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

by Anita Raghavan

  Despite the potential downside of bringing in the feds, Markowitz decided to refer the case to the US attorney’s office for the Southern District of New York in March 2007. The office, dubbed the Sovereign District of New York because of its storied reputation for independence, covers the boroughs of Manhattan and the Bronx and has far more cases to choose from than it can handle. Wadhwa and Markowitz knew that they had to convince the criminal authorities that the developing case against Galleon was worth their time and effort. Markowitz was encouraged when the prosecutors said they would be willing to come to the SEC’s offices for a meeting. Usually it was the SEC lawyers who made the trek across Lower Manhattan.

  “This is our best shot at getting into hedge fund insider trading,” said Markowitz. His subtext was This is a headline-grabbing case. The SEC lawyers shared with their criminal counterparts some of the suspicious instant messages the exam staff had uncovered. William F. Johnson, deputy chief of the Securities and Commodities Fraud Task Force, appeared intrigued. “Wow, that is good evidence,” he said. Then Michaelson handed over a binder focused on trading in two stocks, AMD and Arris; two DVDs containing emails; and a CD containing a trade blotter and some instant messages. Soon after the meeting, the US attorney’s office in Manhattan embarked on a criminal investigation. Wadhwa and Markowitz were thrilled; their pitch to the US attorney’s office had worked.

  At the same time, an anonymous letter arrived at the offices of the SEC. It was postmarked Queens, New York, and was addressed to the SEC’s New York Regional Office director. “It is hedge funds like Galleon Group that create wealth for their shareholders and themselves at the expense of innocent investors,” the letter began. The writer went on to say that the limited partners in Galleon “are industry executives…and Board Members of large public companies…They share quarterly results with the management of this fund prior to release to the public. In return the fund provides greater returns on their money.”

  The anonymous letter writer claimed never to have worked for Galleon but seemed astonishingly well-informed about the company’s practices. “Faxes are delivered from companies containing financials, product mix data etc. on Galleon management’s desk prior to release the next day.” The letter’s author waxed colorful when describing the corporate culture: “Prostitution is rampant for executives visiting Galleon. You will find that the superbowl [sic] parties for the executives, paid for by the Galleon Group, including [sic] prostitutes and other forms of illegal entertainment. In return, the executives provide Galleon the unfair edge that the fund leverages so well.” The letter closed by throwing down the gauntlet to the SEC: “I’m sure you will not have to dig too deep to unravel the truth behind this manipulative hedge fund.” It was signed “Seeking Integrity in Business,” but its author, whom SEC lawyers suspected was a disgruntled employee, could not be found.

  By April it was clear to Galleon’s lawyers that the SEC was training its sights on Galleon rather than Sedna. At a deposition of a Sedna employee, the fund’s lawyer Jerry Isenberg asked Wadhwa point-blank, “Is this an investigation of Galleon or an investigation of Sedna?”

  The inscrutable Wadhwa did not answer. He was not required to respond. At Galleon, where Rajaratnam tended to cultivate silos, in keeping with his secretive management style, few except for a handful of Rajaratnam’s closest lieutenants were aware of the escalating probe. But for anyone who cared to look, there were clues. Sedna Capital, Rajaratnam’s brother’s hedge fund, whose suspicious trading activity sparked the investigation into Galleon in the first place, suddenly closed, largely on account of poor performance. Tellingly, its employees were absorbed by Galleon.

  As the SEC examination continued into spring, Galleon and its lawyers turned hostile. In April, Beaudreault telephoned Wadhwa and charged that it was improper for the SEC to be investigating Galleon under an order sanctioning a probe of Sedna. When Wadhwa failed to act, her colleague Isenberg telephoned Wadhwa’s boss, David Markowitz, and claimed that the SEC was on a fishing expedition. Wadhwa was furious but Markowitz backed him, telling Isenberg that if he thought that kind of tactic was going to work, he didn’t understand how things worked at the SEC.

