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

by Anita Raghavan

  “Do you think we should buy some Spansion for other funds?” Rajaratnam asked.

  “Uhm…let me see what offer comes in as of tomorrow,” Kumar replied.

  Minutes after hanging up with Kumar, Rajaratnam telephoned Kris Chellam and another colleague. Rajaratnam had known Chellam almost from the time he got started in the business, following him around Silicon Valley as he bounced from Atmel to Xilinx before coming to work for Rajaratnam at Galleon. Chellam was a regular at Rajaratnam’s infamous wild and sexually charged Super Bowl parties in Miami.

  “Somebody is gonna put a term sheet for Spansion,” Rajaratnam told the two. “May third is the deadline, which is I think tomorrow, right?”

  Rajaratnam said he asked Kumar whether he should buy some Spansion for Galleon but Kumar had told him to wait.

  “This is the one that we also have to make sure that we keep our conversations just privileged to the three of us,” said Rajaratnam. “You know, you just have to be careful, right?”

  One of the best ways to protect themselves, Rajaratnam suggested, was to create an email trail. He would start the chain by sending an email to the two of them saying: “You know, have you guys thought of Spansion? The stock looks cheap, right?”

  Then they could offer to get the Galleon analyst who covered Spansion to do some work on the stock. Alternatively, Rajaratnam could send a more general email. “Something like, you know, ‘there’s a basket of semiconductor companies like Lattice, Spansion and Atmel…see what you think,’” Rajaratnam said. “And you should say, ‘Atmel and Spansion look good.’ You know, so that we just protect ourselves.”

  “Have a corporate record,” replied Chellam.

  “Yeah, we just have a email trail, right, that uh…I brought it up,” said Rajaratnam.

  * * *

  Sixty blocks south of Galleon’s midtown office, an FBI agent was sitting in a secure room with about ten other agents, each with a headset, tuned in real time to a call between Rajaratnam and his associates.

  Roomy Khan’s calls to Rajaratnam had suggested that there was indeed criminal activity taking place on his cell phone, so on March 7, 2008, Lauren Goldberg, the prosecutor who had given Khan a lecture when she first sat down with the government, presented a wiretap affidavit to the court seeking permission for the feds to eavesdrop on Rajaratnam’s conversations. Federal judge Gerard E. Lynch approved a wiretap on Rajaratnam’s cell phone for thirty days. His work phone and his home phone were not tapped. Now, for the first time, the FBI was in a position to get an insider’s glimpse into Rajaratnam’s relationship with Kumar, Gupta, and a host of others. Three days after Lynch’s authorization, the FBI intercepted calls over Rajaratnam’s cell phone, monitoring both outgoing and incoming calls. Each time a call came into Rajaratnam’s cell phone, a number would pop up on a computer screen in front of the agent manning the wire. Typically the agent would listen to the call on a headset and write on lined sheets the initials of the callers.

  Under Title III, the statute governing wiretaps, “non-pertinent phone calls” such as a target speaking to his mother must be “minimized,” which means not listening to and not recording the call. If the call appears to be “non-pertinent,” the agent manning the wire has to turn down the volume, which also stops the recording, wait a few minutes, and then turn up the volume to see if it has turned to a “pertinent” subject. If the call is with someone who always seems to be “non-pertinent,” they generally have to “minimize” the entire call.

  Some agents are more adept than others at manning the wire, a job that within the FBI is known for its drudgery. A few times during the investigation a call that could have yielded important evidence got “minimized,” meaning it isn’t recorded at all. It is hard to fault the FBI agents, though. Before a wiretap goes up, prosecutors are required to read the agents manning the wire a speech that lasts about twenty minutes. Prosecutors impress upon agents that one way a wiretap can be suppressed or thrown out later is if an agent fails to minimize a call properly. Judges are all over the map on their views of calls that aren’t minimized properly; some exclude the specific call, whereas others disallow the whole wire, potentially jeopardizing an entire investigation and killing a case.

