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

by Anita Raghavan

  Why not cook her dinner, the analyst suggested, adding that women often liked it when men showed their feminine side.

  “I have a South Asian woman to cook dinner,” he snapped back.

  Rengan and Raj spoke several times a day, exchanging investment ideas over the phone. On weekends, Rengan often headed to Greenwich. He enjoyed hanging out with Raj and his family at their spacious McMansion in what’s known as Back Country, Greenwich, an area that once housed sprawling horse farms and big estates. Set well away from the main road, behind a stone wall that stretches around the perimeter of the property, the Rajaratnam estate, with a long driveway leading up to the main house, was secluded just like a fly-below-the-radar hedge fund manager would want.

  Unlike his brother, Rengan was a bachelor who freely confessed to having a hard time meeting the right woman. “It definitely feels like there are less quality women out there,” he told FoxNews.com in 2001 for a feature the website was doing on the lack of young single women. Thirty-one years old at the time, Rengan said he was stressed about it. “It’s like they’ve all gone away or someone snatched them all.” Raj, the more successful of the pair, often helped out his kid brother, making introductions on his behalf for business and pleasure.

  For a change, on the Arris trade it looked like Rengan was giving his older brother Raj a hand. On July 26, hours before Arris reported its poor earnings, two Galleon funds managed by Todd Deutsch, a socially awkward Galleon portfolio manager who reminded colleagues of the movie character Rain Man because of his astonishing ability to name the exact stock price of a thousand different stocks, sold more than $1 million of Arris stock. In an email sent at 11:17 a.m. the next morning, Deutsch, the manager of the Galleon Captain’s Partners fund and the Captain’s Offshore fund, said to Rajaratnam, “Arris [thank you] for getting us out.” (Deutsch has not been charged with any wrongdoing.)

  Unusual as the Arris trades were, for Wadhwa, the case offered little promise. Moon, the UBS lawyer, suggested that Sedna was engaging in a pattern of cherry picking, where a manager who runs several funds allocates the best investments to a preferred fund, in this case keeping the winners for an investment pool where all the investors are friends and family members. Cherry picking works like this: shares in a trade are allocated to different funds after a fund manager determines if a trade is profitable or not. Ordinarily, shares are supposed to be allocated to funds at the time of purchase, when it is unclear if a trade is a winner or a loser. Cherry picking is a violation of US securities laws, but it is hardly a sexy, headline-grabbing crime like insider trading. Few regulators, if any, have made their name on cherry-picking cases. And the hedge fund involved, Sedna, was minuscule. Was pursuing a case against Sedna the best use of the SEC’s scarce resources?

  The meeting concluded and Wadhwa went back to his office to investigate.

  A quick search on Google revealed that Sedna was a speck on the hedge fund landscape, which by 2006 was a sprawling investment metropolis of more than sixty-five hundred hedge funds, mostly based in Greenwich and London, managing $1.1 trillion in assets. The only thing that distinguished Sedna from the hedge fund pack was that its founder, Rengan, was the younger brother of Raj Rajaratnam, the manager of the Galleon Group, a successful New York hedge fund managing some $5 billion in assets. As Wadhwa delved deeper, he found a trove of laudatory articles on Raj Rajaratnam that gushed about his stunning market-beating investment performance.

  Jaded by his experience with other cases, Wadhwa took a more jaundiced view of Galleon’s steady returns and the positive press surrounding Raj Rajaratnam. He wondered: was Rajaratnam truly a hedge fund savant as the articles portrayed, or was he simply a mere mortal with impressive connections?

  Chapter Four

  Drama at IIT

  When Rajat Gupta arrived at IIT in 1966, he stood apart. Most of the boys in his class—and they were largely boys—were living away from home for the first time and found the small liberties of dormitory life intoxicating. Not Gupta, who at seventeen was mature beyond his age.

  “Our adolescent hormones and new-found freedom formed a dangerous mixture and we were all 17 going on 14,” says Harbinder Gill, who lived in the same dorm as Gupta. “We spent every waking moment on some insane prank or the other, which would today be considered sexist or even harassment. Except Rajat, who seemed to be 17 going on 30.” While classmates would spend their free moments “gallivanting on the Delhi University’s richly co-ed campus [a neighboring school to IIT], Rajat was busy volunteering his services around IIT,” remembers Gill.