  On May 14, 2007, nearly nine months after the initial tip that Rengan Rajaratnam’s Sedna Capital was engaging in some sketchy trades, the SEC issued a subpoena to Galleon for information on all trading activities, all trade blotters from September 2005 to the present, recording purchases and sales of securities, diaries, date books, and calendars, and all documents concerning specific securities such as AMD, the security that the Sedna friends and family fund made a killing on in 2006. They also issued a subpoena for Rajaratnam’s testimony. Galleon fired back immediately, canceling a scheduled SEC interview with Tom Fernandez, Galleon’s investor relations head, and effectively ending the exam.

  “My team is getting kicked out,” George DeAngelis, a branch chief in the SEC’s Investment Adviser/Investment Company Examination Program in New York, told Wadhwa. (Members of DeAngelis’s team are the beat cops who patrol broker-dealers, the hedge fund and mutual fund industry, and other large swaths of the country’s financial infrastructure. If they spot troubling and pervasive activity, they can enlist Wadhwa and his enforcement group.)

  “Don’t worry,” Wadhwa replied. By this time, he was comfortable that the SEC had enough strands of suspicious activity at Galleon to chase. It had a good idea, for instance, of the stocks Galleon made money on in 2006. One winning trade that stood out was a huge bet that Rajaratnam made on ATI Technologies, which was acquired by AMD. Surely the suspicious instant messages between Raj and his brother Rengan about AMD a few weeks later were not just a coincidence. The SEC could not prove it yet, but Wadhwa and Michaelson were just about convinced that Raj had an inside source on AMD and Raj was tipping off his brother.

  The question the SEC lawyers now faced was whether to take testimony from Raj Rajaratnam immediately or subpoena more documents and then depose him. Ultimately they decided there was little harm in bringing him in straightaway. There was always a chance he might be able to offer a believable explanation for the suspicious threads the SEC lawyers were starting to tug at. After weeks of combing through emails and IMs, the SEC examination team had not nailed down any of his inside sources. In any case, if it needed to, the SEC could ask him to return, and there was always the possibility it could catch a break. Rajaratnam might say something that was provably false that could be used against him later. He might even slip and give up the name of a source, the indispensable element needed to build a case.

  On the morning of June 7, 2007, as Wadhwa was walking with his colleague DeAngelis to take Rajaratnam’s testimony, DeAngelis spotted an email on his BlackBerry. One of his staffers had found “some interesting” chatter in a stack of instant messages between Rajaratnam and a person using the IM handle “roomy81.”

  This was the first time Wadhwa and Michaelson had heard of roomy81. Not knowing the person behind the IM handle and wanting to do more digging, they filed the name away. They made a conscious decision not to ask Rajaratnam about the exchanges between him and roomy81. The last thing they wanted was for him to get the idea that they were going after roomy81. If he did, he could simply coordinate stories and cover up any impropriety. The less they appeared to know, the better. Walking to the deposition, they quickly devised a seemingly innocent way of asking Rajaratnam about the identity of the person behind the IM handle.

  At 10 a.m., Raj Rajaratnam, flanked by the same two lawyers who had accompanied his brother Rengan six months earlier, walked into the SEC’s Testimony Room 416. With windows looking out onto the World Financial Center’s Winter Garden, Room 416 is rectangular, with a stained beige carpet. Rajaratnam wore a blue blazer and looked relaxed. Unlike his brother, he was smooth and understated. He explained the foundation for all his suspicious trades in a calm, matter-of-fact way, never losing his composure and never appearing arrogant or high-handed.

  But, like his younger brother, he plied
the SEC lawyers with half-truths. The SEC lawyers were not surprised. It was a tack they often encountered. When people are deposed by the agency, they have three choices. They can tell the whole truth, which could lead to the SEC bringing a case against them. They can invoke their right against self-incrimination and plead the Fifth Amendment, which the SEC could present to an SEC administrative law judge in any future civil case. Or they can lie. While invoking the Fifth Amendment can’t be presented as evidence in a criminal proceeding, it is permissible in a civil action. Some executives take the gamble that lying under oath is better than invoking the Fifth Amendment in the event that the SEC brings a civil complaint and their pleading of the Fifth is used against them.

  During the course of the seven-hour deposition, Rajaratnam tripped all over himself.

