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

by Anita Raghavan

  Before Bharara could even consider higher office, he needed a career-defining case, and in US v. Rajaratnam, he had a very good shot at one. The forty-four-year-old Bharara, who can come across as a Boy Scout, takes insider trading seriously. Some legal scholars contend that it is a victimless crime, often involving minuscule amounts of money. In the Galleon case, for instance, the government alleged that Rajaratnam pocketed as much as $75 million from his illegal trades. Compared to Rajaratnam’s net worth of $1.3 billion at one time, the sum pales. What galled Bharara, whose father is a doctor and whose mother is a homemaker, was that the Rajaratnam case boiled down to people with lots of money trying to game the system. “Disturbingly, many of the people who are going to such lengths to obtain inside information for a trading advantage are already among the most advantaged, privileged and wealthy insiders in modern finance,” he told a packed crowd at the New York City Bar Association in October 2010. “But for them material nonpublic information is akin to a performance-enhancing drug.”

  The South Asians who have been prosecuted by Bharara’s office are by and large first-generation immigrants, born and bred outside the United States. Bharara, whose first name, Preetinder, is a Sikh name meaning “the one who loves God,” is of a different generation. He was born in 1968 in Ferozepur, India, an ancient city not far from the Indo-Pakistani border, but came to the United States when he was a toddler. Mirroring a journey taken by hundreds of thousands of Indian immigrants, his father, Jagdish, a Sikh, and his mother, Desh, a Hindu, migrated to Eatontown, New Jersey, in 1970. When the Bhararas arrived in Eatontown, it had only about two dozen South Asian families.

  Jagdish Bharara, a pediatrician with a medical degree from Amritsar Medical College in Punjab, quickly poured his energies into retraining as a doctor so he could practice medicine in the United States. He started a practice in Asbury Park, New Jersey, home to the blue-collar poet Bruce Springsteen, a lifelong idol of Preet’s. On the side, the family and others owned an Indian restaurant for a short time, where Preet washed dishes and waited on tables. Weekend evenings were spent socializing with the small group of Indians in Eatontown or with Jagdish Bharara’s classmates from Amritsar and their families. Like the Bhararas, they had come to America to stake out a new future.

  Bharara’s father was typical of the early wave of Indian immigrants. He pushed his children to excel. The Bharara boys were not expected to come home with anything less than a perfect score on tests. “My dad was more of a tiger dad—if there is such a thing,” Bharara told NDTV, an Indian television station. Though money was tight, the Bhararas splurged on one luxury: a private school education at the Ranney School in Tinton Falls, New Jersey, for their oldest son, Preet, and his younger brother, Vinit, born not long after their arrival in America. Vinit went on to cofound an online retailer—its businesses include Diapers.com—which he and his partner would sell for $540 million to Amazon.

  Preet shone at Ranney, making his mark in everything from ballroom dancing to art history. One time, for a difficult art history test in eighth grade, Bharara simply handed in an outline. He got an A-plus. “Mrs. Tomlinson held it up in class and said, ‘Look what Preetie did,’” says Christine Gasiorowski, a classmate. “If it was anyone else, I would be really mad.” But Bharara was so unassuming and low-key about his achievements that he was well liked despite having a reputation as something of a teacher’s pet. Whenever he did well, he shrugged it off, telling friends, “Oh, I was just lucky.” His modesty was endearing. More important, it sheathed a great ambition.

  After graduating from Ranney as valedictorian, Bharara headed to Harvard College in the fall of 1986 to major in government, with a specialty in political theory. He was a nerd with a serious girlfriend at Wellesley College, with whom he spent almost every weekend. Bharara entered Harvard with sophomore standing, meaning he was eligible to graduate in three years because he did sufficiently well on the required number of AP tests in high school. His freshman roommate, Chip Clark, remembers being blown away by Bharara when the two took political science professor Joseph Nye’s class together. “We decided to study together and we found a quiet place, and all he did was bring the syllabus,” recalls Clark. “And he stared at the syllabus for forty-five minutes and he said, ‘Okay, this is what the questions are going to be.’” Clark and Bharara were sitting next to each other when the exam questions were passed out, and Clark heard Bharara say under his breath, “You’re welcome.”