  Unlike his classmates, Rajat could not afford the luxury of adolescence. Not long after he arrived at IIT, his mother died of a heart attack. Gupta and his elder sister were already in university, but his younger brother, Kanchan, and sister needed supervision. Rather than farming them out to various relatives, as was common at the time, Gupta arranged for an unmarried aunt to come and stay. And he took on the role of parent. Whenever he could, he would drop in on his younger brother’s parent-teacher meetings at school so that Kanchan would not feel left out when the parents of other kids showed up. And every weekend, Gupta would leave his dormitory at IIT, which was then on the outskirts of Delhi city and was surrounded by thick forests teeming with wildlife. It was so out of the way that three-wheeled scooter taxis in the more crowded parts of Delhi were loath to ferry faculty and students to the campus. A trip home required changing buses a few times, not to mention missing out on campus socials. But Rajat knew that Kanchan eagerly awaited his visits, and he made a point of never disappointing. Whenever he returned home, he brought a small gift, such as a tin of jam, a rare luxury in 1960s India.

  When the IITs, or the Indian Institutes of Technology, welcomed their first students in the early 1950s, many believed the grand experiment destined to fail. The country was struggling to feed its population, so how could it possibly build a network of MIT-like universities from scratch? But that is exactly what it did, in large part because of the vision of Jawaharlal Nehru. Even before independent India came into being, its first prime minister foresaw the need for technocrats who could design dams and build power plants and help shore up India’s industrial base.

  IIT Delhi, where Gupta was studying, was one of the last of the original IITs to be set up with the help of the British. Shashi K. Gulhati, who interacted with Gupta as the faculty advisor on extracurricular activities at IIT Delhi and is the author of The IITs: Slumping or Soaring, says, “Getting admission in the IITs was not always a dream come true.” From time to time, he would get telephone calls from uncles who said, “Our son has been admitted to IIT Delhi. Should we send him there?” At the time in Delhi, IIT was far eclipsed by the more famous establishment school, St. Stephen’s College.

  Seeking to staff the schools with world-class faculty, Indian recruiters wooed native students like Gulhati, who heard of the IITs for the first time at a lecture at MIT. When he returned to accept a position at IIT Delhi, he found it underwhelming compared to MIT’s state-of-the-art facilities. The campus “looked very bare,” says Gulhati about his first visit in 1963. Unlike at MIT, “there was no imposing multistory block, library building, no auditorium with an eye-catching roof.”

  Today Gulhati gets calls ranging from outright appeals for help in getting a child into IIT Delhi to advice on the best crammer courses to prepare a child for the make-or-break entrance examination. The school’s attraction is its long list of successful graduates, who credit their achievements to their time at India’s engineering boot camp. “When I finished IIT Delhi and went to Carnegie Mellon for my masters, I thought I was cruising all the way through Carnegie Mellon because it was so easy relative to the education I got at IIT Delhi,” said Vinod Khosla, the prominent venture capitalist and cofounder of Sun Microsystems.

  Aside from Khosla and his fellow tech titans, many IIT alumni have worked their way to the tops of giant firms in mainstream corporate America. Victor Menezes, a former senior vice chairman of Citigroup, is a grad
uate of IIT Bombay; Rakesh Gangwal, the former chief executive of US Airways, went to IIT Kanpur; and Rono Dutta, the former president of United Airlines, graduated from IIT Kharagpur. They all may come from different IITs, but they generally have a one-word description of their time at school: brutal.

  It is the IITs’ focus on meritocracy that has made it a beacon of excellence in an India bedeviled by cronyism and back-scratching. Admission requires academic excellence, period. Narayana Murthy, founder of software giant Infosys, or India’s Bill Gates, told 60 Minutes that his son could not get into IIT to study computer science, so he had to go to his safety school, Cornell University, instead. Indira Gandhi, Nehru’s daughter and later prime minister of India, also discovered that wealth and family connections would not ensure admission. Gandhi was very keen for her son, Rajiv, to attend IIT Delhi. “So Pandit Nehru invited us to tea,” recalls Kanta Dogra, the wife of R. N. Dogra, the first director of IIT Delhi.

