Circle of Friends

by Charles Gasparino

  Galleon was, of course, one of the nation’s biggest hedge funds. It dealt with all the blue-chip firms and was a major client of Goldman Sachs. And yet a lowly analyst, albeit a connected one at a mid-sized hedge fund, was regularly speaking with Galleon’s founder.

  Over the course of the next year or so, the feds would record scores of conversations between the two, confirming a tip that David Slaine, himself a Galleon trader before he became a cooperator, had provided investigators. Makol asked Slaine at one point whether Rajaratnam “liked pretty girls.” Slaine’s response: Of course he does. In the case of Chiesi, he liked them better when they helped him make money trading.

  A former beauty queen with blue eyes and a Jayne Mansfield build, Chiesi was quite the topic of conversation among the traders and company executives she dealt with—though at forty-four years of age, her beauty was slowly starting to fade. Unlike Rajaratnam, Chiesi didn’t go to Wharton or even to graduate school. But as the investigation showed, she was street-smart and had one of the best brains for obtaining and leveraging inside information. She came from a middle-class background. Her father was an insurance company executive. She attended the University of Colorado, was a sorority queen, graduated with a degree in economics, and then set her sights on Wall Street. Friends described her as outgoing and generous. The feds who were listening to her conversations thought she was a hardened white-collar criminal who had learned through her twenty years of working up the Wall Street ladder the game of developing sources that could provide insider tips. Along the way, she met Kurland, and when Kurland came to NewCastle in 1996, he brought her with him.

  The Wall Street hedge fund trading community is one of the last nearly all-male bastions in corporate America, but Chiesi knew how to fit in with the boys. She dressed provocatively and wasn’t bashful about flirting, former associates said. She also could curse like any of the guys, as the feds discovered from their wiretaps.

  She might not be Ivy League material, but she was brilliant at the dark arts of insider trading, developing relationships with key executives all over the hedge fund and technology worlds and expertly prying information from them. It was a cat-and-mouse game for Chiesi; for people like Rajaratnam she offered a quid pro quo in terms of shared information. For people like Robert Moffat, an executive at IBM, it was sex, or possibly love.

  Moffat was one of IBM’s rising stars. He was so close to CEO Sam Palmisano that many people inside the company thought he would replace him, which is why he was a perfect friend for Chiesi. How or when the sexual part of their relationship began was unclear to the government investigators. Chiesi, government investigators say, had a real emotional bond with Moffat, but her first love was the information he brought her. Moffat, friends have said, initially liked Chiesi mostly because she was a real player in the technology world with relationships that included major investors and top CEOs.

  Moffat, who was married, soon became a key member of Chiesi’s circle of friends, passing along tips about earnings announcements to Chiesi, who would then pass those tips along to others, including Rajaratnam. As investigators were discovering, Kurland encouraged his subordinate to use any means necessary to squeeze tips out of these sources—in fact, Kurland and Chiesi had had their own fling over the years.

  One of Chiesi’s skills, it seemed from the wiretaps, was her understanding of why each source needed to talk to her. Rajaratnam spoke with her because it was lucrative. And Chiesi spoke with Rajaratnam for the same reason. She said she “loved” him, but it was mainly for the love of insider tips he passed back to her.

  Likewise, Hector Ruiz, chairman of chipmaker AMD, initially needed Chiesi because NewCastle owned shares of the company, and Chiesi needed Ruiz for the obvious reasons, though less obvious ones would develop over time. Ruiz had attended one of Chiesi’s soirees at her apartment in Manhattan’s Sutton Place, and the two began what some people described as a close relationship. Ruiz denies that the relationship was anything but business.

  Chiesi, meanwhile, sprinkled her information—some of it acquired legally and some not—around to the various people in her circle of friends, but as the wiretaps showed, she saved the best stuff for Rajaratnam, and for obvious reasons. She knew he had an even better circle of friends and the information that went with it.

  One of the best examples that investigators were looking at involved the circle’s trading in shares of AMD. Initially it was Roomy Khan who was Rajaratnam’s AMD source, but by 2008 he was getting much of his information from two other players in his circle, Anil Kumar, the McKinsey consultant who worked on projects for the company, as well as Chiesi, through her dealings with Ruiz.