  At Harvard, Bharara bonded with Viet Dinh, the conservative legal scholar and former assistant attorney general under George W. Bush, when they were both in the same sophomore tutorial. The two started arguing in class about whether the founding fathers considered man to be inherently good or evil. Their debate raged until 9 a.m. the next day. “I really think they considered themselves intellectual peers,” says Clark. Socially and politically, though, they were different. Dinh wanted Bharara to join the Phoenix Club, one of eight exclusive all-male final clubs at Harvard. Bharara demurred. “I do think he just didn’t think it was the right thing,” says Clark. After Harvard, Bharara headed to Columbia Law School, where he got a law degree and found a wife in Legal Method class. The couple live in Westchester County today with their three kids.

  As Bharara watched, Rajaratnam’s lawyer, John Dowd, painted a very different picture of the case in his opening remarks. The “evidence will show that the government has it wrong. And the government has it wrong because it believed the word of unbelievable people.” One of the “unbelievable people” Dowd clearly had in mind was Anil Kumar, the former McKinsey consultant. The contempt Dowd displayed toward Kumar came straight from his client Rajaratnam. Before the trial, Rajaratnam gloated to friends that the government’s case would crumble under Kumar. “He’s a wimp,” declared Rajaratnam. “He will crack on the stand.”

  Kumar was the government’s star witness, and on March 10, 2011, he took the witness stand wearing a charcoal suit, white shirt, and blue tie. He appeared to be nervous. He did not broach a smile or look at his onetime friend Rajaratnam. He simply bowed his head and put his hands together and composed himself. He was determined to excel as the state’s witness just as he had in every undertaking since he was a schoolboy.

  As Streeter led Kumar through a series of biographical questions that centered on his former professional life as a consultant at McKinsey, he grew more at ease. His face lit up when Streeter asked him to explain basic concepts. In defining the term “hedge fund,” Kumar gave jurors a tutorial explaining that the name was derived from the fact that they hedge their risk and that virtually anything could be hedged today.

  Even when the reality of his present situation intruded into his testimony, Kumar was articulate and forthright. Knowing that the defense would seek to paint Kumar as a liar who was testifying only because he had signed a cooperation agreement with the government in the hope of leniency at sentencing, Streeter asked him to tell the jury the consequences of lying on the witness stand.

  “That would be a very big mess,” said Kumar. “That would be like a huge crime—maybe perjury or something like that.” For a moment, he sounded like he was back at the Doon School considering the punishment he would receive if he went “out of bounds.”

  Kumar’s testimony against Rajaratnam proved devastating. He painted a clear and astonishingly detailed picture of his tipping Rajaratnam on the AMD-ATI deal, among others. His testimony about the payments he received for his moonlighting and the admonishments he got from Rajaratnam when his tips didn’t pan out seemed credible. He provided color and context for the jury on several wiretapped conversations that offered a rare window into the life of a hedge fund manager in the midst of a financial crisis. In one memorable wiretap, Rajaratnam asked Galleon portfolio manager Adam Smith how the market was treating him that day.

  “Ahhh…like a baby treats a diaper,” replied Smith.

  Rajaratnam would never take the stand in his defense during the course of the two-month trial, but almost every day
his cool, calm voice would emanate from the crackly wiretaps.

  Though Kumar’s testimony was convincing, his explanations for his own motives in deviating from a life of probity were less believable. By pleading guilty he had taken responsibility for his actions in the eyes of the government. But on the witness stand he seemed to blame Rajaratnam for leading him into a half-life of crime. And away from the scrutiny of the government lawyers, he appeared to act as if nothing extraordinary had happened. After receiving sanction from the court, he got back his passport and resumed his whizzing around the world. He was a regular passenger in the first-class cabin of the British Airways flight from Delhi to London. When he ran into old friends, he was as high-handed and arrogant as they remembered him.

