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

by Anita Raghavan

  But the honeymoon between Rajaratnam, the handler, and Kumar, the mole, was fading fast. Now that Kumar was a paid consultant, Rajaratnam wanted to speak to him more than a few times a year. And he was no longer content with hearing Kumar’s eggheaded musings on the big-picture trends in the technology industry. When they chatted, Rajaratnam came to the conversations armed with a battery of questions about AMD. How was the quarter going? What were their strategic plans? Did they have any thoughts of buying another company? He was particularly interested in what AMD was going to tell Wall Street about its future prospects.

  In the investment world, a company’s statement about its future business is known as “guidance.” Often, even if a company reports blockbuster earnings, negative “guidance” can bury a stock because investors in stocks are making a bet on a company’s future performance. Rajaratnam told Kumar that “guidance” was a key fact and he wanted him to get it as often as possible.

  At first, Kumar felt at sea. He was a consultant at heart, preoccupied with weighty subjects like a company’s strategic direction. He had little interest in picayune day-to-day matters like a company’s quarterly profits. He knew that “guidance”—the company’s forecast of its future, the nugget that Rajaratnam singled out as important—was difficult to come by because it was typically set by companies late in the earnings reporting process. But Kumar felt like he owed Rajaratnam something now that he was being paid and he had to try as hard as he could to get the information Rajaratnam wanted. Ironically, his old Doon School values kicked in. If he was being paid to do a job, he had to perform to the best of his ability.

  When Rajaratnam first offered to compensate Kumar to keep a list of investment ideas and call him once a month, he told Kumar that he knew Kumar would keep his promise only if he was paid. “You will not remember to keep a list if you don’t get money from me,” Rajaratnam said. Rajaratnam knew that the only currency sealing the bond between him and Kumar was cold cash. Kumar always looked upon Rajaratnam with a certain disdain. He didn’t think Rajaratnam was his intellectual equal. Few people rose to that level. “I have all the brains and you have all the billions,” he liked to tell Rajaratnam, repeating a variation of a line he often used with his Wharton friends who had made it big on Wall Street.

  If there was one thing the two men could agree on, it was that they couldn’t have been more different. Rajaratnam’s billions had made him loud and boorish. He rarely censored himself now—even with clients whose business he was seeking to win. One evening in 2005, he met with two former executives of the London hedge fund company Man Group PLC for cocktails at Opia, an upscale French restaurant in Manhattan that Rajaratnam was invested in. At some point, the conversation invariably digressed to women. Rajaratnam regaled his guests with his sexual joking. An attendee recalled him saying his idea of a good time was to get a few girls on his lap and spank them. He made a motion with his hand to show the executives exactly how.

  Had he been there that evening, Kumar would have been appalled. In all the years Rajaratnam knew him, he never saw Kumar laugh and be really happy. He was so stiff that one former colleague of Kumar’s described him as trapped in the “prison of his personality.” He fancied himself a Renaissance man who could speak eloquently about art and drama. He was formal to the point of awkwardness. When his high school class at Doon was putting together a directory for their thirty-fifth reunion in 2009, Kumar supplied his secretary’s contact details and his address at McKinsey in New York. Almost everyone else in Kumar’s class provided their personal contact information.

  Though there was little in the way of shared interests, Kumar was now inextricably tied to Rajaratnam’s largesse, so he scraped around for morsels of tradable information. From time to time, when he attended meetings with AMD’s senior executives, he would overhear snippets—“We are doing quite well” or “Intel is fighting us and hurting profits, so this quarter will look bad.” He slipped the tidbits to Rajaratnam.

  At times, Rajaratnam tried to reciprocate. He treated the informants in his financial underworld much like a mafia capo controls his foot soldiers. He made sure that he always had something on them, and he liked to tie them as closely to him as he was to them. Sometimes lending a hand—helping them with their work—was a way to draw his informants deeper into his web. On two occasions, Rajaratnam FedExed packages of slides running fifty pages long detailing new product plans for AMD’s archrival, Intel, to Kumar. He didn’t tell him beforehand he was sending the slides.

