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

by Anita Raghavan

  The one item Rengan was prepared to make a concession on was the quality of record keeping at Sedna. He admitted to the SEC lawyers that Sedna kept poor records, failing to preserve emails as required by a hedge fund that registers with the SEC as a “regulated investment adviser.” Not all funds seek the title. While it can give a fund an aura of legitimacy, it imposes strict reporting requirements that are expensive for small funds like Sedna. SAC Capital, run by Rengan’s former boss, Steven Cohen, did not seek the SEC imprimatur until 2012, and Sedna got it only in January 2006, nearly two years after it was launched.

  “This is kind of the mistake we made,” Rengan told the SEC lawyers. He said at one time Sedna’s analysts “used to actually burn the emails to the CD-ROM drive, take it home and keep it in Brooklyn, God forbid anything happened in New York.” Wadhwa suspected Rengan’s contrition was calculated and the allusions to a 9/11-type event deliberate. All too often an SEC lawyer, confronted with a hedge fund manager who can’t produce the emails he is requesting, will charge the fund with a books-and-records violation—essentially a slap on the wrist. Wadhwa found it hard to believe that a manager like Rengan, who had worked at SAC Capital and who seemed well put together, was unable to lay his hands on all of Sedna’s emails. At 4:57 p.m., after nearly seven hours of questioning, the deposition ended.

  Rengan felt good about it. When his brother asked how it went, he said well. At the SEC, though, Wadhwa and Michaelson were left with a different impression: they had no doubt that Rengan was dissembling when he gave testimony.

  Chapter Six

  Promises to Keep

  In the fall of 1971, Rajat Gupta said good-bye to his college sweetheart, Anita, and boarded a KLM airplane from New Delhi, making the first leg in his journey to the United States. The flight was Gupta’s maiden trip outside India. After a stopover in Amsterdam, where he and a friend marveled at the spanking-new Mercedes cab they hailed—nothing like the clunky Ambassador cars on the streets of Delhi—they landed in London. There they caught a play and Gupta bought a London Fog raincoat. Gupta and his friend quibbled over which coat to buy. In the end, Gupta wisely bought the more expensive one with a lining. Boston winters, he would discover, are brutal.

  At Harvard, Gupta found himself in the company of accomplished men from pedigreed backgrounds who went to the best private schools, summered in Europe, and, through family ties, landed jobs at Fortune 500 companies or clubby Wall Street banks before even arriving at Harvard. They had an easy confidence and an aura of sophistication. Many, like Edward Shoen, a classmate of Gupta’s, were part of an exclusive, moneyed club. Shoen would one day run U-Haul International, the company his father founded. For others, like Ray Dalio, the son of a jazz clarinet and saxophone player, Harvard would become a way station en route to founding one of the world’s largest hedge funds, Bridgewater Associates.

  If Gupta was intimidated by it all, he didn’t show it. Instead he struck a balance between assimilating and retaining his Indianness. During the week, he absorbed American culture from his dorm mates, but on weekends, he often took to the campus of MIT to catch a Hindi movie or joined a married friend from Delhi for an Indian meal. He so missed the spicy food from home he kept a jar of hot pickles in his room.

  His quiet confidence was all the more striking given that he was one of the youngest members of the HBS class of 1973 and one of three from India. Of the 768 students in his class, there were only 30 women and half as many Asian students. “There were a lot of Brits, Aussies, and an occasional Japanese student” at the school, recalls Grover T. Wickersham, a member of the class. “But in those days there weren’t many foreign students from India.”

  Unlike a number of his peers, who worked on Wall Street or served in the military before making their way to Harvard, Gupta was a greenhorn, arriving in Allston, Massachusetts, straight from IIT Delhi. John Carberry met Gupta on his first day at Harvard at their dormitory, Morris Hall, which, like all the dorms at Harvard Business School at the time, was fittingly named after a leading figure in finance, in this case Robert Morris, who saw to the bankrolling of the Revolutionary War. “My immediate impression was what a nice guy this is,” says Carberry. “There wasn’t a cockiness about him. If anything there was a sweetness, a kindness about him—maybe a little naive but always upbeat, always pleasant.”