  The kindest explanation they could offer was that it was all an elaborate facade—a desperate bid to hide the emotional scar tissue beneath. Six months after his arrest, his mother, who was caring for his ill father, suddenly died. Kumar confided in friends that he was having a terrible time coping. She believed in him as only a mother could—unconditionally. He knew his father was too sick to appreciate what had happened to him, but his mother understood the gravity of his situation. Intelligent as he was, he had to wonder if she died because she could not bear the shame of it all.

  The hardest person Kumar had to face was his own son. After his arrest, Aman asked his father, “Why?” He did not have to say more. His father knew exactly what he was asking. Why, with everything he had going for him, did he have to resort to selling corporate secrets?

  “Someday I will have to explain to Aman,” Kumar confided to an associate. “But for now I don’t know.”

  On March 15, the third day of Kumar’s testimony, assistant US attorney Jon Streeter dropped a bombshell. It was exactly two weeks after Gupta had sent hundreds of friends and business associates an email saying that there were no tapes showing him tipping Rajaratnam. Streeter introduced into evidence the wiretapped conversation between Gupta and Rajaratnam on July 29, 2008, more than a month after Goldman’s board meeting in St. Petersburg, Russia.

  In a way, the information Gupta transmitted about Goldman was the most innocuous part of the call. When Rajaratnam asked Gupta about a rumor he had heard about Goldman looking to buy a commercial bank, Gupta confirmed that there had been a big discussion at the board meeting about Goldman acquiring a bank or even an insurer and threw out a couple of names. It was hardly information on which Rajaratnam could place a trade. However, during their rambling conversation, Rajaratnam confessed that he had been paying Kumar, still employed at McKinsey, “a million dollars a year for doing literally nothing.”

  “I think you’re being very generous…he should sometimes say thank you for that, you know?” replied Gupta.

  For a while, the two kibitzed about their greedy pal Kumar and his aggressive push to get an equity stake in New Silk Route. Then Rajaratnam returned to the subject of his paying Kumar a million bucks a year for about four or five years. The money, Rajaratnam said, was “after taxes, offshore cash.”

  Gupta, the former three-time managing director of McKinsey, did not flinch. “Yeah. Yeah,” he replied, seemingly unperturbed by Rajaratnam’s disbursements to Kumar, which at the very least would have been inappropriate in Kumar’s role as a full-time consultant for McKinsey and, though ambiguously worded, could have represented an evasion of US taxes.

  Gupta’s nonchalance was damning and the repercussions of the public release of the tape were swift and severe. A few days before it was unveiled, Gupta took a leave of absence from his own private equity fund, New Silk Route. Soon after it was played in court, McKinsey moved to cut all its ties with its former managing partner. By the end of March, Gupta also stepped down as an adviser to the Bill and Melinda Gates Foundation, one of the last high-profile positions he still held. Unfortunately for Gupta, it was not the last time the jury would hear the tape.

  When it came time to cross-examine Kumar, John Dowd could not hide his disdain. Like an aging heavyweight fighter, the lumbering Dowd threw punch after punch with remarkable effect. He walked Kumar through the embarrassing steps he took to craft an Indian identity for his housekeeper, Manju Das, who lived in California.

  “You wrote here that it was going to be tricky to get the information Shireen was asking for, right?” Dowd hectored. “Tricky because Galleon and Morgan Stanley were requiring proof that Manju Das lived in India when she, in fact, lived in California with you. That’s what you meant by tricky, right?”

  “Correct, sir,” Kumar conceded.

  But he did not crumble. After he stepped down from the stand, Rajaratnam’s friends sensed that the Galleon chief for the first time was contemplating defeat. He reviewed his assets to figure out the amount his family would need to survive if he was sent to jail and the sum he could reserve for fighting the costly legal battle. And he talked about taking the case to the Supreme Court.