  Michaelson, who had prepared meticulously to take Rajaratnam’s testimony, spent most of the morning easing his witness into the process and getting him comfortable. He walked him through simple questions such as where and when he was born, what computers he used, and how he kept track of his appointments. Rajaratnam breezed through it all, rarely hesitating before replying. When he was asked if he had ever come into possession of material nonpublic information, he responded: “Me personally, no.” Sometimes his answers were revealing. When Michaelson asked Rajaratnam about the hedge funds he invested in, he offered a variety of names. Some were start-ups like his brother’s fund, Sedna Capital, and Slattery’s Symmetry Peak. But others were old, established hedge funds like the Tudor funds, run by business chum Paul Tudor Jones, a renowned commodities trader; and Duquesne Capital, run by his good friend the legendary Stanley Druckenmiller. A protégé of George Soros, Druckenmiller masterminded one of Soros’s most brilliant trades: making $1 billion in 1992 speculating on the devaluation of the British pound.

  When Michaelson asked which investors in his funds were also directors and officers of public companies, he threw out a couple of names—Ken Levy of KLA Instruments, Charlie Giancarlo of Cisco, and Kris Chellam of Xilinx. But he failed to mention Rajat Gupta, who at the time sat on the board of Goldman Sachs and was an investor in Galleon’s Voyager fund.

  At 12:30, Isenberg requested a break. Rajaratnam was a diabetic, and his blood sugar was low.

  When they reconvened after lunch, Michaelson started grilling Rajaratnam on AMD, asking him about the kind of information he relied on to buy the stock.

  He said he acquired about $40 million of AMD stock between July 24 and August 11, 2006, because the stock was a bargain. AMD was unveiling a new product, Opteron, and it had a technological edge over Intel. He thought his source on the new chip may have been PC Magazine or industry buzz.

  Galleon’s investment decisions were built upon a hundred different variables—analysts’ reports, money flows, Rajaratnam’s view of the market, and his tolerance for risk, among others. The hedge fund had thirty-four analysts to whom Rajaratnam paid somewhere between $30 million and $60 million in total a year to keep happy. They drew on public announcements and articles, stock analysts’ reports, trading patterns, and money flows to patch together winning investment ideas. When lawyers pressed him about whether he had any specific information that Dell or IBM was going to use AMD products in its computers, he said he had none.

  Then Michaelson said, somewhat offhandedly, that he had a couple of quick questions before they recessed again.

  “Are you familiar with a ‘roomy81’ instant-message address?” he asked.

  “Yes.”

  “Who is that?”

  “She worked at Galleon and then she left Galleon to start her own fund. I think she primarily manages her own money.”

  “What is her name?”

  “Roomy…Khan,” said Rajaratnam, spelling out her surname.

  Michaelson asked Rajaratnam if he ever talked with Khan about Advanced Micro Devices.

  “She may have given me information, but I can’t recall.”

  Then Michaelson called the midafternoon break.

  Rajaratnam’s prevarication appeared to peak during the last hour, when Michaelson grilled him about an instant-message exchange on August 2, 2006, between him and an analyst with the IM handle APJITW. Apjit Walia, whose aim in life was to be a fighter pilot before becoming a securities analyst, worked at the investment banking unit of Royal Bank of Canada. Walia first met Rajaratnam when he and a colleague called on Galleon, a client of the bank. As often happens on Wall Street, a business relationship turned into a friendship. From time to time, Walia and Rajaratnam would have a drink, and on one occasion Walia accompanied Rajaratnam, an avid cricket fan, to Trinidad for an exciting match: India versus West Indies.

  “AMD on August 1st, now 13th,” Rajaratnam appeared to be messaging, writing “13eh” instead of “13th.”

  “Hey, for the tickets have to choose package B?” the analyst, Apjit Walia, shot back.

  Michaelson wanted to know “what’s going on in this IM exchange,” clearly trying to figure out the link between package B and AMD, the ticker symbol for Advanced Micro Devices. (“A ticker” is Wall Street lingo for the symbol under which a public company’s stock trades. Google’s ticker symbol, for example, is GOOG.)

  “We were going to see cricket in Trinidad,” Rajaratnam responded. “We were talking about the cricket packages, the tickets we had to buy for the World Cup. There were different packages as to whether you could play in Barbados or Trinidad.” (Walia, who has not been charged in connection with the Galleon case, also told the SEC in his voluntary testimony that his remark referred to the World Cup cricket.)