  Chiesi’s AMD trades had already drawn interest from Bear Stearns compliance, though they dropped the matter and the firm’s implosion prevented further action. Meanwhile Chiesi smelled a big score, as the feds had found out. Not long after Bear’s demise in the summer of 2008, AMD was ready to strike a deal with a Middle Eastern sovereign wealth fund, Abu Dhabi’s Mubadala Development Co., to create a joint venture. IBM had a role in the deal as well because of technology it was providing AMD.

  The deal represented the best of both worlds for Chiesi, given her dual relationship with Moffat (the point man for IBM on the deal) and Ruiz. It was an insider trading version of a ménage à trois; Chiesi bragged to her boss Kurland that she was going to “triangulate” the relationship with her pals Ruiz and Moffat to get more details, which she did. She sat in on meetings with Ruiz and Moffat as she discovered that AMD and the fund were entering into the joint venture that would lead to a spin off AMD’s chip manufacturing business into a separate entity.

  The fund would hold a 50 percent stake and the result, they believed, would be positive for AMD’s stock. AMD had struggled in chip manufacturing, and unloading a chunk of it to a well-financed partner could boost shares.

  Chiesi and Kurland moved quickly, as did Rajaratnam, who kept his end of the bargain, alerting Chiesi that someone in his circle had provided further proof the deal was a go. An additional tipper was Rajaratnam’s source Anil Kumar, the McKinsey executive who was also working on the transaction.

  “We’ve got to keep this radio silent,” Rajaratnam told Chiesi after he presented his own piece of the puzzle. The information he had was so good that she shouldn’t share it with anyone, “not even to your little boyfriends.”

  “Believe me, I don’t have any friends,” Chiesi answered, adding “Love you,” before hanging up.

  Chiesi did love the arrangement she had with the billionaire hedge fund manager, and the feeling, at least according to the wiretaps, appeared to be mutual. On its face, the AMD deal seemed so esoteric that it would barely attract notice from the regulators as a material event once the friends began snapping up shares before it was made public. That is, unless, the feds had wired someone’s telephone, which they had. In any event, NewCastle began aggressively buying shares of AMD, as did Galleon, amassing a position of 8 million shares, while NewCastle held 2.3 million. By this time in the summer of 2008, the growing financial crisis was forcing hedge funds to unload stocks for the safety of cash. Even Steve Cohen, by the crisis’s September height, was largely selling stocks, not buying. The AMD deal also turned out to be a rare loser for Rajaratnam, Chiesi, and the entire circle, and not just because the feds were recording their activities. The broader market hated the deal, and the financial crisis made stocks a bad bet with or without insider tips. Still, the episode was instructive to government investigators as they pieced together the cluster’s wiretaps and trading records. Rajaratnam did indeed employ the mosaic theory of investing, albeit with illegal inside information, and one losing deal did little to break up this circle of friends.

  It was also instructive for Rajaratnam, who continued to rely on Chiesi because, more often than not, she delivered.

  “He just called me talking about the family,” Chiesi breathlessly explained to Rajaratnam during the summer of 2008, about a call she had just had with Kiera
n Taylor, a family friend but also a mid level marketing executive at tech company Akamai. She had just finished “playing [Taylor] like a fine-tuned piano,” she said about the details of the company’s earnings announcement.

  At this point, Bear Stearns no longer owned NewCastle, and the financial world was just a few months away from its cataclysmic collapse. But Chiesi was focused like a laser on how best to beat the markets, and in so doing help Rajaratnam beat them, too.

  It “took a little time” for Taylor to trust her with Akamai information, Chiesi told Rajaratnam as the feds listened. In fact, it is still unclear if Taylor even understood that what he was telling her could be used to profitably trade on Akamai shares. Unlike Chiesi and most of the rest of her circle, Taylor hasn’t been charged in the matter. In an interview Taylor says he gave Chiesi nothing of substance—he wasn’t high enough up in the company to do so.

