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

by Anita Raghavan

  “Right,” said Rajaratnam. It was exactly the kind of wishy-washy investment idea from the talking-head types at McKinsey that he could not afford right now.

  Wall Street had been closed for the Good Friday holiday. In most years, traders welcomed the break, but now there was so much uncertainty swirling that even a day away from the markets unnerved them. Rajaratnam had originally planned to join Kumar in Singapore later in the week, and then the two were set to fly to India together to look at possible investments. But with the stock markets seesawing in the wake of Bear’s collapse, Rajaratnam felt he had better stay strapped to his desk.

  “I am not sure whether I’m going to Asia right now…you know, it’s just crazy and I just need to be here, right?” he said.

  “I didn’t check on what happened today. Was it down again?” asked the clueless Kumar. Rajaratnam, by contrast, was so driven by the markets that his moods hinged on their performance. “Sometimes, my wife is the most beautiful woman in the world,” he would say, referring to days when the markets went his way. “And sometimes she is a midget.”

  By 2008, the rocky state of the stock market was hurting Kumar’s cherished client, AMD, too. Its acquisition of ATI Technologies in 2006 had saddled it with a mountain of debt. Although the company dreamed up wonderful new computer chip designs, investors fretted that it did not have the stash of cash it needed to build the factories to manufacture them. What most investors didn’t know was that behind closed doors the company was quietly hatching an innovative plan that would enable it to build the chip factories without a big cash outlay. Instead of footing the bill all on its own, AMD looked to find a deep-pocketed investor—perhaps a cash-rich sovereign wealth fund—that could bankroll the plants. The supersecret initiative was code-named Asset-Lite. The moniker reflected the notion that once the deal was done, AMD would own fewer factories, or assets, because the facilities would be spun off.

  Kumar began briefing Rajaratnam regularly on the Asset-Lite strategy. In the winter of 2007, they spoke once every three weeks because Kumar was planning to move to New York to lead the McKinsey Asia Center, which advised US companies about business opportunities in Asia, and Asian companies about the United States. Kumar wanted to give McKinsey one last chance to elevate him, but if he wasn’t going up at McKinsey, this time around he’d get out.

  During their conversations, Kumar told Rajaratnam that if AMD spun off its manufacturing facilities, it would lift a huge financial burden off the company: “It will be fantastic.”

  “Oh, this is going to be just like ATYT,” replied Rajaratnam. It was hard to forget AMD’s 2006 acquisition of ATI Technologies, a deal that made Rajaratnam tens of millions of dollars.

  Yes, Kumar agreed, it would be just like ATI.

  As the months progressed, it became clear that it would be nothing like ATI. Rajaratnam was under the impression that the investment in the chip-making facility was imminent, but when Kumar called from Tokyo, he got a rude shock.

  “It could take two more months,” said Kumar. “It’s not like weeks.”

  “Oh my God,” said Rajaratnam, remaining remarkably cool in the face of news that he clearly was not expecting. Always flexible, Rajaratnam suggested he salvage the situation by lightening his position in AMD the next time the markets rallied.

  Despite his winning tip on AMD-ATI, by 2008 Kumar was on shaky ground, eclipsed by a rival who enjoyed nowhere near the stature in the corporate world that he did but had much more to offer to Rajaratnam. Rajaratnam had told Kumar that there was a woman on Wall Street named Danielle Chiesi who he said was having an intimate relationship with Ruiz, the AMD chief executive and Kumar’s client. (Ruiz denies that he was ever involved with Danielle Chiesi and the relationship is otherwise unsubstantiated.) Kumar did not know it, but Chiesi was Rajaratnam’s newest acolyte. After she asked a Galleon analyst for an introduction, they met for lunch. The two hit it off, and soon Chiesi was getting invitations to Rajaratnam’s parties. Guests noticed her at Rajaratnam’s birthday bash on the boat in June when she took to the dance floor alone and kept changing from one low-cut slinky outfit into another. In September, she and her mother were invited to the clambake at Rajaratnam’s Greenwich estate, where Kenny Rogers sang his hit “The Gambler” (“You got to know when to hold ’em, know when to fold ’em, know when to walk away and know when to run”). It was a favorite of Rajaratnam’s and he had Rogers sing it over and over again.