  At first, it seemed like for every question Michaelson posed, Rajaratnam had a ready answer. Package B, he said, referred to accommodation and tickets packages that some tour operators were offering. When Michaelson followed up by asking which tour operator he was using, he retorted: “We decided to get our own house.”

  But then Rajaratnam was flummoxed.

  “Did you buy package B?” Michaelson asked.

  “Sorry?” Rajaratnam answered.

  Michaelson asked the question again. For a moment, it seemed like the stories had caught up with Rajaratnam.

  “What is package B?” Rajaratnam asked. Then, without missing a beat, he said package B, which he ended up buying, was unavailable to people who followed India in cricket.

  The SEC lawyers were divided about the meaning of package B. Some, like Markowitz, were convinced that “package B” was a code word to buy a security. Rajaratnam denied it was. After the deposition, Michaelson spent hours Googling cricket packages to look at the various permutations. His gut feeling was that the exchange about package B probably was innocent, as Rajaratnam suggested. It just seemed too elaborate a way to telegraph the buying of a security.

  What clearly was not innocent from Michaelson’s perspective was the apparent shift in timing—“AMD on August 1st, now 13th.” When Michaelson asked Rajaratnam about it, he claimed that he did not know the significance of the word “13eh.”

  “I know this is about cricket,” he told the SEC lawyers. “I don’t know. It’s about cricket. I remember package B and the ticket, absolutely about the tickets. I don’t know of anything else.”

  He said he was pushing Walia to choose tickets and now Walia was reminding him and so he called him a “rocket scientist.” “We nailed the deadline,” Rajaratnam said. “I don’t know what the deadline was, the thirteenth or the fifteenth.”

  Seconds after the protracted discussion, during which Wadhwa and Markowitz jumped in, Michaelson showed Rajaratnam an IM exchange between him and his brother Rengan that took place the day before the chat with Walia.

  “are you going to hold the amd?” Rengan asked.

  “y through the 13th,” Rajaratnam messaged back, using “y” as an abbreviation for “yes.”

  Again, Michaelson asked if Rajaratnam could tell the SEC lawyers the importance of the date, the thirteenth.

  “I don’t recall what the significance of the thirteenth was,” Rajaratnam
said.

  In an effort to jog Rajaratnam’s memory, Michaelson pointed to the two instant messages within twenty-four hours that seemed to refer to the thirteenth, one correctly and the other as “13eh.” But before Michaelson could finish posing his question, Rajaratnam’s lawyer Jerry Isenberg jumped in.

  “Are you representing that ‘13eh’ means the thirteenth?” Isenberg asked. “Do you have some secret knowledge that the rest of us don’t have?”

  The SEC lawyers persisted in their line of questioning, and Rajaratnam stubbornly stuck to his line of defense.

  “It doesn’t change my memory,” said Rajaratnam. “I don’t know.”

  Before the SEC wrapped up the deposition, Michaelson asked Rajaratnam how he paid for package B for the cricket match. Rajaratnam said he paid with his credit card.

  The next day, June 8, 2007, the SEC issued a five-page subpoena to Galleon for his email and cell phone contacts, requests to identify his personal security and brokerage accounts, bank accounts, and investments in privately held companies, and handwritten notes concerning any securities transactions. Buried in the five-page subpoena was a request for Rajaratnam’s credit card bills.

  Then the SEC went dark—it issued no more subpoenas and asked for no more testimony from anyone at Galleon. As far as Rajaratnam was concerned, the investigation, which had cost him a lot of time, money, and headache, had ended. Now he could get back to one of his core businesses, trading on inside information.

  Part Two

  Rising

  Chapter Eight

  No Ask Backs

  Walter Salmon had just wrapped up a class at Harvard Business School in the spring term of 1973 when he noticed a defeated look in the eyes of one of his best students. Salmon didn’t know Rajat Gupta socially. He sometimes had students over to his house in bucolic Lincoln, Massachusetts, for brunch or cocktails, but if it happened, it was generally in groups, not the kind of setting to get to know one student particularly well. As with most professors, Salmon’s knowledge of Gupta came from his interaction with the young Indian’s work. And that work was extraordinary. It was odd to see someone with such a bright future deflated.