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

by Anita Raghavan

  As Gupta approached a potential third term, colleagues sensed he yearned to burnish his legacy outside the notoriously discreet firm. He was a regular fixture at the World Economic Forum meetings in Davos, and, closer to home, he plunged into a diverse array of outside activities. One was the American India Foundation.

  In early February 2001, just six months after Gupta was invited to the White House for a dinner in honor of India’s prime minister, Bill Clinton, now out of office, reached out to Gupta and Victor Menezes, a Citibank executive, to brainstorm ways to help the earthquake-hit Indian state of Gujarat. Menezes hosted a working lunch for members of the South Asian diaspora at Citibank’s headquarters in New York and after the meeting he and Gupta took up the mantle and ran with it. They set up the American India Foundation, a charity to raise money for victims of the earthquake. With its pedigreed founding fathers, Gupta and Menezes, AIF quickly became an A-list charity for the Indian-American community in the United States.

  At its 2008 spring gala, nine hundred corporate titans, philanthropists, and community leaders packed the Waldorf Astoria hotel in New York to hear from one of independent India’s own success stories: Mukesh Ambani. Looking out onto a sea of women in brightly colored silk saris and men in Nehru suits, Ambani, one of the richest men in the world, declared, “There cannot be an island of riches in an ocean of poverty.” It was a glittering display of the enormous wealth of the South Asian diaspora in the United States. In one night, AIF raised $3 million.

  Gupta’s forays into philanthropy thrust him into a new league—far bigger than the ones he had played in in Chicago and Scandinavia. In April 2001, when he traveled with Clinton to India on a fact-finding mission, the two men forged a friendship. After Gupta returned to America, he invited a photographer who traveled with them to his home. “I heard you take good pictures and have taken a lot of Bill Clinton’s photos in the White House,” he remarked to the man during their trip. The photographer was soon hired to take photos at the Gupta estate.

  As managing director, Gupta had always devoted a significant chunk of time—as much as 25 percent—to ventures that had nothing to do with the firm. He never regretted it. His outside activities—and there were many—almost always redounded to McKinsey’s benefit. His push into public health, he asserted years later, made him intimately acquainted with the heads of the major drug companies, many of whom were McKinsey clients or belonged to companies McKinsey hoped to enlist as clients. The interest in public health also helped him build ties with heads of state. It was his vision to start a quasi-public private health foundation in India that drew him deeper into the orbit of India’s new prime minister, Dr. Manmohan Singh, and helped him earn Dr. Singh’s respect.

  But during his last term as managing director, Gupta’s lack of focus was felt acutely among the partnership. He barely got elected to managing director when he stood for election the third time, and a number of McKinsey clients—Swissair, Kmart, and Global Crossing—filed for bankruptcy court protection during his final term.

  The biggest black eye was Enron Corp. Because of its ties to the company’s chief executive, Jeffrey Skilling, McKinsey had long held a big presence at Enron. At one point, the firm’s annual billings to Enron exceeded $10 million. The public Gupta took the setbacks in stride. “In these turbulent times, with our serving more than half the Fortune 500 companies, there are bound to be some clients who get into trouble,” he told BusinessWeek magazine in July 2002.

  He started spending more time in Stamford, Connecticut, where he had an office, and he distracted himself with outside interests—the World Economic Forum at Davos, AIF—and in 2002, he joined the board of the Global Fund to Fight AIDS, Tuberculosis and Malaria, one of his most important philanthropic achievements. Gupta helped conceive the “one-stop shop” organization, believing that a unified effort was the best way to combat the three killer diseases. He had been motivated in part because his Harvard friend David Manly had died of AIDS. It was a death he felt could have been prevented.

  His activities outside McKinsey drew him into the company of an ever-widening group of influential businessmen. Many were South Asian luminaries like Raj Rajaratnam who could write out big checks, not just collect them from rich donors. Gupta first learned about Rajaratnam from Kumar, who told him that Rajaratnam had given $1 million anonymously to ISB in 2001. When Gupta was raising money on behalf of AIF for earthquake relief in Gujarat, in step with his new friend Bill Clinton, he approached Rajaratnam directly. Again, the Galleon hedge fund manager gave generously.