  Rajaratnam believed that through Ruiz, Chiesi came to learn of AMD’s bid to spin off its facility to make computer chips and create a joint venture that would be 50 percent owned by a Middle Eastern sovereign wealth fund.

  “Your value to me is a little bit diminished,” he told Kumar.

  Then he pressed Kumar to see Ruiz and tell him to stop the purported pillow talk. Lest Kumar be confused into thinking that Raj was trying to save Ruiz’s marriage, he made it clear to Kumar that his issue was that Chiesi was freely sprinkling Ruiz’s secrets to everyone who would listen on Wall Street. What irritated him was that the loose-lipped Chiesi robbed him of the “edge” he had at AMD. She was muddying the waters in a stream of insider information that was his alone to fish.

  “Raj, you’ve got to be kidding me,” said Kumar, flabbergasted by the request. “Dr. Ruiz—he is my client. He is older than me.” Rajaratnam wanted Kumar’s morally challenged job description expanded to include verbal subterfuge. Kumar was comfortable transgressing the law, but he was far less at ease with the idea of crossing social norms.

  His pushback came at a trying time in his relationship with Rajaratnam. Ever since his big tip in 2006 on the AMD–ATI Technologies talks, Kumar’s hot streak had gone stone cold. In 2007, he told Rajaratnam that the industry of business intelligence, in which companies use software to mine mountains of information stored in widely available databases, was ripe for consolidation. The tip piqued Rajaratnam’s curiosity. “How do you know?” he asked.

  Kumar explained that he was providing consulting services to a company called Business Objects, a French-American firm that made intelligence software. Naively, or perhaps simply because it was easier this way for him to rationalize his behavior, Kumar believed that Rajaratnam would buy stocks in three or four companies in the sector and hopefully in a year they would rise and Rajaratnam would make a profit.

  In July 2007, at a time when Business Objects was getting hammered by Microsoft and Oracle, Kumar attended an offsite meeting the company was holding in Napa Valley, California. Kumar passed on the bleak prospects that Business Objects was facing to Rajaratnam.

  Sometime after, he got a call from Rajaratnam.

  “Anil, are you absolutely sure they are doing badly?” Rajaratnam quizzed him. What was puzzling Rajaratnam was the performance of Business Objects stock in the market. If the company was indeed struggling, then why was its stock inching up? It was as if all the players in the market were in on a big secret and somewhat surprisingly had left the master of divining secrets out of the loop.

  It wouldn’t have mattered to Rajaratnam except that he’d traded on Kumar’s tip, accumulating a sizable short position in Business Objects stock, by essentially borrowing shares on the belief that he would be able to buy them back at a cheaper price as the market appreciated the company’s challenges. Every dollar rise in the stock cost Rajaratnam money on his bearish bet on Business Objects. Uneasy with the rally, Rajaratnam told Kumar that he was halving his short position.

  A few months later, in October 2007, Business Objects announced that German technology giant SAP was acquiring it for $6.78 billion, a move that sent its shares soaring and saddled Galleon with more losses—around $5 million on a realized and unrealized basis. Rajaratnam told Kumar he was very upset about the money-losing trade and in 2007 he did not pay him. A few months had passed since the Business Objects fiasco but Kumar still smarted from the rebuke. At the same time, managing the elaborate consulting arrangement with Galleon was getting harder.

  In 2008, Morgan Stan
ley, which handled administration details for Galleon, pushed for verification that Manju Das (Kumar’s housekeeper, who received the consulting payments made by Rajaratnam to Kumar) was an offshore investor living in India and not required to pay US taxes. Among other items, it sought a notarized passport, certified copies of two forms of address such as utility bills, and a bank assurance letter for Manju Das.

  “Let me look into this and see what can be done,” Kumar emailed an investor relations employee at Galleon. “May be tricky.”

  The reason it was “tricky” was simple. Even though Das, his housekeeper, lived with him and his wife and son in California, Kumar had given his in-laws’ address in New Delhi as Das’s home. In doing so, he established falsely that she was an offshore investor in Galleon and thus not liable for US taxes.

