The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund
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“Wall Street was tough to get into for us,” Rajaratnam would say decades later. “Not to be crude but there’s a Jewish mafia, and a Wasp mafia, and an Irish mafia up in Boston…They hire their own; they socialize among their own.” Rajaratnam understood how the system worked. If he couldn’t get into anyone else’s club, he’d build his own.
At Chase, Rajaratnam discovered that there were two hot industry groups that analysts were vying to join: electronics and petroleum. After completing the credit program, Rajaratnam was tapped for the electronics group, where he earned the nickname “HP Raj.” Unlike his peers, he didn’t need a Hewlett-Packard calculator to figure out mathematical computations; he could do complex calculations in his head.
Except for his acumen in math, Rajaratnam kept a low profile at Chase. He struck superiors as humble and deferential. One time, Rajaratnam was on a trip with a couple of colleagues visiting a client. The group was divided into two cars. Rajaratnam drove one, while a seasoned and more senior colleague drove another. The men from Chase were late for the meeting, but the gray-haired gentleman would not accelerate. Rajaratnam’s colleagues gesticulated to him with hand signals to overtake them. Despite their frantic motioning, Rajaratnam lagged behind, refusing to pass. Quizzed about it later, Rajaratnam said he was not comfortable overtaking the older gentleman. In his mind, he said, it showed a lack of respect. His colleagues found his gesture charming; they didn’t focus on the fact that among Asians the elderly were revered. All Rajaratnam was doing was behaving as he had been brought up to do.
Even though Rajaratnam thrived at Chase, colleagues sensed that his passions lay elsewhere. “Give me a Quotron,” he often quipped, referring to the stock quotation machines once ubiquitous on Wall Street trading floors. He liked that the markets were unforgiving and that they humbled you. But most of all he loved the game and the thrill of winning. It was an energy that he infused into every part of his life. Whenever he played tennis, he would blast every ball. Years later, when he started his own company, he described his drive to compete: “After a while, money is not the motivation. I want to win every time. Taking calculated risks gets my adrenaline pumping.” Soon he would be an adrenaline junkie.
In 1985, Rajaratnam quit Chase to join Needham & Co., a second-tier, scrappy investment bank specializing in technology and health-care stock trading. Founded by George Needham, a former investment banker at CS First Boston, the upstart firm challenged Wall Street by filling its ranks with outsiders. “I hire one-legged men, and I beat the crap out of them,” Needham liked to say. Employees were required to take red-eye flights on business trips and stay over Saturday nights if it saved the firm money. Needham himself was known to sift through the stack of FedEx slips every day to see which employees sent FedEx packages rather than using the cheaper and preferred Airborne Express. And he thought nothing about putting down his employees, calling his banking group an “island of misfit toys” and his analysts “hundred-thousand-dollar doorstops.”
Amid Needham’s hardscrabble culture, Rajaratnam flourished. He had vision and fortitude. When US semiconductor companies were struggling, battered by a flood of cheap Japanese computer chips, most research analysts gave up on the sector, thinking it a dead end. Rajaratnam decided to build a career out of it.
Boyish and dashing, he traveled to Silicon Valley and charmed an up-and-coming generation of technology executives with his folksy ways. He told them his first name meant “king” in Hindi and together with his last name, it made him the “king of kings.” He mesmerized them, regaling them with larger-than-life tales. “He would tell about his experience with the Tamil Tigers,” says Gerald Fleming, who covered chip equipment makers at Needham. Fleming remembers a trade group conference in Monterey, California, during which Rajaratnam captivated dinner companions by telling a tale of how “he went into training with the [Tigers] and one day a bullet whizzed past his ear, and that’s when he decided to go and study in England.” No one knew what to make of the story. (A spokesman for Rajaratnam told Forbes in October 2010 that the insurgent group Fleming refers to was not in existence when Rajaratnam left Sri Lanka.)