  But as Chiesi explained it, she had subtly slipped in her request for some insight into Akamai’s pending earnings announcement, and at least based on what she was telling Rajaratnam, it had worked.

  “People think it’s going go to twenty-five,” she said. Based on what she was able to discover, Akamai insiders believed the earnings number would be so bad that the stock could crater 25 percent.

  With that, she implored Rajaratnam to short the stock steadily in the days leading up to the announcement but not to share the information with other traders on his team. Keeping it quiet would be more worthwhile, she said, because without so many others playing the same trade, she and Rajaratnam would both be virtually printing money.

  During the call, Rajaratnam said the trade was “an easy one for you.”

  Always the charmer, Chiesi responded: “Honey, you know it’s for us. I could very easily short it without telling you. I wouldn’t do that because we share everything. . . we need to be a team.”

  Akamai’s guidance conformed with the information Chiesi had given Rajaratnam. The company slashed its profit forecast and shares cratered by the 25 percent Chiesi was predicting, showering millions of dollars of profits on NewCastle and Galleon.

  CHAPTER 10

  SOMETHING GOOD IS GOING TO HAPPEN

  Another reason Danielle Chiesi was such an effective player in the Rajaratnam circle of friends was that she put pressure on others to become better at breaking the law. Keep in mind, Chiesi wasn’t paid directly by Rajaratnam with cash, or at least investigators didn’t find evidence of money directly changing hands. She was paid with information.

  Like Rajaratnam, Chiesi understood that the mosaic they were trying to assemble often required several pieces of inside information assembled from various sources; the compensation was in the sharing of that information until the mosaic was completed.

  And she seemed to stop at nothing to meet that goal. Anil Kumar, the executive at McKinsey & Co., felt the most pressure in Rajaratnam’s circle to live up to her example.

  Unlike with Chiesi, whom Rajaratnam liked, his relationship with Kumar was somewhat strained. First, Kumar worked for money. Even more, Rajaratnam considered him an Indian version of a WASP, with his Ivy League pedigree and family background. Later the relationship faltered because Kumar, for all his book smarts, couldn’t match Chiesi’s talent for gathering inside information.

  That didn’t cause Rajaratnam to cut Kumar off—far from it. Despite his complaints about Kumar that were picked up on tape, Rajaratnam knew that it was always good to have friends in high places who were willing to break the law. And given Kumar’s position at McKinsey, there were few places higher.

  McKinsey’s tentacles extended into every corner of corporate America, and if Kumar wanted to earn money from Galleon, he would be competing with the likes of the feisty Chiesi to provide Rajaratnam with the most valuable of that information.

  Kumar and Rajaratnam, of course, shared many attributes aside from their education at one of the world’s best-known business schools. They were immigrants: Kumar from India, and Rajaratnam from Sri Lanka. They were both ambitious, Kumar in a quiet, analytical way, while Rajaratnam boasted a macho approach to trading, calling himself a “warrior.” He once told Kumar that trading during the 2008 financial crisis was like “fighting Muhammad Ali; I know he’s stronger and faster but you’re in the ring with him.”

  And they shared a love for making money, as the wiretaps so vividly displayed. That said, Kumar was a reluctant addition to Rajaratnam’s circle of friends. “Raj seduced Kumar into doing insider trading,” was how Wadhwa believed the relationship took hold. The facts bear that out to a certain extent. Kumar was looking for a legitimate business relationship with Galleon, offering the consulting services that McKinsey is known for, and was seduced by the trappings of Rajaratnam’s success—the private planes, the houses, the expensive trips—and of course, his enormous wealth.

  Once he decided to join the Rajaratnam circle, Kumar was paid $500,000 a year and offered a $1 million bonus in return for what Rajaratnam described as “valuable” information. Rajaratnam even had an idea on how to hide the obvious illegality of the arrangement. He suggested that Kumar set up a dummy company in Geneva, Switzerland.

  Rajaratnam would arrange to have the bulk of the Galleon payments to Kumar delivered to something called Pecos Trading. The money would wind its way to Pecos from a Galleon account under the name of Kumar’s housekeeper, Manju Das.

