The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (27 page)

“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. Rajaratnam, 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.

In the summer of 2008, as Manhattan emptied out and New Yorkers left the city for their vacation homes in the Hamptons, Andrew Michaelson, the SEC lawyer on loan to the US attorney’s office, stayed tethered to his desk in a drab office overlooking the Metropolitan Correctional Center. His docket was full, and the FBI wiretap of Rajaratnam’s phone was producing new pieces of information.

Since May, the FBI agents manning the wiretap, who listened in to Rajaratnam’s cell phone from as early as 6 a.m. to as late as midnight, seven days a week, had noticed a new caller crackling across the telephone wires. Most of the calls the agents monitored were between men. Their conversations were typically all business with some predictable locker-room banter interspersed.

The new caller was a woman named Danielle Chiesi. Her conversations with Rajaratnam on his cell phone titillated, touching on everything from sex to sport. Trading corporate news, Chiesi once said, was “like an orgasm.” It soon became clear to the agents and Michaelson that she inhabited a world of powerful men whom she played off one another to make her living. Her galaxy of sources was so impressive that Rajaratnam could not ignore her.

On Thursday, July 24, Chiesi telephoned Rajaratnam at 9:18 p.m., shortly after she got off the phone with a family friend who worked as a senior executive in marketing at Akamai Technologies. Chiesi had learned that Akamai, which manages Internet traffic for companies, planned to give pessimistic guidance to Wall Street analysts when it unveiled its profits the following week.

On reaching Rajaratnam, Chiesi didn’t waste a moment in getting to the point.

“Please don’t fuck me on this,” she told Rajaratnam. “[Akamai] they’re gonna guide down.”

Chiesi was pleased with the way she had handled the call with her Akamai source. Instead of asking him directly about the company, she acted as if she didn’t care and started talking to him about their mutual family members.

“I played him like a finely tuned piano,” she declared.

It was then that the Akamai executive dropped the bombshell.

He said, “You know, oh by the way, we’re gonna guide down on Wednesday.”

By the summer of 2008, the headwinds buffeting the financial markets were getting stronger by the day. Trading stocks was treacherous, and surefire investments that months earlier would have worked out the way traders imagined were suddenly going askew. The markets were so unpredictable that fundamental forces that normally drove individual stocks were no longer a factor, superseded by the market’s seemingly capricious moves—down one day, up another.

Chiesi worked for New Castle Partners, and only four months earlier, she’d seen the unforgiving nature of Wall Street up close. Bear Stearns, which owned New Castle, nearly imploded. Many of Chiesi’s friends found themselves out of work after JPMorgan Chase took over Bear. The lucky ones, the ones who had managed to hang on to their jobs, saw a lifetime’s worth of savings vanish in weeks. Bear was the sort of firm where many employees didn’t diversify and had the lion’s share of their retirement savings in company stock—a stock that plummeted from nearly $93 in February 2008 to less than $5 a share in March. Chiesi was fortunate to still have her job, but her life savings was decimated. Trading on business news was no longer just for excitement; increasingly it was for survival.

Within Akamai, the betting was that the profit outlook was so bad that the company’s stock would drop to $25 from its then price of $32. “You know what baby, I don’t know about you, but I need it,” Chiesi told Rajaratnam.

“Please just give me a chance to short it a little bit,” she pleaded with him. The Akamai tip, she confided, was the “best thing” she’d heard all day.

Chiesi worried that Rajaratnam, eager to make money, would scramble to borrow as much Akamai stock as he could find to sell short, making it harder for Chiesi to accumulate enough shares for herself. When a number of players in the market are trying to short a stock, selling borrowed shares in the hope the shares drop in value and can be bought back at a cheaper price, it’s sometimes difficult to find shares to borrow or it can be very expensive to borrow them.

“I’m not going to say anything,” he reassured her. “You short it as much as you want.”

“But just between the two of us, and just between us, that’s it…Fuck your whole desk. I don’t want anybody to know,” Chiesi reiterated.

Rajaratnam promised to be “radio silent.”

Chiesi had a soft spot for Rajaratnam. There was no need to tell him about the Akamai tip—she really needed a home-run trade all to herself—and Rajaratnam would never know if she held back the information. But she would not dream of keeping a hot tip from Rajaratnam. Chiesi thought the two of them a team; they shared everything. It was not clear that Rajaratnam felt the same way.

