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

by Anita Raghavan

  Despite hailing from the same country, it was as if the two sets of Indians, the ABCDs and the OTBs, grew up in parallel universes. Often the young Indians reared in America had to choose. They could be friends with Americans or with Indians, but they could not be friends with both. Though their ethnic origin should have been a unifying bond, US-raised Indians and immigrant Indians were almost as far apart as black Americans and white Americans.

  Unlike the awkward Indian students at Wharton, Rajaratnam mingled easily with all crowds. He got along well with both Indians and Americans, straddling the different cultures effortlessly. His social grace was all the more remarkable because Rajaratnam did not truly belong to either community. He was a Tamil from Sri Lanka, a small pearl-drop-shaped island nation in the Indian Ocean, just to the southeast of India.

  Rajaratnam’s father, Jesuthasan, was emblematic of the success of the country’s upper-middle-class Tamil community. He joined Singer Sewing Co. as a young man and eventually rose to be the head of its operations in South Asia. His success in business led to connections in politics; the two went hand in hand. In 1948, the British left Sri Lanka (then Ceylon) and the picture for Tamils, many of whom had migrated from India, changed. In the decades that followed, their position eroded as the government embarked on discriminatory policies that pushed Sinhalese nationals into ascendancy.

  The turning point came in 1956, one year before Rajaratnam’s birth. In what New Yorker writer Philip Gourevitch has called the “defining catastrophe of post-colonial Sri Lankan history,” then prime minister S. W. R. D. Bandaranaike, the scion of a Sinhalese noble family, enacted a law that established Sinhalese as the sole official language of the country, replacing English. The “Sinhala-only” policy excluded Tamils, who were conversant in English, from careers in public service and access to other educational opportunities. It also marked the beginning of bloody ethnic violence between the Tamils and the Sinhalese, a perennial feature of the Sri Lankan landscape in the decades to follow.

  Growing up as a young boy in the 1960s, the second oldest of five children, Rajaratnam enjoyed the privileged life common to Sri Lanka’s Tamil elite at the time. The family lived in Cinnamon Gardens, an enclave of Colombo known for its stately whitewashed colonial-era homes kept cool by rows of swaying palm trees. Like most well-to-do Sri Lankan Tamils, the Rajaratnams firmly believed that the path to success in life lay in education, so they sent Raj and his siblings to the finest schools and, in later years, encouraged each of them to pursue a career rather than rely on the family’s wealth.

  Raj attended St. Thomas’ Preparatory School, an institution patterned along the lines of an English public school, equivalent in manner to the Doon School in India from which Anil Kumar graduated. When he was seventeen years old, he was sent to study at Dulwich College, a boys’ school in southeast London, better known for churning out writers like the Sri Lankan–born author Michael Ondaatje (The English Patient) than for minting hedge fund managers.

  Decades after Rajaratnam left school, his time at Dulwich became part of a colorful fabric of tales he wove for himself. In an interview in 2011, he said he lived in the same room once occupied by P. G. Wodehouse, the writer of wonderfully witty books popular in Asia because of the humorous way they depict the British upper classes. Following a Dulwich tradition in which pupils write their names on the walls of their dorm rooms, he said, he affixed his name right under Wodehouse’s. But by the time Rajaratnam arrived at Dulwich in September 1974, Wodehouse’s old dormitory, Elm Lawn, had been converted into the headmaster’s residence.

  At Dulwich, Rajaratnam did not stand out either in the classroom or on the sports field. Rajaratnam rarely spoke about his time in England except when it suited his purpose—if he was trying to bond or curry favor with someone who was English. Colleagues sensed that his reticence came from being bullied at school or having a hard time assimilating into the England of the early seventies, which was a closed and some say racist society. He did speak publicly about his years in England in 2011, when he gave an interview to Suketu Mehta, an Indian writer and author of the acclaimed book Maximum City. Rajaratnam recalled that it was an era when the Far Right party the National Front was marching through the streets and beating up “Pakis.” Rajaratnam remembers walking down a road in a rough London neighborhood with his uncle once when three white men rammed their shoulders into his uncle.