  The charitable gift stuck in Gupta’s mind. He had had a rough time raising money for the earthquake relief effort. When Rajaratnam opened his checkbook so effortlessly, Gupta was impressed. Someone so generous was surely a good man. He and Rajaratnam formed a casual friendship, though in the early years, certainly while Gupta was still at the helm of McKinsey, they weren’t close. They traveled in different circles.

  Ironically, during the peak of the dot-com boom, Gupta could have easily joined Rajaratnam’s big-money crowd. Offers were flooding in from private equity firms and technology start-ups looking for a seasoned manager, but Gupta resisted. His wife, Anita, would tell his colleagues at McKinsey that Gupta enjoyed the stature that came with being global managing director. He could always trade places with Rajaratnam, but the Galleon chief could never trade places with him.

  But after the tech hemorrhage and the criticism that came with it, Gupta stepped down as managing director amid a period of darkness. No longer the can’t-miss global genius, he was now being portrayed as the man who grew McKinsey too far too fast, leaving his successor with a laundry list of problems.

  In 2003, shortly after Ian Davis was elected to the position of worldwide managing director, John Byrne, a writer for BusinessWeek, got a call from Davis’s handlers. Would Byrne agree to be interviewed for a videotaped piece that would be shown to McKinsey’s partners at their next meeting? The topic of the interview was the subject of Byrne’s story a year earlier, “Inside McKinsey,” which focused on whether the firm had overreached.

  “The new leadership was basically saying things got out of control under Rajat and we are moving back to the basics of Marvin Bower,” says Byrne today. “To some degree, that was a repudiation of his leadership of the firm.”

  Longtime friends sensed that Gupta felt lost.

  “He was feeling literally crazy” after he stepped down as managing director, says Bala Balachandran, a neighbor of his in Winnetka and the dean of the Great Lakes Institute of Management in Chennai, India, one of a handful of new business schools that have sprung up in India since the founding of Gupta’s Indian School of Business. Balachandran remembers visiting Gupta after he relinquished his position as global managing director. In previous years, the two sat and talked in his generous and beautifully decorated office on McKinsey’s executive floor. But now Gupta was relegated to a much smaller office on a different floor, and he was obviously embarrassed by the new digs.

  He said, “Bala, I am sorry I couldn’t take you to the big office,” Balachandran recalls. His sense of having lost sway and influence was palpable. As Balachandran looks back on his friendship with Gupta, he sees a man who was always “tossed between two forces.” On one side, Gupta was “very humble, accessible, and open,” and on the other side, he was enamored with prestige, power, and the finer aspects of life. He liked to name-drop. “He was very proud of saying ‘I hired Chelsea Clinton—I hired Hillary Clinton’s daughter,’” says Balachandran.

  Another case in point: at the turn of the millennium, Gupta and Anil Ambani wanted to expand the campus of the Indian School of Business. Ratan Tata, one of the wealthiest men in India, known for his very modest lifestyle, and an ISB board member, asked the two: “Are you trying to build a five-star luxury hotel for a business school?” Saying that he did not want to build a “Taj Mahal or a mausoleum” for ISB, Tata scaled back his involvement in ISB. Balachandran said Gupta approached him and asked him to talk t
o Tata. “I said to Rajat, ‘You can’t have your cake and eat it too,’” says Balachandran.

  Gupta’s retirement as managing director at McKinsey was a pivotal turning point in his life. “Up to his McKinsey days, he was guided by the McKinsey guidelines and values. He was governed by McKinsey and not Rajat. He was on the right side,” says Balachandran. “After McKinsey, he put his eggs in the basket of money rather than reputation. He stepped up his quest for money because his professional superiority had climaxed.”

  In April 2004, Gupta traveled to Columbia University to speak to Srikumar Rao’s Creativity and Personal Mastery class. Much of his talk was devoted to trotting out his usual philosophies, but at one point a student asked him about his attitude toward money and wealth creation. Gupta offered a remarkably honest response.

  “When I look at myself, yeah, I am driven by money,” he said. “I like many creature comforts. I want to make sure I take care of my kids well and so on and so forth. And when I live in this society you do get fairly materialistic, so I look at that. I am disappointed. I am probably more materialistic today than I was before and I think money is very seductive…you have to watch out for it because the more you have it, you get used to comforts, and you get used to, you know, big houses and vacation homes, and going and doing whatever you want, and so it is very seductive. However much you say that you will not fall into the trap of it, you do fall into the trap of it.”