  Gupta and Carberry were part of the same “can group”; they each belonged to a set of four two-room suites connected to a can, the slang for “bathroom.” Typical of his friends in his first year was David Manly, who was as provincial as Gupta was exotic. He came to HBS from a small town in upstate New York and was taken with Rajat’s gracious manner and his roots in the “mysterious east.” On his study table in his room, Gupta kept a tattered piece of paper. It read, “But I have promises to keep and miles to go before I sleep—Robert Frost.” He had received the piece of paper from his father during his final days. Close to Nehru, Ashwini Gupta knew that the poem was a favorite of the Indian leader.

  The eight members of the can were a tight group, often strolling into each other’s rooms for help with cases or simply for a late-night chat to break the relentless grind. Every evening, they would make the quarter-mile trek to Kresge Hall for dinner, wending their way in the bitterly cold Boston winters through the underground tunnels that were a signature feature of the HBS campus. “All we ever did during those walks—and over dinner—was to go over the case discussions earlier that day or see if anyone started on the cases for the next day,” says Carberry.

  Operating along the lines of a top music conservatory, HBS culled the business-world equivalent of highly talented pianists and violinists who were yet to realize their full potential as concert-level artists. Like any good music school, Harvard recognized that talent itself was not enough to produce effective leaders. So the bedrock of its philosophy was practice, practice, practice. The view was, “You don’t teach business by having people read textbooks; you teach business by having people make many, many decisions during their two years,” says Fred Sturdivant.

  Thirty-two years old and self-described as cocky, Sturdivant struck students as a youthful Professor Charles W. Kingsfield Jr., the exacting Harvard Law School professor immortalized in the 1973 movie The Paper Chase. Like in Kingsfield’s law class, one of the key teaching devices at HBS was “cold calling,” in which students were randomly selected to answer questions. Sturdivant kicked off by walking into the large amphitheater-style classroom “like a Gestapo officer,” Carberry recalls. Without even looking up, and with his back turned, Sturdivant said, “Mr. Clarke, will you begin.” Townsend Clarke, or Towney, was hardly a slouch. He was about six foot four and 240 pounds, with wispy blond hair and a square jaw. He was said to be the last all-American football player to graduate from West Point and arrived at Harvard fresh from his latest tour of duty in Vietnam. For fifteen minutes, Clarke offered a penetrating diagnosis of Hesper Silver, a case about marketing silver flatware. When he finished, Sturdivant, seeming singularly unimpressed, declared, “Mr. Clarke, if you can’t do anything better than recite the case, I think we had better ask someone else.”

  It was no accident that Clarke was selected to be the first target of the new class. At a party the night before, Sturdivant said he was looking for a “strong student”—someone who could take the pressure of leading off on the first day. When students offered up Clarke’s name, Sturdivant didn’t quite appreciate what he was getting. “The minute I said, ‘Mr. Clarke would you begin please,’ the young man jumped to his feet, snapped to, and barked, ‘Sir, yes, sir,’” says Sturdivant. “It scared the hell out of me. Everybody sat there traumatized, thinking, Is this what I am supposed to do?”

  As Carberry and other students slogged through their first term at Harvard, Gupta appeared to cruise. “Rajat constantly just floated above all this,” says Carberry. “We all got the impression that the academic challenges at Harvard Business School were not that much of a challenge for him.” Even though Gupta had no experien
ce working in the business world, he was as fluent at navigating an income statement as his classmates who’d held jobs at companies before coming to Harvard. Friends marveled at the ease with which he tackled problems, getting to the nub of cases so much faster than they did. “If you had a problem with a case, Rajat would gladly help you out,” says Carberry. “He wouldn’t give you the answer, but he would say, ‘Have you thought about that?’ He would open some doors for you.”