  He set up the account because Kumar’s principal concern was to avoid having his consulting arrangement with Rajaratnam traced back to him or McKinsey. If he indicated that Das lived in the United States at his address, it wouldn’t take much time to connect him with her.

  Under the original arrangement he put in place, account statements for Das were sent to his in-laws’ house in the Delhi suburb of Vasant Vihar but naturally addressed to Das, the account holder. The setup raised logistical problems from the start. “My concern is with Manju’s mail—there is always the possibility of it being handed over to one of her relatives by mistake/returned/handed over to others. They do ask and come here occasionally to get news of her,” wrote Kumar’s mother-in-law, Reva Dayal, in 2005. Perhaps her son-in-law could find another solution.

  In 2006, soon after Galleon registered with the SEC, Rajaratnam started pressing Kumar to move his money out of the Manju Das account and into an offshore vehicle. He told Kumar that it was a wise move since the SEC was starting to scrutinize matters like this more closely. He didn’t mention that his brother Rengan’s hedge fund, Sedna Capital, was being examined. If the probe moved to focus on Galleon and Rajaratnam, investigators might be able to connect Das with Kumar.

  It was important now more than ever for Raj Rajaratnam to give the impression that Galleon was complying with SEC regulations. Kumar said he knew someone in Switzerland who worked with Asian investors on affairs like this but generally did not like having US investors as clients because of the stiffer regulatory environment in the States. After some arm-twisting, the Swiss gentleman agreed to buy the holdings in Galleon from Manju Das and transfer them into a financial institution called Ambit. Kumar thought it was the perfect way to deal with all the inquiries he was getting on the account. Ambit was an institutional investor and unlikely to raise the same kind of red flags as an individual.

  “From a Morgan Stanley Fund Services perspective, they should not care if an LP has sold their stake to another party, for whatever consideration. All they may ask for is a transfer form,” Kumar emailed Galleon’s investor relations’ staffer Shireen Gianchandani on May 26, 2008. “It is the most elegant solution to the predicament. And hopefully one which will not require too many documents.” Kumar asked Gianchandani not to proceed yet or to copy anyone on their correspondence.

  “Bottom line is to avoid redemption of the funds from Manju’s Galleon account into a bank account in her name for immediate reinvestment back into Galleon,” he wrote. “That would be a painful exercise.”

  The transfer wasn’t as simple as Kumar thought. To move assets from the Das account into Ambit, Morgan Stanley required two proofs of address for Das. When Gianchandani raised the issue with Kumar, she met with obvious irritation.

  “Manju Das comes from a village in the remote areas of Bengal,” he wrote in a July 17 email to Gianchandani. “It is not customary to have utility or water bills in these areas. The permanent address, as noted in her passport, is in that district and this is used by all authorities as proof of address.” Apparently annoyed that his arguments so far had not succeeded in swatting away the issue, Kumar concluded by saying, “In India, a notarized copy of the passport with current and permanent address is considered as adequate proof of residence since passports are only issued upon physical verification of residence by a local administrator.”

  But Kumar kept bumping up against Morgan Stanley, which was still not satisfied. Frustrated that he was not getting anywhere close to resolving the situation, he devised a way to get the necessary documents. He turned to someone he had known for years: Dr. Alok Mathur, a physician who had been his in-laws’ doctor for twenty-five years.

  At Kumar’s behest, Mathur wrote a letter certifying that Das was in his care for ten years and confirming Das’s address in Delhi. For the second proof of identity, Kumar reached out to an assistant at McKinsey in Delhi to obtain a notarized copy of his housekeeper’s passport.

  “Dear Mr. Mahindroo, do you know of a notary who will easily and conveniently sign letters/copies/affidavit et cetera?” Kumar emailed on August 1.

  “There is no need to know anybody,” replied Mahindroo. “They are businessmen and just shop keepers. They have to charge and sign.”