  When Kumar opened the package, he was terrified. There was an open-door policy in his office at McKinsey in Silicon Valley. What if one of his colleagues walked in and saw the confidential Intel documents lying around? What would he say if he was asked where they came from? Kumar quickly asked his secretary to shred the slides. He couldn’t admit to himself just how dirty his business was with Rajaratnam. He had to keep up the charade that he was only providing big-picture pontifications to Galleon, not inside information, but the lies he told himself were getting harder to believe every day.

  Even though Rajaratnam was making good money on AMD, he told Kumar in 2005 that his advice was not as valuable as he’d expected it would be. Kumar failed to get the detailed quarterly financial results that Rajaratnam was looking for from AMD or other McKinsey clients. Rajaratnam knew it was time to tie Kumar’s compensation to his information. Kumar would get paid now only if his information paid.

  Rajaratnam proposed that they change the relationship. Instead of giving Kumar cash, he would buy based on Kumar’s information and split any trading profits. The plan left Kumar queasy. He thought a consulting-like arrangement more appropriate and less risky. If Rajaratnam bought shares, how would he let Kumar know that he had bought the shares or tell him what price he had paid? Rajaratnam would probably have to email him or post some documents to him. It was a scheme that seemed too prone to discovery.

  It was also a setup that would force Kumar to come face-to-face with what he was doing. Somehow, Kumar felt a little sheltered by the cash-for-information deal he had cooked up with Rajaratnam; he could rationalize the whole arrangement. After all, he didn’t know exactly what Rajaratnam was doing with the information he supplied. But if Rajaratnam started buying shares based on the tips he provided, there would be a direct link between the information he gave and the money he made. This tit for tat struck him as a much bigger crime. Emotionally, he thought, it would stare him in the face and make him feel uncomfortable. At the very least, it would be hard to ignore his role in the seamy affair.

  For a while, the two debated an alternative payment plan. As they thought about a new arrangement, for three months Rajaratnam did not pay Kumar. Finally Kumar suggested something even better than the stock-trading scheme; it was a payment plan akin to an arrangement McKinsey had with some of its clients. He told Rajaratnam he would be happy if at the end of each year Rajaratnam decided how much to pay him based on his judgment of Kumar’s contribution for the year. He would be like a nonsalaried investment banker. All of his pay would be in the form of a bonus, decided by his boss, Rajaratnam.

  Anil Kumar had always done well for himself when he was trying to perform for a higher-up, be it his masters at Doon or his mentor, Rajat Gupta, at McKinsey. He felt comfortable in the employee/boss dynamic. Rajaratnam was more than comfortable. He had Kumar right where he wanted him.

  Chapter Twenty-Two

  On the New Silk Route

  Galleon employees first started noticing Rajat Gupta visiting their offices in the spring of 2005. Their boss, Raj Rajaratnam, was a consummate networker, always meeting new people, many of them South Asians. Some came to talk to him about Galleon—either a job at the hedge fund or an investment with it. But many more came to chat with Rajaratnam about new ventures. If there was one thing Galleon employees knew about their boss, it was that he had his fingers in an array of businesses. He owned a share in Manhattan restaurant Rosa Mexicano; he had a 5 percent stake in a large Sri Lankan conglomerate; and
he even was an early investor in Marquis Jet, a private plane leasing company. (One of the perks of the investment was that Rajaratnam received free flying time. When Galleon was still small, he flew the firm down to New Orleans for a company trip in a Gulfstream IV private jet.)

  But Gupta was distinctive, different from many of the other callers. He was impressive in an understated way. Whereas Rajaratnam was garrulous, his new friend was quiet but always polite. Since stepping down from the helm of McKinsey, Rajat Gupta, by now fifty-seven years old, had been casting about trying to determine his next move in life.