  In mid-April, Andrew Michaelson—the SEC line attorney who had built up the investigation from suspected cherry picking of investments at tiny Sedna Capital to insider trading at giant Galleon—was lent to the US attorney’s office in Manhattan to work on the Galleon case. Before he left the SEC, there had been a small breakthrough in the investigation. On April 2, Roomy Khan, after months of obfuscation and ridiculous stories, admitted that she had made trades in Hilton stock based on inside information. As part of an agreement with prosecutors, Khan had been cooperating, but she had been holding out on revealing the Hilton informant because she had met the source through her cousin, whom she was trying to protect. Her source was Deep Shah, a young analyst at Moody’s, the credit-rating agency, whom SEC lawyer Jason Friedman had identified the previous summer when he drilled down into Khan’s world. At the time, Friedman knew only that Shah was one of the hundreds of contacts in Khan’s Rolodex. He had no way of knowing that as a Moody’s analyst Shah had been briefed on the Hilton deal before it was announced.

  As Khan told the story, one day in late 2006 her cousin telephoned her and said that his roommate worked at Moody’s and was privy to a lot of buyout information before it was unveiled. Moody’s, which provides widely watched ratings on corporate credit, is often briefed on deals before they are announced, as they were in the Hilton case, so they can develop a new rating when a takeover is unveiled.

  “You know you can make a lot of money,” said her cousin. Then he put his roommate, Shah, on the phone. In their very first conversation, Shah served up a takeover tip—the trouble was it was Friday evening and the deal was going to be unveiled on Monday before the market opened. There was no window for Khan to trade in; however, when the deal was announced on Monday exactly as Shah had predicted, Khan knew she had a new surefire source. For the Hilton insider tip, she told prosecutors she paid Shah $10,000. The tip was red-hot; Shah called her on July 2 soon after learning about it from a colleague who had been briefed by Hilton. (Shah has denied being the source of the Hilton tips.)

  “Didi,” he said, using the Hindi word for “older sister” when he got in touch with her. “This is happening tomorrow so better get on it right away.”

  Khan shielded Shah for as long as she could, risking her own cooperation with the government to protect her cousin, who had introduced them. Soon after she agreed to help the feds and record calls on phones she was given by the FBI, she got a new cell phone, which she had registered in the name of her gardener. She used the cell phone to make calls to a few in her circle, including Shah, whom investigators believe did not return to the United States from India after she casually mentioned that she had gotten some inquiries on Hilton from the SEC. Prosecutors discovered her scam when they noticed the new caller reaching out to people in Khan’s circle. When prosecutors finally discovered that the phone number was in the name of Khan’s gardener, they summoned Khan to New York and ordered her to quit playing games.

  By the spring of 2008, it had been one and a half years since Michaelson and Wadhwa had first started sifting through the trading records, emails, and instant messages at Sedna and noticed the curious exchanges between Sedna’s cofounder Rengan Rajaratnam and his brother Raj at Galleon on stocks like AMD. They had taken testimony from both brothers and reviewed thousands of pages of documents, yet the only stocks on which they had direct evidence of insider trading by Rajaratnam were Polycom, Google, and now Hilton.

  Upon arriving at One St. Andrew’s Plaza, where the prosecutors in the US attorney’s office sit, Michaelson received a thick folder of material from B. J. Kang, the FBI agent working the Galleon case. It contained a slug of recordings that soon came to be known as the “Clearwire” calls.

  After nearly two years of Sisyphean frustration, parti
cularly with AMD, Michaelson started to feel optimistic. At the SEC, investigating was like a game of connect the dots—linking a phone call, for instance, to a trade soon after. But sitting in the US attorney’s office with his headphones on, listening to the wiretaps, he was riveted. Not only were the dots connected, but he was inside the room. It was the early days and already the wiretaps were yielding heaps of direct evidence that Rajaratnam received confidential nonpublic information from a wide circle of informants. For the first time, there was a sense at the US attorney’s office that the case prosecutors were developing was going to be huge—in terms of not just the number of people but also their prominence.

  As Michaelson delved into the file of Clearwire calls that Kang gave him, he found for the first time direct evidence of the passing of confidential corporate secrets between Goel and Rajaratnam, the two friends from Wharton.