  “Nehru was too uncomfortable to ask my husband for admission for his grandson, so he left the room,” Kanta Dogra says. When Indira Gandhi broached the subject, “my husband told her simply, ‘From his school records, he will not be able to get a place because it is very competitive. But I will get him a place in the Imperial College of London,’ which he did.” (Rajiv Gandhi attended both Cambridge University and Imperial College, but he did not receive a degree from either.)

  Gupta was one of sixty-two students at IIT Delhi in the “Mech 71-ers”—the mechanical engineering class of 1971. From the beginning, he stood out less for his engineering abilities and more for his leadership skills. His earliest-known management role came when he was elected general secretary for the Recreational and Creative Activities Committee, a group that managed the extracurricular activities at IIT Delhi. As a young student leader, he made a name for himself during a tense time in IIT’s early history.

  In 1970, about one hundred students, spurred on by a couple of ringleaders, marched on the house of the IIT Delhi director, R. N. Dogra. The students were unhappy with what they believed was Dogra’s oppressive way of running the institute and wanted to create a student union. Among other things, Dogra required 85 percent class attendance. If a student was just one class short, the student was expelled.

  The protests got so impassioned that three students camped in the vestibule outside Dogra’s office and went on a hunger strike. One of them was ultimately expelled, while others were kicked out of the institute for a year. During the tense days of the disturbances, Gupta worked with Dogra and the administration to restore order. “When Rajat got involved, he took the establishment standpoint,” says Anjan Chatterjee, a classmate of Gupta’s. At one point, at the peak of the foment, Gupta confronted Chatterjee, who was among the group of demonstrators. “We are not afraid,” Gupta told him. “If you burn down the buildings, we will call in the fire engines and rebuild.” Unlike his father, Rajat would not live a life falling on his sword for radical principles. His sympathy lay with the establishment.

  Gupta had another passion beyond academic excellence. He was an actor. In another life, without his heavy responsibilities, he would have considered taking up acting as a profession. Like everything else at IIT, drama was serious business. Rehearsals began after dinner and often lasted until 4:30 in the morning. Costumes were elaborate, and the performances, which were staged in IIT’s Seminar Hall, on the ground floor of IIT’s main building, drew packed houses. As many as five hundred people would attend. VIP guests included IIT’s director, Dogra, and his wife. The only room for many students in the audience was standing on the stairs.

  It was the fashion at the time to adapt English and French plays and to then perform them in Hindi. Gupta was a convincing actor, versatile at playing a part, and prodigious; during his five years at IIT, he acted in seventeen plays, Hindi and English, modern and classical. But by far, his most remembered performance was his role in Jean-Paul Sartre’s searing existential drama Men Without Shadows.

  Men Without Shadows concerns five French resistance fighters during World War II who fail to liberate a village, resulting in the slaughter of many innocents. They’ve been arrested and are awaiting interrogation, locked in a communal cell. Throughout the play, the five characters contemplate how they will confront the inevitable torture coming their way. Will they cooperate and give up the location of their leader? Will they beg for their lives? Will they resist?

  Gupta did not have to plumb the depths of his imagination to understand the dilemma. At one juncture in the adaptation of the play at IIT Delhi, the lone female character asks Gupta’s character, “Do you have parents?”

  “Nahi,” Gupta replied, shaking his head sorrowfully and answering with the Hindi word for “no.”

  It was heartbreaking to watch. On the close-knit IIT campus, many in the audience knew of his mother’s death after he arrived at IIT.

  “You must have felt terrible knowing that she was going to die,” Chatterjee remembers saying to Gupta.

  “Think of how she felt knowing she was going to die and leave us alone,” Gupta responded to Chatterjee. He further confessed to his schoolmate that there were “nights I can’t stop the tears. It is not easy living without parents.”