  Chapter Twenty-One

  The Dishonorable Dosco

  That is “very useful information,” said Rajaratnam as he listened intently to Kumar.

  Starting in late 2003, just a few months after their discussion at the Indian School of Business reception, Kumar was already delivering: two giant computer companies, Hewlett-Packard and Dell, who were loyal Intel customers historically, were in advanced talks to move some of their business to Kumar’s client Advanced Micro Devices. Over the next couple of months, Kumar kept Rajaratnam abreast of the twists and turns of the negotiations, giving him a heads-up when discussions with Dell fell apart and alerting him when talks with Hewlett-Packard heated up.

  On occasion, Rajaratnam would ask Kumar if he would buy AMD stock. Knowing if Kumar would invest his own hard-earned cash in the company would be a good guide for Rajaratnam of whether he should buy the stock. Kumar reiterated that he was not allowed to buy AMD stock under McKinsey’s rules, but he was so excited about the deal, he told Rajaratnam he would buy stock if he could.

  Kumar had long reveled in his role as consigliere to some of America’s biggest technology companies, and one of his most cherished clients was Advanced Micro Devices, Inc., a Sunnyvale, California, company that supplied chips to personal computer companies. AMD was founded in 1969 by the colorful tech entrepreneur Jerry Sanders, who received as much notoriety for his parties, fancy cars, and Beverly Hills mansions as he did for taking on semiconductor giant Intel Corp. When AMD prospered, Sanders built a shrine to himself: an opulent headquarters building in Sunnyvale that came to be known as “Jerry’s White House.”

  In the world of semiconductors, the rivalry between AMD and Intel is legendary. AMD was the David to the Goliath Intel. Together, they control the chip market. During most of their historic rivalry, AMD was the long-suffering laggard, but in 2003, AMD executives champed at the bit, excited because the company had devised a new computer chip, Opteron. It was their lethal weapon in the fight to win market share away from Intel. Within AMD, secrecy naturally surrounded the new product. Thanks to Opteron, AMD was on the cusp of winning a big order from one of Intel’s most long-term and loyal customers, Hewlett-Packard Co.

  After overtures from AMD’s most senior executives, HP was coming to the view that AMD’s new chip was the best for some of its server systems. But the deal was not sealed yet. So as not to run the risk of a leak that would let Intel retaliate and sabotage its plans, AMD gave its efforts to grow market share the code name MAID, an acronym for Microsoft, AMD, IBM, and Dell. The companies represented the firms that were integral to the efforts to gain market share. From the beginning, only a few people knew about the MAID initiative. One happened to be Kumar.

  Unlike rival consultants, Kumar enjoyed a privileged perch at AMD. He was a confidant of the company’s chief executive, Dr. Hector Ruiz. Kumar and McKinsey did work for Ruiz when he was the president of Motorola’s semiconductor unit. Though the two came from different socioeconomic backgrounds, they were alike in one important way: they were nerds. Ruiz, the engineer, had a PhD in quantum electronics. Kumar, the consultant, had a master’s degree in applied mechanics.

  At AMD, Ruiz treated Kumar as a strategic sounding board and often called him, sometimes at home, to bounce ideas off him. Among the coterie of obsequious advisers who tried to pitch their services to AMD, Kumar was by far the most knowledgeable, a bold and big thinker whom Ruiz trusted implicitly. Like Ruiz, who, after he was widowed, met his second wife at a daycare center where they both took their children, Kumar was a family man. Both men were immigrants to the United States, though Ruiz had a far more inspiring tale of hope and triumph, which lent a soft edge to an otherwise imperious facade. Ruiz was born into a poor Mexican family. As a young man, he would walk across the border every day from his home in Piedras Negras to attend high school in the South Texas town of Eagle Pass. He didn’t start learning English until he was sixteen, but he graduated as valedictorian.

  Not long after Ruiz assumed the reins in 2002, Kumar appeared at AMD. When he was at Motorola, Ruiz was known as “Hector the Dissector” for his large-scale job cuts. At AMD, he also embarked on a program to slash costs and enlisted McKinsey’s help. Longtime AMD employees marveled at the access Kumar and McKinsey were given. They were shown product road maps and future financial projections, even though some of the advice they served up bordered on the absurd. During one of its first projects for AMD, McKinsey briefly considered an idea to cut costs by unscrewing every other lightbulb in AMD’s offices.