  Then, once the money started to flow, the mind games with Kumar began. “Your value to me is a little bit diminished because there’s now another source coming directly from the CEO,” Rajaratnam told Kumar one day, referring to Chiesi’s relationship.

  “I’m giving him a million dollars a year for doing literally nothing,” Rajaratnam complained to a mutual friend. That wasn’t true at all. Indeed, as the growing web of wiretaps showed, Kumar was furiously supplying Rajaratnam with information on AMD, including the timing of the proposed spin-off of the manufacturing arm.

  No character portrait of Rajaratnam is complete without an appreciation of just how well he understood the criminal mind—his own and others. His arrogance led him to believe he would never get caught, which people who know him say is the main reason he blathered so much on the telephone.

  But his knowledge of the white-collar criminal mind was sharp and he knew that at bottom, all of them, from Anil Kumar to Rajat Gupta to people like Danielle Chiesi, were motivated by vaunting greed and—perhaps even more astutely noted on Rajaratnam’s part—the need to please. They would do anything he asked if he could press the right button.

  That’s why Kumar was so valuable despite Rajaratnam’s complaints. For that $1 million he helped steer tips Rajaratnam’s way, and as investigators discovered, served as a recruiter as well.

  In fact, it was Kumar who introduced Rajaratnam to Gupta, one of corporate America’s leading statesmen and soon to be co-conspirator as one of the most important members in Rajaratnam’s circle.

  Wadhwa and the SEC were on to Gupta from the minute they got hold of Rajaratnam’s telephone records; they also knew that Kumar and Gupta had founded a business school in India together and that the two remained close. Kumar considered Gupta his mentor, and on paper it’s easy to see, given their mutual corporate pedigree.

  But it took some more digging to determine just how low Gupta, an icon of the business community, had sunk. This was, after all, a man who counted as friends Kofi Annan, then secretary-general of the United Nations, and Microsoft cofounder Bill Gates. Gupta raised millions of dollars to fight AIDS, malaria, and tuberculosis across the globe. As it turns out, Gupta’s record at McKinsey held some clues for why he turned bad. The white-shoe consulting firm had for years been a place for high-quality services delivered in specialized fashion. Gupta, according to people there, changed the dynamic. McKinsey began to ramp up the fees and hired more low-level talent to pitch more work.

  McKinsey, as the Financial Times once pointed out, had a tradition that ran counter to the “sins of self-enrichment and self-aggrandizement” that c
ould be found all over Wall Street. Gupta’s tenure was controversial, according to some former partners, because the firm operated more like a bank; it embraced both of those sins as a way to ramp up fees and profits at the expense of its clients. Yes, the Gupta years were profitable, and huge bonuses were awarded to senior executives, obviously including Gupta himself, but the drive for more money changed the firm’s culture—some would say for the worse.

  Yet Gupta’s drive to make money held obvious value to Rajaratnam. Gupta had sat on the board of directors of several firms since he left McKinsey in 2003, including Goldman Sachs and Procter & Gamble, and he knew just about every major CEO in the country and many around the world.

  He was worth an estimated $100 million at sixty-five years of age, but by all indications he wanted more. So, not long after leaving McKinsey in 2003, he reached out to Kumar to set up a meeting with Rajaratnam about creating a hedge fund.

  The fund never made it out of the starting gate, but the Gupta-Rajaratnam relationship flourished, as he too became a member of the Rajaratnam circle. Over at the FBI, the connection became apparent the minute they began taping Rajaratnam’s calls. One key moment came in 2008, as the financial crisis started to accelerate and Gupta began feeding Rajaratnam confidential information about Goldman board meetings.

  Rajaratnam called to tell Gupta that rumors were rampant that Goldman was looking to buy a commercial bank like Wachovia, which was run by former Goldman executive Bob Steel. There were obvious benefits to Goldman in such a purchase, as Wall Street slowly slipped into crisis mode during the summer and fall of 2008. A commercial bank, unlike a traditional investment bank, has consumer deposits. These deposits could be drawn down to fund the firm’s operations if Goldman’s own lenders ended up pulling back, if and when the crisis became more acute.