  Gupta had always been intrigued by the investment business. He was a prodigious investor, soaking money into everything from private equity to friends’ start-up ventures. When the daughter of new age physician Deepak Chopra was trying to launch an Internet company, Gupta, who believed in lending a hand to enterprising youngsters, readily agreed to invest $250,000. The business never took off and Gupta was not able to recoup his investment, but he never once mentioned the loss to Chopra. It was not the only time he had lost money on the Internet. During the dot-com bust of 2001, Gupta had suffered searing losses in technology stocks, but he made a killing on an investment in Scandent Solutions, a company started by a friend of his, Ramesh Vangal. Now that he was gradually phasing out of McKinsey, he was thinking about getting into the investment business himself. As he did with everything in his life, he approached it with lofty aspirations.

  Gupta and a friend, Ravi Trehan, whom Gupta met one summer when Trehan rented a guesthouse in Connecticut from Gupta, had come to sound out Rajaratnam on the idea of buying an investment management company. The firm—which Trehan had found in Florida—was a so-called fund of funds, which raises money from institutional and high-net-worth investors and then allocates money to different kinds of hedge funds. Gupta and Trehan, a seasoned investor with an enviable track record of structuring deals, told Rajaratnam that they thought they could buy the company for 2 percent of assets. At the time, investment managers were trading at about ten times assets. Gupta and Trehan were looking for $100 million from Rajaratnam as equity capital to buy the company. Rajaratnam was skeptical and the plan went nowhere, but another idea caught his imagination.

  It was an investment vehicle called Voyager Capital Partners. Voyager, essentially a creation of Trehan’s, would invest in a smattering of funds and strategies—some run by Galleon and some by Trehan’s investment firm BroadStreet Group.

  The beauty of Voyager was that it would be highly leveraged, which amplified its investment firepower. Essentially the fund would borrow money, invest it, and then seek to pay back the debt after its investors made an acceptable profit. Under the structure, Rajaratnam put in $40 million, giving him an 80 percent stake in the entity, Trehan invested $5 million for 10 percent of the equity, and Gupta $5 million for 10 percent. On the back of the $50 million in equity, Voyager borrowed $350 million, pumping up the vehicle’s investment capacity—and the potential returns—to its three partners.

  Most of the loan—$300 million—came from Lehman Brothers, which bore the least risk in the event there were losses in Voyager. The three equity partners—Gupta, Trehan, and Rajaratnam—carried the greatest risk. If there were losses in Voyager, they would shoulder them first.

  From the start, Voyager was highly lucrative for its partners and even more so for BroadStreet, which was Voyager’s investment manager, doing the paperwork, allocating the money to different funds, and receiving fees for its role. On January 11, 2006, just three months after Voyager was set up, the equity of the shareholders stood at $58,382,958, a return of nearly 17 percent. But while the profits were piling up, the goodwill between the two key partners, Trehan and Rajaratnam, frayed.

  One day in early 2006, Rajaratnam, Gupta, and Trehan were meeting at Galleon’s offices when Rajaratnam started laying into Trehan. Instead of BroadStreet serving as the investment manager of Voyager, Rajaratnam was angling for Galleon to be making the asset allocation decisions at Voyager (and getting a bit of the lucrative management fees). At one point, Rajaratnam became so abusive that Trehan, a seasoned investor with a successful track record, got fed up and said, “I don’t want to do business with you if that is the way you are going to act.” Then Trehan walked out of Rajaratnam’s office. Gupta stayed. He did not follow his friend.

  People noticed that Rajaratnam always addressed Gupta with great deference, unlike the way he treated others. He liked to refer to Gupta as a South Asian “rock star” and explained to friends that Gupta was a half generation older than him and, in Asia, it was the custom to treat elders with respect. Shortly after the falling out, Trehan sold his investment in Voyager to Rajaratnam and for a while, Rajaratnam owned 90 percent of the equity of the vehicle and Gupta held 10 percent.

  In 2006, Gupta was starting to focus on his life after McKinsey; even though he had stepped down as managing director in 2003, he remained a partner and had signaled to colleagues that he wanted to stay on at the firm until 2008, when he turned sixty. His outside activities, though, were making it increasingly difficult for him to continue. One of the most nettlesome was a new money management company that Gupta was in the throes of setting up even as he was still on McKinsey’s payroll as a partner.