  Starting in late March 2008, Goel, who worked at Intel Treasury, began briefing Rajaratnam on Intel’s plans to invest $1 billion in a new wireless venture with an all-star cast of technology companies—Clearwire, Sprint Nextel, Time Warner, and Comcast, among others. The move was part of a bid by Intel to spur the rapid adoption of a longer-range wireless technology called WiMAX. In 2006, Intel Capital invested $600 million in Clearwire, a company led by cellular pioneer Craig McCaw, which was a large holder of frequencies suitable for WiMAX.

  Now Intel Capital was in the midst of talks to take the assets of Sprint and Clearwire and create a nationwide geographical footprint of cellular broadcasting licenses. While Goel worked on the initial 2006 investment by Intel into Clearwire, he was not involved in the latest deal. However, he came to know of it because of the size of Intel’s investment.

  On March 19, Goel was feeling a little tired and came home early. He was supposed to meet with an Intel vice president to get an update on Intel’s investment in the new venture. At about 5 p.m. West Coast time, he called Rajaratnam, ostensibly to engage in some of their usual freewheeling banter.

  “I just called to say you’re a good man,” Goel started.

  “Why?” Rajaratnam asked.

  “I just called to say that you’re a good man, that’s all,” Goel repeated.

  “Why am I a good man?” Rajaratnam asked again.

  “I just thought that you are one of the better guys that I know,” Goel said.

  “That’s highly suspicious,” said Rajaratnam.

  The two traded compliments back and forth until Rajaratnam concurred that Goel was a “good guy too. When I see you I’ll give you a kiss on the cheek.”

  “No, no, no,” insisted Goel.

  Before he hung up, Goel told Rajaratnam: “Aacha, listen,” using a Hindi word for “okay.” He had not had a chance to meet with the Intel vice president, but he knew that the Intel board was not going to consider the Clearwire deal that day.

  Rajaratnam thanked him for the information, and with that, the two said good-bye. When they hung up, so did the agent at the FBI, which was now monitoring Rajaratnam’s cell phone in real time.

  Over the next few days, as the FBI listened in, Goel called regularly, filling Rajaratnam in on the details of the Intel investment so that he could figure out how to assign a value to the new entity. He generally called Rajaratnam from home, but it was hard to talk at times. Goel’s kids made fun of the hushed tones that their father used when he spoke to Rajaratnam.

  “What do you have?” Rajaratnam asked. “Bunch of hyenas there?”

  “No, no, no. No, they are laughing at the way I talk to you,” Goel explained.

  Between March 24 and 25, Galleon bought 385,000 shares of Clearwire stock, the majority of which was allocated to the technology fund Rajaratnam ran. But before he could accumulate a bigger position, he got scooped.

  “Oh dude, we’re fucked,” said Rengan, who called his brother Raj on the evening of March 25 to tell him word of the deal was public. “It’s all over the Wall Street Journal.”

  “What price does it say?” asked Rajaratnam.

  Rengan said the Journal story was short on details but did reveal that the company was looking to raise as much as $3 billion.

  “Shit,” said Rajaratnam.

  As they listened in on the conversations between Raj and Rengan Rajaratnam, the investigators began to form a picture of the family and the role each of the brothers played in it. They took to comparing the Rajaratnam brothers to members of the Corleone family depicted in Mario Puzo’s novel The Godfather. In their minds, Raj Rajaratnam was Michael Corleone, the youngest and wiliest son of Don Vito Corleone, who was chosen by his father to succeed him as the head of the crime family. Like Michael Corleone, Rajaratnam was smooth and effective. He devised ways to get potential sources like Goel indebted to him and then he started asking for information.

  Rengan most resembled Michael Corleone’s older brother Sonny, who was portrayed as a hothead and a ruthless killer. Rengan’s bombastic answers during his deposition reminded them of Sonny. R. K. Rajaratnam, the former ConAgra executive who came to work for his brother Raj, was in their minds Fredrico “Fredo” Corleone. He had a twisted face like Fredo and was widely considered inept, the weakest link among the trio of brothers.