As Rajaratnam unleashed his natural charisma at social gatherings, in the trenches he was even more impressive. A cut above the typical analyst in the technology sector, then a Wall Street backwater, Rajaratnam displayed a prodigious knowledge of the industry and an all-consuming desire to learn about the companies operating at the cutting edge. “When you are presenting a highly technical story, it is not too often you get an analyst who really understands it,” says Bob Anderson, one of the cofounders of KLA Instruments. “He clearly had the ability to understand what was going on.”
Fortuitously for him, Rajaratnam arrived on Wall Street just as Silicon Valley was starting to see an influx of South Asians too. Rajaratnam forged multiple ties with Silicon Valley’s small but growing community of Indian expatriates. One of his earliest contacts was Kris Chellam, a technology industry veteran who worked at Intel. A professional relationship between the two flowered into a friendship, particularly after Chellam joined Atmel Corp. in September 1991. Whenever Chellam came to New York City, Rajaratnam would rent a limousine and the two would head off to Atlantic City.
“Raj sort of had a South Asian mafia,” says Fleming, the Needham analyst. There were people he could call and “get, for a number of companies, [their] earnings to a penny.” Fleming recalls once sitting in Rajaratnam’s office when he logged a call to Advanced Micro Devices. After some time, his secretary came in and said that someone with an Indian-sounding name had returned the call. Rajaratnam took the call, walked onto the trading floor, and announced the profit figure. “And he was right,” says Fleming, astonished at the time.
As his clout at Needham grew, he shed his quiet persona and took on the bravado of a Wall Street wheeler-dealer. If a banker missed a piece of business and the treasurer of the company was a woman, Rajaratnam would inquire: “Why didn’t you sleep with her?” At Needham, he was “pretty much the same guy you see now. He was bossy, he was loud, and not a particularly nice guy but he was a rainmaker at the firm,” says Lisa Lettieri, who worked as a sales assistant at Needham in the mid-1980s. “He had to be on a beautiful woman’s arm all the time. He wanted lots of [money]. It was money and women.”
While playing the bon vivant at work, Rajaratnam was seriously dating a woman at the time. Asha Pabla was a quiet Sikh Punjabi woman who worked in the textile industry. She was as fair as he was dark. Even though he publicly denied it, his intimates knew that he had always had a chip on his shoulder about the color of his skin. Years later, when he catapulted to hedge fund stardom, he would often marvel at how he—a man with a black, ugly face—had gone from being an outsider, hovering on the fringes of Wall Street, to being a consummate insider. (Rajaratnam, through a spokesman, denied to Forbes that he ever mocked his own appearance.)
Rajaratnam told friends he fell in love with Asha at first sight, but it took her awhile before she was convinced that she wanted to settle down with him. Her parents were dead set against the union because they were from different communities, but Rajaratnam vowed that he would earn $1 million quickly and then ask her to marry him. In 1988, with Raj still far from the million-dollar mark, the two were married. Soon Rajaratnam was earning the big bucks.
Sometimes he did it by cutting corners. In the early 1990s, Novellus Systems learned that Rajaratnam, who covered their company at Needham, was courting its archrival, Applied Materials, for an offering of securities. Novellus was founded by a group of refugees from Applied Materials and the two companies were fierce competitors. When the Novellus executives found out that Rajaratnam won the mandate, they suspected he might have clinched the deal by discussing with Applied Materials some cutting-edge technology that Novellus had developed and previewed before him. Whether he had done so is not known. They were furious with Rajaratnam; after the incident, Novellus cut off Rajaratnam and Needham for a time from future investment banking business.
At Needham, pushing boundaries—both personal and professional—became a point of pride for Rajaratnam. One time, after Rajaratnam bragged to his colleagues that he could handle any kind of spicy sauce, a colleague decided to put his taste buds to a test. As a crowd looked on, Rajaratnam spread a bottle of habañero sauce called Armageddon onto two chicken wings. Within moments of tucking in, tears were streaming from his eyes and he was coughing. He rushed to the bathroom and went home early that day, a rare move on his part. Later, he chuckled about the episode.