  Among the pride of alpha males at HBS, Gupta was distinctive in a very non-alpha-male way. In a picture that appears in the class prospectus, Gupta appears very reserved. “When you look at the guy, he is kind of a Nehru. Even without a jacket, he seemed like he had a high collar,” says Wickersham. In study groups, students would often ask, “What is the deal with Rajat?” recalls Wickersham. Few really had a sense of what IIT was at the time except to know “it is three times harder than MIT. Everyone figured he got here so he is pretty smart. He did everything on a slide rule that everyone at MIT did with massive computers.” Wickersham got the impression that Gupta came from a modest background—he wasn’t the kind of guy who made it to HBS because he was born with a silver spoon in his mouth. “I looked at Rajat and used to think he’s the guy who vindicates the system,” says Wickersham. “It’s the American approach of meritocracy. It doesn’t matter who you are or what kind of family you are from. Rajat is the guy who should have gotten in if you believe in meritocracy. He, to me, was the shining light; he went the distance. If they made movies like Rocky about a business guy, he would be the guy.”

  During the first six weeks at HBS, Wickersham says, an engineer like Gupta thrived because the course work was quantitatively driven. But when the courses started having a more liberal arts flavor to them, Wickersham expected Gupta to struggle, like some of the math geeks did. He didn’t. What was remarkable was that Gupta excelled even though he was reticent in class. It was well known that a large part of one’s grade came from class participation, triggering a curious pattern of one-upmanship in class, with one student trying to outdo the next in the heated competition for airtime.

  In later years, Gupta would acknowledge his silence as one of his personal shortcomings at HBS and would attribute it to his Indian upbringing, in which children were judged in school by their written work rather than their class participation. In the end, Gupta said he made a deal with three of the five professors who taught him; he would be judged on his written final exam rather than his contributions in class.

  Despite his quiet way, Gupta was learning a lot at HBS—both inside and outside the classroom. At times, Carberry says, he would return home from the library at about eleven o’clock at night and find Gupta working on cases as he kept one eye on the television, often to watch Monday Night Football. Gupta proved to be a quick learner. By mid-November of his first semester at Harvard, he could carry on an intelligent conversation about the game, filling in Carberry on the strategy of a given team or how its players lined up. About two or three months after Gupta arrived in the country, he and Carberry were watching a football game in their suite. “I think it was the Vikings versus the Giants,” says Carberry. “At one crucial point in the game, with the Vikings having the ball, Rajat says to me, “I think the Giants need to ‘red dog’ here.” (“Red dog” is an old-school term for “blitz.”)

  At other times, Carberry would return to Morris Hall late at night and find his can mate Gupta watching Johnny Carson. “He was picking up on American culture,” says Carberry as he thinks back on Gupta’s first year in the United States. “He would say, ‘What is Johnny Carson doing with Ed McMahon? Sometimes he is funny and sometimes he is not.’”

  As eager as Gupta was to soak in American culture, he kept silent about one of the most salient features of life in America at the time, the Vietnam War. Classmate John Hook remembers sitting in a class next to Clarke, the celebrated West Point graduate, one day when “I proposed we stopped the bombing.” The class was divided between students who served in the military and believed the bombing was necessary and appropriate retaliation for a North Vietnamese offensive that started in late March, and civilians in the class who adamantly opposed the escalation. What was clear was that when heated discussions like this flared up, “someone like Rajat would be silent through these debates,” says Hook, who is now an adviser on global trends to hedge funds. “Rajat would not take controversial positions—I would say that is not his thing.” Growing up in India, Gupta was always likened to his father; he shared his dad’s brilliance and his breathtakingly good looks. But as he matured into a grown man in America, Gupta would stand apart from his father; over time, the similarities between the two would fade and be overshadowed by differences.

  Chapter Seven

  The Good Ship Galleon

  At the tail end of January 2007, Wadhwa and Markowitz decided to dispatch a team from the SEC’s examination staff to Galleon, Raj Rajaratnam’s firm. Their antennae were raised by the curious instant messages between Rengan and his brother Raj about stocks around which the SEC suspected insider trading was occurring.

  Even before the examiners arrived at Galleon’s offices at 590 Madison Avenue, the 603-foot-high black stone skyscraper on Fifty-Seventh Street formerly known as the IBM Building, they knew what they were looking for. A couple of the staffers on the SEC’s Galleon exam team were camped out at Sedna months earlier and were up to speed on the touch points between the two brothers’ firms.

