match up phone calls between two parties within a window of time around the suspicious trades Rajaratnam had made.

  As the SEC lawyers paged through Rajaratnam’s phone records, they came upon a trove of possible new informants. One frequent caller that jumped out from the thousands of pages of phone logs was Rajat Gupta. Unlike Wadhwa, Michaelson did not know who Gupta was at first. A quick Google search told him all he needed to know. He could not help but wonder what business a respected figure in the corporate world like Gupta would have with a sketchy trader like Rajaratnam. At the time, there was nothing besides the existence of phone calls between the men to tie Gupta to Rajaratnam; there was no evidence to suggest the two had a deep financial relationship. But the SEC lawyers had some sense of Rajaratnam’s circle now. If someone was in close communication with Rajaratnam, they were interested in learning more about him and his relationship with the Galleon manager. They put Gupta’s name aside. It was thrown into a basket of other names that cropped up during the course of the agency’s investigation.

  As Wadhwa surveyed the names at the heart of the probe and the ones he and his team set aside to focus on later, he came to a sobering realization. Without setting out to do so, it appeared that the SEC was on the verge of untangling the biggest South Asian insider trading ring in the history of the US securities industry.

  * * *

  Shortly before 4 p.m. on July 2, Rajaratnam’s phone rang. He was in his glass-walled corner office wrapping things up before setting off for France. On the other end of the line was Roomy Khan, the former Intel employee who had worked for him briefly in the 1990s before she left after trading for her own account. The two had fallen out of touch for a while, but several years later they reconnected. She had lobbed a call in to him because she needed a job, and she knew the best way to get one was to ply Rajaratnam with information. She started feeding him tips she’d received from sources in her wide circle of South Asian informants. Now she was calling Rajaratnam with a hot tidbit of information. He was eager to hear it.

  After she stopped working for him in March 1999, Khan had set up her own financial consulting firm, Digital Age Capital, and focused on building it up. She spent most of the day holed up in her office on the telephone. Khan liked to be connected; she had five telephone lines in her house and an equal number of computers. In the five years that she had been out of touch with Rajaratnam, she had traded her own account. In 2000, she made about $40 million on high-flying Internet stocks—a huge amount for someone who just a year earlier was pulling in a base salary of $120,000 as a hedge fund trader. Khan was on fire. Her investment gains prompted friends to funnel money to her. One was Sunil Bhalla, general manager of the voice communications division at Polycom, the Pleasanton, California–based videoconferencing equipment maker. He lived near Khan in Silicon Valley.

  Bhalla, an engineer by training, immigrated to the United States in 1980 after a two-year stint working for Union Carbide in Bhopal, India. Khan met Bhalla in 2002 when he started dating one of her best friends. Khan’s friend wanted her to meet Bhalla so she could screen the new man in her life. She trusted Khan because Khan and her friend came from the same community. When they eventually wound up having dinner in Sunnyvale, California, at P.F. Chang’s, a Chinese restaurant chain, Khan found she and Bhalla had a lot in common; they were both Punjabi and spoke the same Indian language. Outside India, links like these, though ever so tenuous, were ties that bound. Khan wasted no time in cultivating Bhalla on her own as a source.

  She impressed him with her knowledge of investing. “Thanks for the tips on stocks,” he emailed her in August 2002, soon after their first meeting. “I plan to act on your recommendations. Will be happy to split my profits.” He signed off the email with a smiley face. In January 2003, over lunch at the Marriott in Santa Clara, Khan picked Bhalla’s brain about semiconductor companies such as AMD and Intel. He was easy bait. He had just moved to California from Boston after a traumatic divorce and didn’t have many friends in the area.

  Khan was passionate about investing, putting in fourteen-hour days, and not long after they met, Bhalla decided that he wanted to avail himself of Khan’s expertise. He had never traded stocks on his own and he had heard a lot about Khan’s trading prowess from the woman he once dated, so he gave her authority over a $50,000 account that he held at Lehman Brothers. Khan had broad discretion to trade in the account; besides stocks, she could invest in options and other esoteric financial instruments. Rather than simply preserve his capital, Bhalla wanted to grow it, and he was willing to tolerate a high degree of risk. Khan traded derivatives in Bhalla’s account, and at first she grew his portfolio, quickly doubling his money to $100,000. Bhalla was very pleased, and in early November 2003 he sent her an email saying, “Thanks for doing so well on the stocks. I am proud of you!” Besides the stellar performance, Bhalla had another reason to be happy. Khan refused to charge him any fees for running his money.

  “I manage for close friends and family, and it would be an insult to me if you offer to pay me any money,” Khan told him when he first broached the idea. “You are Punjabi, you are part of the community. I would be happy to do it.”

  Khan came to look upon Bhalla and his new wife, Neelam, as friends and from time to time invited them to blowout parties or visited their house to pray. Like the Bhallas, Khan was a Hindu, and on occasions like Diwali, she would perform a puja, a ceremonial form of worship that involves lighting a lamp and making offerings of sweets and fruits to the gods. She often confided in the Bhallas about the problems she was having with her husband, Sakhawat. She had met Sakhawat in the mid-eighties when she was studying at Columbia University. Sakhawat was brilli
ant and Khan was irresistibly drawn to him, even though their relationship was fraught with problems from the start. Unlike Khan, Sakhawat was a Muslim. Khan ignored the difference, and a few years after meeting, the two were married even though her parents were dead set against the union.

  In 2005, Khan’s winning streak came to an abrupt end. She lost $5 million of her own money and all of Bhalla’s. He was remarkably sanguine about the loss. “We are friends and will remain so no matter what happens with the account,” he emailed her in March. The financial woes strained her marriage, though. Sakhawat, a traditional Asian husband, had never liked that his wife was as devoted to her work as she was to him. He blamed her for the losses. She in turn was upset with him because he had not worked in years.

  “Do something,” she implored. “Do something.”

  It was all the more frustrating because Sakhawat was one of the brightest men Khan knew. During the 1990s, Sakhawat Khan was granted thirty patents, and when Information Storage Devices Inc., a technology company he was working for, was sold, Sakhawat received a stash of cash and stock. By the time he was thirty-five, Sakhawat no longer needed to work for anyone. After the sale, Sakhawat moved to start his own company, Agate Semiconductor Inc., in a room attached to the bedroom of their first house, a modest ranch-style abode in Sunnyvale. When Agate Semiconductor was acquired in 2000 for $7 million, the Khans were enriched yet again, reaping a couple of million from the sale. At the same time, Roomy, emboldened by the $40 million she made trading Internet stocks, placed more bets on the market. Like many during the Internet boom, she was seduced by her own success.