  Few of Rajat’s classmates had any sense of his personal travails. But in 1968, a quiet young woman from Srinagar, the beautiful summer capital of the northernmost Indian state of Jammu and Kashmir, arrived at IIT to study electrical engineering. Anita Mattoo was born into a prominent Kashmiri family of Brahmins, India’s highest caste group, the priestly caste. The summer before Anita arrived at IIT, Anita’s mother died in childbirth, leaving her father to care for four children, one a newborn.

  Like Rajat, Anita felt the weight of family responsibility. Though she was a girl and not burdened with the same duties as a son in an Indian family, she was the eldest child, separated by many years from her younger siblings. She came from a close-knit family and grew up in a shared living arrangement, known as the “joint family system,” that was common in India at the time and exists even today. Anita lived under the same roof as her uncles, aunts, and cousins. Family was as important to her as it was to Rajat.

  The two met while performing in a one-act English play whose name Anita no longer remembers. The friendship between the two turned into something more when they appeared onstage in Kanjoos, a Hindi adaptation of the Molière play The Miser. Rajat and Anita, in full view of others, would share laughs together on the set. Gupta nicknamed Mattoo “Grandma” because she played an older woman in the play. Many young girls would have been turned off by the moniker, but Mattoo was unperturbed. She knew the handsome Gupta was a catch. He was one of the most eligible men on campus.

  “I was the only girl in a graduating class of 250, shy, scared and still reeling from the sudden death of my mother,” she recalled years later. “Rajat was a big man on campus, bright, talented, popular, head of the student government and very involved in all extracurricular activities…But I have never forgotten his kindness to the very shy, quiet, small-town girl who felt so out of place.”

  Friends in Mattoo’s dormitory first sensed the depth of their feelings when they ventured downstairs into the common area of the women’s hostel, Kailash, which was fittingly situated near the faculty residences. Often, they would find Gupta, who lived on the other side of campus, visiting with her. Men were not allowed in the women’s rooms, so their friendship flowered into love in the visitors’ area of Anita’s dorm.

  In 1971, when Gupta was set to graduate from IIT Delhi, he was at a crossroads. India’s private sector was rudimentary. For the most part, it consisted of companies consigned to making inferior copies of Western goods—televisions, cars, drinks—and hawking them at discounted prices. Entrepreneurship was not considered an appropriate occupation for an Indian. A thriving bureaucracy of red tape, a veritable small business unto itself, strangled any economic ambition.

  Moreover, India’s hostile policies toward foreign investment succeeded in keeping non
-Indian businesses at bay. In 1970, in a bid to “Indianize” foreign investment, the government moved to pass an act requiring corporations to dilute their shareholdings in Indian companies to 40 percent. Scores of Western companies quit India in the wake of the law. The best-known defector was the US soft-drink giant Coca-Cola, which, rather than comply with the law, up and left. For years after Coke’s departure, bottles of Coke were smuggled into India clandestinely from Nepal and sold on the black market at stratospheric prices. Serving Coke rather than the local soft drink Thums Up came to be seen as a sign of affluence. To many, it was also an indictment of India after independence.

  Inevitably, bright and hungry students like Gupta cast their eyes abroad. “All Rajat would talk to me about was getting to America and getting admission” to a US business school, says Subramanian Swamy, a well-known Indian politician who taught Gupta economics at IIT Delhi. At Gupta’s behest, Swamy, who received his PhD from Harvard University and taught there before joining IIT Delhi, wrote Gupta a recommendation for Harvard Business School. Anita kept Gupta company at the campus coffee shop as he wrote his essays for his HBS application.

  In his final year, Gupta was one of two students at IIT Delhi to get a job offer from ITC Ltd., the equivalent of Philip Morris in the United States, a prestigious company with pedigreed beginnings in India dating to the time of the British Raj. When ITC started in 1910, it began operating under the name Imperial Tobacco Company of India Ltd. But as India changed overlords, ITC changed owners. After independence, the company’s ownership increasingly fell into the hands of Indians and its name changed to reflect its new complexion—first it was christened India Tobacco Company and ultimately ITC.