  “We started pushing and shoving” but did not run. “Running has never been part of my M.O.” Rajaratnam and his uncle got beaten up, but “I didn’t get beaten up anymore than they did.” The incident taught him an important lesson: “I was conscious of the fact that I could be attacked because of my ethnicity.”

  Rajaratnam stayed at Dulwich until December 1976, remaining an extra term to take exams that would determine if he would get a place at England’s finest universities, Oxford and Cambridge. He did not, so in 1976 he headed to the University of Sussex, a middle-of-the-pack university on the outskirts of Brighton, a seaside resort town, where he got a bachelor of science in engineering before moving on to Wharton for his MBA.

  Rajaratnam could not have cared less about the South Asian pecking order at Wharton. “He was so charismatic,” says Anju Jessani, a former classmate of Rajaratnam’s. “Everyone knew Raj.” She says he “wasn’t like all the other Indian students who were much more reserved and kept to themselves. He socialized with lots of people.” His bawdy sense of humor and his single-minded focus on meeting beautiful women disarmed Americans, whose perception of South Asians was grounded more in caricature than in reality.

  He appeared to skate through Wharton, working little but managing to pull off decent grades. Gregarious and outgoing, he was not clannish like his South Asian peers. For a time, he lived in the University of Pennsylvania’s International House, a dormitory that drew students from all across the college, not just the Wharton School. His roommate was an American, Tom Fernandez.

  Unlike many South Asians who buried their heads in their books, Rajaratnam often skipped class and relied on sycophants to lend him their notes, which they freely did. If friends wanted to borrow his notes, however, Rajaratnam would make the loan contingent on them agreeing to do him a favor, such as procuring marijuana or introducing him to a woman he was interested in. His galaxy of friends included classmates such as Krishen Sud, Tom Fernandez, and David Lau, who would join him years later as he rose in prominence on Wall Street.

  * * *

  When he arrived at Wharton, much as he had at Doon, Anil Kumar kept to a close circle of friends, mostly Indians. Rajaratnam wasn’t part of the future McKinsey man’s crowd. It isn’t even clear that they liked one another.

  Once, after a statistics exam, Rajaratnam remembers Kumar asking him, “How much did you get?” Rajaratnam replied: “Ninety-seven.” Then he asked Kumar what he got.

  “I don’t want to tell you my grades,” Kumar replied.

  Kumar and Rajaratnam became acquainted less by choice than by accident. Kumar’s roommate at Wharton was an Indian who happened to be friends with Rajaratnam too. He would often host curry dinners in their dormitory room at Penn’s graduate towers, and Rajaratnam was a frequent guest.

  “They were both incredibly smart but very different personalities,” says Tushar Mody, who was in the same Wharton class and socialized with both from time to time. With Raj, “you knew what you were getting. Anil was quiet, observant and calculating.”

  One year when their classmate Anil Ambani (a member of the Ambani family of Reliance Industries fame) sent out Diwali cards to mark the Hindu festival of lights, Kumar made a mental note of the gesture.

  “Boy, this guy is organized,” Kumar told Mody. “He is keeping in touch with everyone.” Over the years, Kumar mastered the networking skills he observed in Ambani as a young man, always making a point to follow up on a casual encounter with an important person. The one person in the Wharton class of 1983 that no one expected Kumar would keep in touch with was Rajaratnam.

  Ch
apter Eighteen

  Reeling in Roomy

  On January 3, 2008, Roomy Khan, accompanied by her attorney, arrived in New York to lay out the information she could provide the government as part of a proffer agreement. In a proffer, prosecutors promise they won’t use an individual’s statements against them, with some exceptions. Among the exceptions: if the individual lies. Initially, Khan was remarkably reticent. After the first day, Lauren Goldberg, the assistant US attorney who was working the Galleon case, read her the riot act. The next day, Khan came in ready to enlighten prosecutors on a new instance of insider trading of which they were not even aware.