  On March 23, 2011, Goldman Sachs chief executive Lloyd Blankfein arrived at the federal courthouse to testify for the prosecution. Blankfein has a bald pate and elephantine ears, but based on the anticipation surrounding his appearance, he might as well have been a supermodel. US attorney Preet Bharara, who had been attending the trial regularly, was in the courtroom with four of his deputies. Andrew Ross Sorkin, the New York Times writer and author of the best-selling book Too Big to Fail, made a cameo. The only person unfazed by Blankfein’s appearance seemed to be Judge Holwell, who, a couple of weeks earlier, when lawyers were picking a jury for the case, mispronounced Blankfein’s name. He rhymed the second syllable with “bean” rather than “fine.”

  The task of drawing testimony from Blankfein fell to Andrew Michaelson, a moment in the sun for an attorney who had worked the case for both the SEC and the US attorney’s office. Michaelson quickly laid the groundwork and then went to the wiretap of the July 29 conversation between Gupta and Rajaratnam. After playing an excerpt, he asked Blankfein, “Did Gupta violate his duties as a board member?”

  Blankfein hesitated and then said, “My sense of it, yes.” He didn’t have to say any more.

  Then Michaelson honed in on two events at Goldman, the $5 billion investment by Berkshire Hathaway on September 23, 2008, and a call a month later in which Blankfein disclosed that Goldman was losing money. Michaelson asked the Goldman chief the significance of both events. The October 23 call, Blankfein testified, was important because “we were losing money…We generally make money.” The jury and spectators laughed.

  Unlike with Kumar, when it came to cross-examining Blankfein, Dowd treated the Goldman chief with kid gloves. He was almost deferential. He asked if Blankfein knew if Rajaratnam traded on information about Goldman. Blankfein said he didn’t. He also asked Blankfein about the Troubled Asset Relief Program (TARP) and whether Goldman received any money under the government plan. One of the defense’s arguments was that Rajaratnam bought Goldman shares on September 23 because of growing signs that TARP would be enacted.

  As he was leaving the courtroom after testifying, Blankfein walked over and extended his hand to Rajaratnam, his former client. The two spoke briefly before Blankfein walked away. Rajaratnam was beaming.

  Over the course of five weeks, and before resting its case on Wednesday, April 6, the government would trot out eighteen witnesses, among them Adam Smith, a clean-cut Galleon portfolio manager who turned cooperator after being confronted with incriminating wiretapped conversations. In his testimony, Smith completed the story Kumar had started to tell, regaling the court with an insider’s view of the corrupted culture at Galleon. The firm’s practice, he told jurors, was “to do your homework but to still cheat on the test.”

  When making trades, Galleon portfolio managers liked to “have two torpedoes in the water,” one for buying or selling shares on information that was in the public domain and lawful and the other for making trades on inside or unlawfully obtained information. His insights into Galleon would stand in sharp contrast to the one Galleon witness the defense c
alled, Richard Schutte, a top executive at the hedge fund who came off as measured and mature, someone to be believed.

  Taking the stand more than a week after Smith, Galleon president Schutte testified in excruciating detail to research reports showing that the hedge fund’s winning trades were grounded in deep and rigorous investment analysis. He cast the research effort at Galleon as a disciplined process during which analysts routinely went on bus tours to visit with companies’ management and wrote weekly reports, which were due every Friday at 5 p.m. Most important, he described Rajaratnam as a well-prepared investor who was on top of the companies in Galleon’s portfolio. “He knew what questions to ask…It was impressive to watch,” Schutte testified.

  But Schutte’s credibility was shattered on cross-examination. In questioning him, Brodsky elicited that Rajaratnam had invested $10 million in the fall of 2010 in a fledgling hedge fund Schutte had founded, called SpotTail, and that Rajaratnam’s family had wired another $15 million only eight weeks before the trial started. With $25 million, the Rajaratnams were the largest single investor in SpotTail, which had less than $35 million in assets. Like most hedge fund managers, Schutte charged a 2 percent management fee and a 20 percent performance fee on assets managed, meaning that at the very least he would earn $500,000 a year if the Rajaratnams kept their money in. Schutte, who at first struck a marked contrast to Smith, the calculating cooperator, wound up looking much like him. He was stunned by the public smearing over SpotTail; in preparation for his testimony he had discussed it with Rajaratnam’s lawyers and expected to be “questioned” about it on direct examination.