The summer of 2008 was also a busy one for Rajaratnam. He was in the thick of growing Galleon, with $7.2 billion in assets under management. A few months earlier, ahead of the onset of turbulent times, Rajaratnam had raised money. Galleon was coming off a great run. In 2006 its diversified fund returned 25.69 percent, and in 2007 it posted a respectable 12.2 percent return. But it was already clear that 2008 was not going to be as robust. As of the end of March, the diversified fund was down 2.96 percent for the year, making it all the more important for Galleon to shore up its investment coffers. There was always a risk that as markets turned south, skittish investors would start to pull money out of Galleon and move it into safer investments.

In February, Rajaratnam hired Ayad Alhadi, a seasoned marketer whom he hoped would help Galleon unlock the millions of dollars sitting in the Middle East among the sovereign wealth funds of the region’s oil-rich countries. He was also in talks with Rajat Gupta to head Galleon International, a Pan-Asian emerging markets hedge fund, and help Galleon tap into new investors.

Gupta was one of the few players in the corporate world who could be described as truly global. He was connected in India in a way that Rajaratnam, an outsider, a Sri Lankan Tamil, could never be, despite all the billions to his name. He counted men like Mukesh Ambani as friends; he had known Ambani for more than twenty years. Besides sitting on the boards of American companies, Gupta also served on the boards of foreign companies. His best-paying directorship was as a board member for the Russian bank Sberbank, which paid him $525,000 in 2008. And he also participated in gilded charities, the kind that burnished his philanthropic résumé. He had been an adviser to the Bill and Melinda Gates Foundation since 2004, and as head of the board of its Indian AIDS initiative Avahan, which in Sanskrit means “call to action,” Gupta was credited with persuading the foundation to give $47 million for AIDS programs in India. If Rajaratnam was looking for someone to give Galleon global cachet, there was no one better than Gupta.

Even though Gupta was approaching his sixtieth birthday, he was still very much in the game, ever eager to stay a player. He was a tireless traveler, always whizzing around the globe. On the way to India that April, he stopped in the Middle East and joined Galleon’s new man Alhadi for a day in some meetings with prominent institutional investors—the Abu Dhabi Investment Council, First Gulf Bank, and Emirates Bank International. Gupta did not say much at the meetings, restricting his remarks to basic facts about Galleon—its size and its funds. But his presence at the meetings and his years atop McKinsey impressed investors.

In late April, the Abu Dhabi Investment Council signaled that it wanted to invest $50 million in the Galleon Diversified Offshore fund. In another instance, Larry Currie, a representative of a potential investor, National Commercial Bank, specifically asked if he could meet with Gupta when he visited New York. The Saudi Arabian bank considered investing as much as $100 million in Galleon’s funds. Goldman Sachs owned 10 percent of National Commercial Bank Capital, the bank’s investment entity, and Alhadi had a hunch that Gupta’s Goldman link would help National Commercial Bank gain more comfort with Galleon.

He turned out to be right. A week after meeting with Gupta, Currie called Alhadi and said that National Commercial Bank wanted to start with an investment of between $25 and $30 million in Galleon funds. As Rajaratnam had suspected all along, Gupta’s reputation was unmatched. He only wished his friend leveraged his connections to benefit Galleon more.

For Rajaratnam, the problem with Gupta was that like so many high-achieving executives, he was overcommitted. By the summer of 2008, he had his fingers in a myriad of ventures. New Silk Route, the private equity fund he helped found with Rajaratnam, was sucking more time from Gupta than it should have. His countless board positions, corporate and philanthropic, ate into his schedule. And if that were not enough, he was contemplating raising $600 million for a telecommunications fund.

“It’s now reached a point where it’s physically and humanly impossible to do the things he’s doing right,” said Kumar in a May 28, 2008, conversation with Rajaratnam.

Though nothing was settled, Gupta was talking with private equity titan Henry Kravis about a possible role at Kohlberg Kravis Roberts & Co. The two were tossing around the idea of Gupta being a senior adviser and, with his experience at McKinsey, helping KKR build state-of-the-art infrastructure for a professional services firm. The trouble was that Goldman, on whose board Gupta sat, was not keen about having Gupta take on the role. Goldman and KKR were both major players in the same business, private equity, and the firms had a relationship with each other across several lines. Gupta could not understand Goldman’s position. Several members of the bank’s board had links to private equity firms.