  By May 2008, the investigation was nearly two years old and there was growing concern that as witnesses were approached, word of the investigation could trickle out. It was important for the government to be in a position to bring a case on a hair trigger. The decision posed more issues for the SEC than for the US attorney’s office, which needs only to get a magistrate to sign off on a warrant before an arrest can be made (or immediately after one takes place).

  By contrast, the SEC’s enforcement division needs to get authorization to file a complaint from a majority of its commissioners. To get the green light, Sanjay Wadhwa, who by this time had been promoted to assistant director, had to put together an action memorandum, which essentially lays out the enforcement division’s recommendations to charge a potential defendant.

  On the weekend of May 11, 2008, Jason Friedman was set to accompany his fiancée and his future mother-in-law to Carlyle on the Green, an event venue on the grounds of Bethpage State Park in Long Island. There they would plan the menu for their wedding in two months. One of the important decisions Friedman and his fiancée were going to make that day was choosing a design for their wedding cake. But before he could even get out the door, he got a call from Wadhwa.

  Criminal authorities were planning to approach Ephraim Karpel, a well-liked figure among Wall Street’s clubby traders. Karpel had worked for eighteen years at Mutual Shares, an investment company run by the famed stock picker Michael Price. The government believed Karpel was a participant in an overlapping insider trading ring involving Zvi Goffer, a trader who had worked briefly at Galleon. The FBI was wiretapping Goffer’s phone and decided to approach Karpel after they listened in on a call between him and Goffer on December 31, 2007. In the call, Karpel told Goffer that drugstore chain Walgreens had made an offer to acquire Matria Healthcare.

  “I’ve got the trade for the month of January for you,” Karpel told Goffer. “It’s coming from a banker.”

  Whenever law enforcement officers move to approach a witness in the hopes of flipping the individual and getting him or her to cooperate, they have to balance two competing dynamics. On one hand, if a witness cooperates, it can be a tremendous boost to an investigation, opening up new avenues of inquiry or cementing ongoing cases against potential defendants. But if a witness cannot be flipped, the approached may go to the target and warn the person, shutting down chances of getting additional evidence and even destroying potentially incriminating material. The authorities would then be forced to make arrests and the cover would be blown off a probe.

  As the government prepared for the approach to Karpel, they hatched a backup plan in the event that things did not go according to plan. The last person anyone wanted to lose at this late stage was Rajaratnam, whom investigators singled out as the conspiracy’s ringleader. R
ajaratnam, they believed, had a jet parked at New Jersey’s Teterboro Airport and could flee at a moment’s notice. If the planned approach failed, the government decided it would move to arrest Rajaratnam.

  Sanjay Wadhwa and Judy, his girlfriend at the time, were planning on spending the entire weekend at his parents’ house in Edison, New Jersey, to celebrate Mother’s Day. But when Wadhwa learned that the criminal authorities were planning an approach of Karpel, he cut short his weekend plans and came into the office on Saturday. Working all weekend, he and Friedman put together an action memorandum recommending civil charges against Rajaratnam, Khan, Shammara Hussain (the young woman who provided Khan with the Google tip), Bhalla (the Polycom executive), and Goel. Without the wiretaps, they did not know about Kumar’s role in the Galleon web.

  In June, as planned, two FBI agents approached Karpel outside the Applejack Diner on the corner of Fifty-Fifth Street and Broadway. The agents escorted him into the restaurant and, seated at the back, told him that they had evidence of him passing inside information to his friend Goffer. Karpel quickly decided to cooperate but the effort ultimately took a toll on him. In May 2011, two days after federal prosecutors played for a jury a conversation Karpel had secretly recorded with another trader, he hanged himself in his Fifth Avenue office.

  When it appeared that the approach to Karpel had gone off as the FBI hoped, Wadhwa, who lost a weekend to drafting charge recommendations, got a call from his former colleague Michaelson to hold off.

  “All is good,” said Michaelson. “Let us continue building the investigation.”

  In July, he and Wadhwa headed to Jason Friedman’s wedding in Long Island. As he cut into his wedding cake, Friedman for the first time noticed the design on it. On top of the four-tier chocolate with cannoli cream cake were fresh white and cream flowers surrounded by a ring of beading on each row.