  She disclosed that in mid-2007 she passed along inside information to Rajaratnam on Google’s poor second-quarter earnings. Khan claimed that she had received the tip from Shammara Hussain, a junior employee at Market Street Partners, an outside investor relations company that worked for Google. Khan met Hussain, then a pretty twenty-one-year-old, at a technology conference in San Francisco in late 2006. The two started talking and Khan discovered that Hussain was from Bangladesh, just like her husband. As it happened, Khan also knew Hussain’s father, an engineer at none other than AMD. Hussain bragged that she knew a lot about stocks; she was even trading them during the conference. Eager to get closer to her, Khan started inviting her parents over for dinner. Soon Khan was playing the role of a South Asian “auntie” in Hussain’s life, advising her on how to dress and telling her she was like a daughter.

  Hussain was already on the SEC’s radar. Months earlier, lawyers had spotted her number in Khan’s phone records. When Jason Friedman, the junior member of the SEC’s Galleon team, Googled the number, he found it on a website for a cricket club. It belonged to Hussain, an employee at the club. He also noticed that her number appeared on a BMW enthusiasts website under the name “shamz,” where she posted a number of ads to sell BMWs. As Friedman surfed the website, he found countless posts by others groaning about her arrogance. He also discovered she was a blogger for stocks on a popular website called Seeking Alpha. And she had an account at Minekey.com, where she opined on a variety of subjects. “Saving money is boring…figuring out how to make a return is exciting,” she wrote in one comment.

  One day in mid-June 2007, Khan said that Hussain telephoned her and said, “Short Google.”

  “I am not going to short Google,” Khan shot back. The company’s stock was rising like a rocket; taking a bearish position was suicidal. A week to ten days later, Hussain called again to deliver the same message. This time she told Khan something that made her listen: “I’m on the IR team for Google…they are going to miss the numbers.” IR was short for investor relations. Companies typically enlist their IR teams to help with announcing earnings and other corporate news.

  Khan was apoplectic; she did not want Hussain telephoning her with inside information because of her previous run-in with the law.

  “I do not want you to ever call me again from that number,” Khan told Hussain. “Let’s meet up in person.”

  Over the next couple of weeks, Khan met up with Hussain in Palo Alto a few times. At their first meeting, Hussain said she wanted a lot of money in return for her Google information—more than $100,000 or $200,000, Khan told prosecutors. (Khan never paid her any money.) During one meeting, Khan gave Hussain a cell phone with an account in the name of her cleaning lady so that any incoming calls from Hussain would appear to be coming to Khan from her cleaner and not from someone at an investor relations firm that worked for Google. As Hussain fed her details about Google’s poor financial results, Khan passed the information on to Rajaratnam. After one call to him on July 13, Rajaratnam sold all his Google stock and took a $25 million short position. Later that month, when Google reported disappointing financial results as Hussain had predicted it would, Rajaratnam netted millions of dollars in profits. Khan made money too, locking in a profit of more than $500,000.

  As forthcoming as Khan was about Hussain and Rajaratnam to government officials, she was lying about her trading in Hilton and would not divulge her source for the inside information. When prosecutors asked about the purchases of Hilton stock, Khan said she made the Hilton trades on the advice of her broker. He recommended three hotel companies and she picked Hilton, she said, because socialite Paris Hilton, an heir to the Hilton dynasty, had been arrested and was in jail. The news, she figured, would be good publicity for the hotel company and its stock would do well. Neither Michaelson nor the prosecutors from the US attorney’s office bought Khan’s story. But they could not tease the truth out of her.

  By March 2008, after more than a year and a half of digging, Michaelson felt like he and his team at the SEC had hit a wall, and they were spinning their wheels. Of the twenty-eight stocks in which he suspected Rajaratnam made trades based on inside information, there were only two stocks, Polycom and Google, for which the authorities had direct evidence from Khan of corporate secrets being passed from employees inside the company to Galleon. With Hilton, where it was clear that both Rajaratnam and Khan traded before the Blackstone takeover, Michaelson did not know for sure who the tipper was—Rajaratnam or Khan. On countless other stocks, there was circumstantial evidence—phone calls between the two or incriminating instant messages that were quickly followed by corresponding trades.

  Circumstantial evidence is generally enough to build an airtight insider trading case when the target of the investigation does not trade much, but Rajaratnam alone traded as many as 12 million shares a day. Even if the evidence was strong enough, Rajaratnam could always fall back on the hundreds of research reports he received each week from Wall Street brokerage firms, which usually contained a nugget that could be used to justify a trade. Or he could count on his army of in-house analysts (his “window dressing”) to gin up research to support a trade.