The issue between Goldman and Gupta came to a head in one of the most unlikely places: Beijing. Both Gupta and Blankfein were in China in early August 2008, catching the Summer Olympics and attending the Tsinghua University board meeting. In full view of others, including Gupta’s wife, Goldman’s chief executive, Blankfein, gave Gupta an ultimatum: he had to choose between Goldman and KKR.

In mid-August, after the Blankfeins and Guptas returned from China, Blankfein met again with Gupta in his office. Sitting in his customary place, a straight-backed chair, opposite Gupta, who was seated on the tan couch in his office, Blankfein reiterated that it would be difficult for Gupta to remain at Goldman if he were to pursue the KKR role. Kohlberg Kravis Roberts was just too big a player in the private equity space for Goldman to have a sitting board member that also worked for a rival like KKR. Forced to choose, Gupta said he planned to take the KKR job. A press release announcing his retirement was drafted.

As prestigious as sitting on the Goldman board was, working for KKR would vault Gupta to a whole new level, catapulting him into a rarefied world of high rollers. Some of the richest men on the island of Manhattan—Henry Kravis and Stephen Schwarzman—had made their fortunes in private equity. Rajaratnam suspected it was Gupta’s desire to be in “the billionaire [
sic
] circle” of Kravis and Schwarzman and not the “hundreds of millionaires circle” that was associated with Goldman Sachs directors that had prompted Gupta to explore the KKR opportunity. Though Gupta’s starting take would be modest by industry standards—about $5 million—over time, a position at KKR would pull him into a galaxy of untold riches and influence like Kravis and his rival Schwarzman. The Blackstone chief’s wealth had enriched the New York Public Library—not to mention given it a new name.

Gupta seemed intrigued by the possibilities, but Rajaratnam lamented that the KKR job would mean less time for him. A month earlier, when Gupta had told him about the KKR opportunity, he said to him that he would take it in a “heartbeat.” But he knew Gupta’s going to KKR would mean less time to raise funds for Galleon. “He’ll divide his week into a hundred different parts. And he will tell KKR I’m gonna give you two days a week right. And he’ll tell me that then he’ll tell everybody that you know,” he told Kumar.

Rajaratnam was mulling giving Gupta a 10 percent stake in Galleon International in exchange for his role as chairman of the entity. But he said Gupta was angling for more. “See with me he’s not giving me the luxury of saying why don’t you come up with a package,” Rajaratnam told Kumar. “He’s telling me I want so much.”

Rajaratnam, a pro at prying money out of investors’ fists, knew that if he racked up great returns, money would flood into the fund.

What Gupta does is “he gives a little bit of a cachet in South Asia and globally you know,” Rajaratnam told Kumar. As they spoke, he was coming to the view that a 10 percent stake in Galleon International, vested over five years at 2 percent, was the best he could do for Gupta.

“The worst he’s gonna do is he’s gonna say well I don’t think that’s enough and I’ll say okay, you know,” said Rajaratnam.

He had called Kumar for a “sanity check” and he had got one.

At the US attorney’s office in Lower Manhattan, the Akamai call was a huge breakthrough. The wiretapped call from Chiesi to Rajaratnam on July 24 involved the passing of material, nonpublic information. It was not speculation or rumor. When investigators followed up by subpoenaing Chiesi’s phone records, they found out that just as she told Rajaratnam, Chiesi had spoken to an Akamai executive before calling him that Thursday night. There was no doubt about the veracity of the tip: it was coming from a company insider. And only a week passed between the tip and the trade.

After a number of promising but false starts, Michaelson finally had a call he could build into a compelling case. As he listened to the cell phone calls, Michaelson kept a checklist of the elements he needed to build the case. He required evidence that Rajaratnam was receiving information that was material and not in the public domain. Then he had to find out if Rajaratnam traded on that information consistent with the information he received. Did the information come to pass? That is, did the company make an announcement along the lines of the information Rajaratnam received? Did the stock move as predicted? Last, did Rajaratnam place trades in accordance with the information and make a substantial profit from the trades?