  In early 2006, Gupta confided in Kumar that he wanted to start a large, world-class asset management company, focused not just on hedge funds but on private equity too, that would be targeted at investing in South Asia—mainly India but also China and, to a lesser extent, the Islamic world, Pakistan and the Middle East. His plan was to enlist well-regarded money managers of South Asian origin to run the assets. Gupta said he had already teamed up with three other partners, Parag Saxena, who had expertise in private equity; Rajaratnam, who was a hedge fund pro; and Mark Schwartz, a former Goldman Sachs executive who had worked for many years in Asia. The foursome had an ambitious goal: they wanted to raise $2 billion for the new fund. They were deeply committed to the project, proposing to match the total amount raised—ultimately $1.25 billion—by putting in 10 percent of their own money. The seed money of $130 million was to be divided equally, but Gupta told his partners to count him in for less: $22.5 million.

  The new venture, which was called Taj Capital and later renamed New Silk Route (NSR), at first operated out of space adjacent to Galleon’s offices on the thirty-fourth floor at 590 Madison Avenue. To facilitate his movements in and out of Galleon’s offices, Gupta also received a key card allowing him to come and go as he pleased. Sometimes, his free access caused problems for Rajaratnam. One time, Gupta arrived at the office without an appointment. Rajaratnam told his secretary, Caryn Eisenberg, to lie and tell Gupta he wasn’t there. But Gupta was determined to find him. He got into the office using his key card and eventually tracked Rajaratnam down.

  Gupta poured his energies into raising money for the new fund, tapping into his impressive array of contacts. In mid-2006, when the four partners settled on their plans, the group put together a priority list of investors to target. Gupta was responsible for reaching out to some of the biggest names on the list. He and Schwartz were to go after the investment officers of the endowments for preeminent institutions such as Harvard University, where Gupta’s daughter worked, and Yale. They were also to reach out to Bill Gates and the Walton Family Foundation. (Harvard did not invest, citing as a factor a conflict of interest because Gupta’s daughter worked there; Goldman also passed on the opportunity, raising similar concerns, in this case because Gupta was a board member.) Gupta alone would approach Edgar Bronfman Jr., whose family built a fortune through the spirits company Seagram, even though his McKinsey colleague Anil Kumar, who had been considering joining the fund, had already spoken to Bronfman’s older brother, Sam.

  The lifeboat out of McKinsey now awaited Kumar, but it was the last thing he wanted to pursue. His dissatisfaction with his lot had prompted him to toy with outside ventures, but he knew in his heart that he was most comfortable as a salaryman at a big firm. He desperately hoped that
in three years when a new managing director ascended to the helm of McKinsey, his career would be back on track.

  For now, though, he figured that it didn’t hurt to be deeply involved in the planning of NSR. Operating against company practices, Kumar often fired off emails about the new fund from his account at McKinsey. Sometimes his efforts landed him in near scrapes with his employer. In early October 2006, Kumar sent an email with the subject line “URGENT” in all capitals to the founding partners of NSR. Two of them, Rajaratnam and Saxena, planned to have a meeting with a potential investor, Dr. Hosein Khajeh-Hosseiny, at Northgate, a “fund of funds” that allocated money to various private equity firms. Many of Northgate’s principals had worked at McKinsey. “I spoke with Dr. Hosselnys [sic] asst yesterday. Given Northgate’s special relationship with McKinsey she was puzzled as to why I was joining this meeting today,” Kumar wrote to them. The best positioning for these meetings is that “I am a ‘founding investor’ and an old school friend of Raj and Parag.”

  McKinsey failed to spot Kumar’s work for NSR and that Kumar was angling to be paid hundreds of thousands of dollars by NSR for his efforts even as he was on McKinsey’s payroll. Kumar’s second attempt to moonlight never came to anything because one of the principals of NSR, Parag Saxena, was vehemently opposed to the idea. As a compromise, it was agreed that Kumar would receive a stake, albeit smaller than that of the founding principals, if he decided to join NSR in three years.