  Over the years, Rajaratnam developed clever ways of concealing Galleon’s trading strategy. Typical was the way he indoctrinated Adam Smith, his clean-cut protégé, in the dark arts. Smith, who came to Galleon from Morgan Stanley in 2002, thrived at the New York hedge fund, and in 2006 he was promoted to portfolio manager. Early in his tenure investing money, he and Rajaratnam had several discussions about trading around a position, which meant buying and selling stock. For instance, if Galleon was expecting a positive event to buoy a stock, Rajaratnam told Smith to make purchases and sales of the stock. That way, if the government started investigating, Galleon could point to the sales and argue that they were inconsistent with a hedge fund being dead certain a positive event was imminent. The sale provided cover: Rajaratnam’s trading patterns and the sheer amount of trading he did each day made it difficult to draw a direct link between an instant message, for example, about positive earnings and a bid to buy stock.

  Even though months had gone by since he first began investigating, by the spring of 2008 Michaelson was no closer to finding Rajaratnam’s source in several stocks than when he’d first started. AMD was the most nettlesome because it was the one instance when Michaelson was sure Rajaratnam had an insider feeding him information. He had reviewed Rajaratnam’s IMs and emails and taken testimony from several people, yet he still had not come up with a real, credible source.

  On March 3, 2008, before a meeting with the US attorney’s office for the Southern District, Michaelson drafted a list of stocks in which the SEC believed that Galleon made trades using inside information. In the top right-hand corner, in small print, were the words “Privileged & Confidential.” Beside each of the twenty-eight stocks on the list, Michaelson typed the suspected source, the insider at each of the publicly traded companies. For nearly half the companies listed, Michaelson had not identified any possible inside source. For companies where he was not sure of the source, he identified the name in brackets. The first stock on the list was AMD. It had consumed much of the SEC’s firepower. Next to the company Michaelson put in brackets the name Bharath Rangarajan.

  While trolling through phone records over the summer, the SEC lawyers noticed that a number of c
alls were made from an AMD conference room outside its executive office. One of the contacts in Rajaratnam’s electronic address book was Rangarajan. He was a vice president at AMD and was in the perfect place to know the strategic moves the semiconductor company was making in the fall of 2005. He and AMD chief executive Hector Ruiz were the architects of AMD’s aggressive strategy in the market. But the only thing making him a person of interest was the presence of his name in Rajaratnam’s Rolodex and the fact that he had access to inside information about AMD. There were no instant messages or emails before public announcements pointing to him being a source. It was a tenuous link, but for now, it was all that Michaelson had to go on.

  As part of her discussions in January with the government, Khan agreed to tape some telephone conversations with Rajaratnam. Unbeknownst to her, prosecutors had been mulling making a request for surveillance of Rajaratnam’s cellular phone for some time. Phone intercepts historically have been used in organized crime, drug, and terrorism cases but had not been applied in the investigation of an insider trading ring, even though in 1984 Congress expanded the list of crimes in the Federal Wiretap Act, often known as Title III, to include wire fraud. Among other things, insider trading violates the wire fraud statute.

  The first hint the SEC’s Sanjay Wadhwa had that wiretaps were being contemplated was a call he got in early 2008 from Lauren Goldberg, a Manhattan US attorney who was also working on the Galleon probe. “Have you looked at your accessibility to Title III wiretaps?” Goldberg asked Wadhwa. Under Title III, there are limitations on who can have access to wiretaps, generally only criminal authorities, not civil agencies like the SEC. In the Rajaratnam case, Goldberg was planning to seek a wiretap on the grounds that Rajaratnam might be committing wire or mail fraud. Wadhwa and Jason Friedman did some research on the topic and felt that the SEC could have access to wiretaps, but in the end the US attorney’s office in Manhattan decided it was wiser to play it safe and not share any information their wiretaps uncovered with the SEC. The SEC was even kept in the dark about the decision because the statute places a number of restrictions on the government’s disclosure of wiretaps. As far as Wadhwa and Friedman were concerned, the prospect of wiretapping Rajaratnam died a quiet death. They could only speculate on the reason why.