  On the morning of Monday, February 12, 2007, four SEC examiners met with a team from Galleon—Lindi E. Beaudreault, Galleon’s outside lawyer; George Lau, its compliance officer; and Tom Fernandez, its head of investor relations and a college buddy of Raj Rajaratnam’s. At a welcome meeting, during which Rajaratnam popped in to say hello, Beaudreault painted a picture of a hedge fund operating in full compliance with US securities laws. She told the examiners that Galleon adhered to a very detailed policy on insider trading, which was reviewed every year with the hedge fund’s one hundred employees, comprising largely portfolio managers, traders, and analysts. The SEC team smiled and nodded. This was not the first time they’d heard this speech.

  The Galleon portrait Beaudreault painted eroded over the next few weeks as the team examined the emails and instant messages themselves. A couple of IM exchanges in particular piqued their curiosity. In one, on April 21, 2006, just a few days before Computer Associates, which trades under the stock symbol CA, unveiled quarterly earnings guidance, Rajaratnam chatted with Quint Slattery, the manager of Symmetry Peak, a fund in which Rajaratnam was invested:

  [Slattery] quintussf: what about our ca

  quintussf: u staying short?

  rajatgalleon: my guy has seen the press release

  rajatgalleon: yes

  quintussf: obviously I know you are kidding about that

  quintussf: for the record I think the ims here are logged…

  rajatgalleon: Oh shit

  quintussf: its no big deal

  quintussf: I am careful on im

  rajatgalleon: press relase [sic] about the Yankees releasing derek jeter

  quintussf: that is what I heard

  quintussf: though he might stay

  The exchange was so ham-fisted that it was an insult to regulators. Did Rajaratnam really think they would buy that he was referring to a press release about the Yankees’ star baseball player Derek Jeter? It demanded a response, but building a case from the casual chatter alone was difficult. When Michaelson delved into Galleon’s records, he found that the hedge fund did trade Computer Associates stock around the time of the IM banter. But the name of Rajaratnam’s source—the individual who Rajaratnam boasted had seen the press release and the indispensable link to build an insider trading case—eluded him entirely.

  Michaelson checked the contacts in Rajaratnam’s Microsoft Outlook folder, he reviewed all his IMs and emails and trolled through his copious phone records, but he came up empty-handed. He even reached out to Computer Associates, which sent a t
hick document detailing all the people at the firm and outside it who were briefed on its earnings, but the document did not help uncover the source. Besides showing that material nonpublic information has been divulged, to bring an insider trading case the SEC needs to demonstrate there has been a breach of duty when the information is given. But after weeks of digging, Michaelson couldn’t turn up Rajaratnam’s source. Without an informant, it was tough to allege a breach. As long as Rajaratnam had so many diverse sources of information—some of the tips he traded on came from middlemen, other hedge fund managers, for instance—the SEC could do nothing to dredge up his source.

  From the beginning, Markowitz believed that the Sedna-Galleon case would be one the SEC referred to the criminal authorities. Unlike other insider trading cases that fell on his desk, many of them isolated instances of individuals trying to profit from corporate news they accidentally stumbled upon, there were early signs that trading on inside information at the two hedge funds run by the Rajaratnam brothers was widespread and that it rose to the level of criminal behavior.

  But there was a downside to bringing in the big criminal guns. Whenever the SEC enlists their help, it can lose control of a case. The SEC is a civil body and typically has a lower threshold for cases than the US attorney’s office, which lives and dies by the “beyond a reasonable doubt” yardstick. Many times, the SEC has to wait for prosecutors before it can bring an action. And prosecutors want “winners,” which means building an unbeatable criminal case.

  There was another issue. Wadhwa and Markowitz had got wind that a previous insider trading investigation into Rajaratnam in the late 1990s was squashed because a criminal probe into his possible involvement with a Tamil insurgent group had taken precedence. They didn’t want to waste their time and have that happen again.