By the beginning of 1994, Rajaratnam owned 17 percent of the small boutique bank—the second-largest equity owner after Needham himself, who owned 26 percent of the firm’s equity. He was earning $1 million a year. Job offers from big investment banks were pouring in—a fact he reminded George Needham of all the time. To cement his power, he began building his own empire of loyalists—many of them from South Asia, including his old Wharton friend Krishen Sud. The hires were so blatant that at one point George Needham confronted him. Rajaratnam rattled off the names of the employees on Needham’s trading desk. Most were Jewish.
Needham took the point…If you have your tribe, I’ll have mine. On Fridays, Sud, Rajaratnam, and Ari Arjavalingam, another colleague, would head off to Bombay Palace, one of the oldest Indian restaurants in New York, for a long lunch. George Needham would needle the trio when they returned from their meal, remarking that they came back with extra vim and vigor because of the spicy food they ate.
For years, Rajaratnam was hankering to manage money, and in 1992, in a bid to capture more business from Silicon Valley technology companies, he started a small hedge fund at Needham. Many of the companies he served were going public, enriching their executives along the way. Rajaratnam figured the newly minted entrepreneurs needed a place to invest their new wealth. What better venue than a hedge fund managed by their investment banker? He quickly raised $250 million—a sizable sum of money at the time—from some of his best banking clients.
Rajaratnam was excited about the new fund, but not everyone at Needham shared his enthusiasm. A number of executives started fielding complaints from brokerage clients who were worried about the many hats Rajaratnam now wore: he was president of the company, he was a banker, and he managed money for the very same executives whose companies he covered as a banker. The risks were obvious. Rajaratnam was in a position to get information from his banking clients that he could then use to trade on for his hedge fund. To avoid any impropriety of this kind, it is common at investment banks for there to be a Chinese wall separating investment banking from trading; this forbids bankers who are advising companies on deals from discussing the transactions with colleagues on the trading floor.
Between 1993 and 1996, at least five Needham executives told George Needham that they were concerned about Rajaratnam’s business practices. In November 1996, amid growing tensions between Rajaratnam and the firm he helped build, George Needham told employees, “I greatly regret that Raj Rajaratnam, my friend and partner,” was quitting the firm.
Soon after Rajaratnam left, Theodore O’Neill, a semiconductor analyst, moved into Rajaratnam’s old office. Along one wall, he found row after row of spiral-bound logs of inbound calls from tech executives all over Silicon Valley.
How do I get these guys to call me? O’Neill thought.
Chapter Ten
Up or Out at McKinsey
After arriving at McKinsey’s offices in September 1973, Gupta by his own account struggled. He was assigned to share an office with Karl Wyss, who came to McKinsey with experience in the corporate world and an impressive résumé. The two could not have been more mismatched. Gupta was young and callow. Wyss was mature and wise to the ways of business. Gupta came to McKinsey fresh out of business school. By contrast, his office mate was a ten-year veteran of the computer giant IBM with the experience of managing two thousand people before becoming a consultant. Wyss advanced very rapidly. Within nine months, he started managing projects and was handed numerous responsibilities.
Gupta, meanwhile, was on a slow learning curve, simply treading water. At a company like McKinsey, which evaluates its consultants almost as rigorously as it does the companies it counsels, Gupta was constantly reminded of his shortcomings. In reviews, he was upbraided for being too quiet in team meetings, the routine gatherings of a group of consultants working on a specific project. Always the academic all-star, Gupta found the transition from carefully prepared written responses to off-the-top-of-the-head verbal statements difficult.
“I was sitting there and wondering, Am I in the wrong place, am I really falling way behind?” said Gupta years later. “I was very late in almost everything I did.” Unlike his office mate Wyss, Gupta took four years of incremental progress before he managed his first project.