  It seemed as if Kumar had solved the problem until the documents were delivered to Morgan Stanley. The investment bank rejected them as proofs of address again. “We will require 2 original or certified (notarized) utility bills,” Morgan Stanley’s Sinead Hayes replied to Kumar on Monday, September 8, 2008. The words “2 original or certified (notarized) utility bills” were highlighted in bold. Hayes told Kumar that if he could not supply the required information, “please provide an explanation and I will escalate to our compliance department.”

  It was the last thing Kumar needed. He tried to deflect the issue again with an argument he’d tried unsuccessfully earlier. “In India, there are not utility or fuel bills in all individual’s names, since the infrastructure is so weak,” he emailed Hayes a couple of days later. “The same holds true for the financial/banking infrastructure, and many people have historically held money in other forms, or in joint accounts with other people in other cities from where they live. It has been a country where money matters are dealt with on faith (for example, you can buy jewelry in one city and pay in another, months later, based on good faith). Each country has its own custom, and you can do the same in Japan.”

  But Morgan Stanley was not buying Kumar’s explanation. It kept up its demand for the proof of Manju Das’s address. As stock markets imploded all around him and the financial system teetered on the verge of a great meltdown, Kumar accelerated his efforts to get the documents Morgan Stanley wanted. On October 25, 2008, he emailed an employee at HSBC in Bangalore, India, asking for a letter simply stating that Manju Das, a resident of New Delhi, had an account with the bank. “If you can email a pdf copy immediately, that would help a lot,” Kumar wrote to HSBC.

  However, when the bank sent Kumar a draft of the letter, the true state of affairs intruded into the virtual reality that Kumar was desperately seeking to craft for Manju Das. In a letter dated October 25, 2008, HSBC said that Das had been an account holder at the bank since October 20, 2008—for only five days. Kumar knew the letter would sound alarms at Morgan Stanley. What had started out as a simple transfer of assets from one account to another had turned into a clerical nightmare that took up far more time than Kumar had first imagined it would. He did not want any more hassles, so he emailed HSBC in Bangalore and said, “Please resend a new letter with the words ‘from 20 October 2008’ deleted.

  “Need this asap please.”

  Chapter Twenty-Six

  The Wire

  Anil Kumar sounded preoccupied.

  “Are you in the middle of something else?” Rajaratnam asked.

  It was a little before 2 p.m. on Friday, May 2, 2008, and Rajaratnam was in Washington for an investor conference, catching up on calls before boarding a plane to Toronto.

  “May be leaving in two minutes, but uh…tell me quickly,” said Kumar. It was hard to tell if Kumar was in a real rush or he simply wanted to give the impression he was frightfully busy. In the circles he trafficke
d in, there were two traits that made someone important, being connected and being so in demand that one never had enough time. Rajaratnam had heard from an associate that Kumar was close to Mukesh Ambani, the head of formidable Reliance Industries. Kumar and Rajaratnam were in the same Wharton class as Mukesh’s kid brother, Anil.

  Like many Indian families, the Ambani brothers for the longest time lived under the same roof—Sea Wind, a tower at Cuffe Parade, an enclave of the wealthy in south Mumbai. The two had one of the fiercest sibling rivalries around, and while they were living together—Mukesh moved out in 2010 to a soaring skyscraper—they were locked in a battle over the price Anil Ambani should pay for natural gas from Mukesh’s field, the largest in the country.

  Rajaratnam told Kumar that there was some interesting chatter in the market about Reliance and its interest in semiconductors. He had heard from an investment banker that Reliance was searching for a way to enter the semiconductor space.

  Kumar had caught up recently with Mukesh Ambani, who had been in New York for the American India Foundation fifth annual spring gala at the Waldorf. He had formed his own impressions of Ambani’s ambitions in the semiconductor space. They were not nearly as grandiose as what Rajaratnam envisioned.

  “Are you going to do AMD?” Kumar asked Ambani. “It’s gonna be a big deal.”

  “Anil, for that size deal I’m not ready yet, I need to understand the industry,” said Ambani flatly.

  Kumar told Rajaratnam that Ambani was more likely to pursue a far smaller acquisition—the purchase of the Far Eastern assets of a company called Spansion. In fact, Reliance was set to submit an offer for the Spansion assets the next day.