  In a sign of their elevated importance, the men from McKinsey were installed in a conference room just outside Mahogany Row, the wood-paneled executive floor at AMD’s Sunnyvale headquarters. Sanders personally recruited Ruiz to be his successor at AMD, but before Ruiz arrived, the company for the most part avoided consultants, which made Kumar all the more obvious. Without notice, he would appear at executive events like the once-a-year gathering AMD held for its 250 employees who were at the level of vice president and above. Kumar milled around, not participating in the formal presentations, but he was unnervingly visible to employees, who sensed that the McKinsey man’s presence could mean only one thing: cost cutting. Their fears were quickly borne out. In November 2002, Ruiz announced that the company would lay off two thousand staffers, or 15 percent of its worldwide workforce.

  At Ruiz’s behest, Kumar was invited to attend meetings of AMD’s strategic council, which gathered every four to six weeks, sometimes overseas, to hash out the company’s most pressing strategic challenges. He was part of a coveted inner circle, the only non-AMD executive present among the cabal of top executives. “I was at the heart, inside almost the body of the company,” Kumar would gush. Over the years, Kumar came to identify personally with his client’s long battle with Intel. He fervently believed that AMD’s new chip was better than Intel’s microprocessor, and he liked Ruiz personally and was rooting for him to succeed. In title, Kumar was a consultant to AMD. But in his heart he was an insider. All his life, Kumar had struggled to be appreciated and recognized. Finally, at AMD he was.

  “I am being treated like a confidant by the CEO,” he bragged to Rajaratnam. “I am part of his senior-most four, five, six people thinking through how AMD is going to win in the marketplace.” Like everyone who knew Kumar, Rajaratnam had grown accustomed to indulging his friend’s sense of self-importance, though at times it was tiring.

  Stroking Kumar’s bruised ego would eventually allow Raj Rajaratnam to lure Kumar into his web of tipsters. Ever since Kumar had returned to Silicon Valley fro
m India, Kumar and Rajaratnam had casually swapped insights about the technology space. From time to time—about three or four times a year—Rajaratnam would pick Kumar’s brain and ask him questions with unknowable answers, such as: are the lofty prices in the technology sector a sign of a bubble, and if so, will the bubble burst?

  For his part, Kumar shared his thoughts on the Internet and explained the way it would transform companies. Kumar appreciated the give-and-take; Rajaratnam was very knowledgeable about technology, and the idea that he would be interested in Kumar’s perspective inflated Kumar’s sense of importance. Naturally, Rajaratnam was delighted to hear that Kumar was in the inner sanctum of AMD. By early 2004, the details of the “consulting” arrangement between Rajaratnam and Kumar were finalized. When Rajaratnam first floated the idea that Kumar moonlight for him and get paid for it, the issue that made Kumar lose sleep was that McKinsey might come to know. Rajaratnam helped ease his worry. All Kumar had to do was to find someone else who would be willing to enter into a consulting arrangement with Rajaratnam.

  Since Rajaratnam planned to pay for Kumar’s services with soft dollars—rebates from trading firms—the money could not be funneled directly to Kumar’s housekeeper, Manju Das. There had to be a conduit, an entity that appeared to provide consulting services to Galleon, through which the money passed. After some effort, Kumar found someone in Europe willing to enter into a consulting agreement with Galleon. The firm, Pecos Trading, would bill Galleon for its services and transfer the money it received to an account in Kumar’s housekeeper’s name, at Galleon. As part of the setup, Kumar would be the custodian of his housekeeper Manju Das’s account at Galleon. The beauty of it all was that there would be no paper trail leading back to him at McKinsey.

  On January 16, 2004, Pecos Trading received its first payment of $125,000. Soon, just as Kumar had predicted, Hewlett-Packard unveiled a $400 million trial order to use AMD’s Opteron chip in some of its existing servers. It was a huge order. Hewlett-Packard was a behemoth, so any shift of orders, even a small one, by the Palo Alto–based company would buoy AMD’s business and dramatically reshape the semiconductor landscape.