Whatever Gupta’s own insecurities about his early time at McKinsey were, they slipped past his office mate, Wyss. “Rajat did not seem overwhelmed at all,” says Wyss. Often, when he finished his work, Gupta would pack up and head home at 2:30 in the afternoon to be with his family. “He was his own man,” says Wyss. “You could tell if someone asked him to do something he didn’t want to do, he knew how to say no.”
In the two years that Wyss and Gupta shared an office, Wyss remembers Gupta as being “very private,” rarely divulging much over their morning coffee. Gupta never mentioned the death of his parents even though it would have been fresh in his mind. Then and to this day, “he is a hard guy to pull out,” says Wyss. Though he left McKinsey before Gupta’s real rise at the firm began, he saw in Gupta a quality that would help him climb in later years. “He was not a partner who made enemies,” says Wyss. “He was a partner who tried to build bridges. If you know McKinsey from the inside, becoming managing director is a highly political process. Rajat was a good politician.”
In his early years, while Gupta got solid reviews for his analysis of consulting problems, he was so quiet that he didn’t stand out or make a serious impression. Tom Peters and Robert H. Waterman Jr. thought of Rajat as a “sweet little kid,” recalls Waterman, the coauthor with Peters of the best-selling management bible In Search of Excellence. Waterman first encountered Gupta in the late seventies when Gupta attended one of the training sessions for the Excellence Project. “Rajat didn’t strike me as more ambitious than any other McKinseyite,” Waterman recalls. In fact, Waterman saw Gupta as “possibly less” ambitious because he was a “little bit shy and quiet at the time.” His work, though, was fine—so quietly exceptional that his contributions earned him a spot as an “Excellence” trainer.
Gupta did not know it at the time, but he joined McKinsey during one of the most perilous periods in its history. “The 70s was a lost decade for McKinsey,” says Jeffrey Skilling, who started at McKinsey in 1979 when it was emerging from its dark days. “After growing at breakneck speed through the 50s and 60s, the firm hit the skids in the 70s. The ‘big ideas’ of the 50s and 60s, divisionalization, product management and quantitative decision-making (the ‘McNamara-like’ whiz-kid thinking), had clearly run out of steam by the early 70s. The onslaught of Japanese competition in the 70s in some ways repudiated the American management model that was McKinsey’s stock in trade. Probably even more threatening was the rise of BCG [the Boston Consulting Group] and its offshoot Bain.”
The challenge McKinsey faced was that even as the market for the fir
m’s product grew more saturated, “the new markets were blocked by the new guys [BCG and Bain],” Skilling recalled in a series of emails from federal prison in Englewood, Colorado. (He is serving a twenty-four-year sentence for his role in the collapse of energy giant Enron, a McKinsey client.) “Staff levels and number of offices actually DECLINED in the early 70’s.” Compared to fast-growing BCG and Bain, McKinsey was unattractive to new recruits. With little corporate growth, the chance for an associate to be elected into the partnership diminished dramatically.
Accustomed to the chaos and scarcity of India, Gupta was little bothered by the problems facing McKinsey. He was more excited by the array of new opportunities the firm offered its associates. Soon after joining the firm, Gupta met with Bud Miles, a Yale graduate and a McKinsey institution. Miles was the “staffing coordinator,” who matched McKinsey consultants and their interests with the assignments that were flowing into the firm. Visiting Miles was like going to the candy store—there were all kinds of candies to be had, complex consulting jobs for some of the biggest companies in the world and small assignments that specialized in a certain arcane area, such as operations.
“You got this feeling that the world was there for you to pick and choose what you wanted to do,” said Gupta years later. Most young consultants tried to latch on to important assignments for well-known companies that promised to burnish their careers. When Gupta met with Miles, Miles offered him about half a dozen assignments and gave him a few days to decide which ones he wanted to pursue. Gupta wasted no time in performing his due diligence. He talked to the partners responsible for some of the assignments in the hope of learning a little bit more. He tried to handicap which ones would be good for him and his career, and he tried to figure out what kind of experience he would get from working on each.