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

by Anita Raghavan

  Compared to the prosecution, the defense case was surprisingly swift. Rajaratnam’s team called only five witnesses.

  Rajaratnam’s most powerful witness was Geoffrey Canada, the chief executive of the Harlem Children’s Zone, who took the stand for only ten minutes but transfixed the racially diverse jury. Canada testified that he had met Rajaratnam seven years before and the two “hit it off right away. His wish was that we could level the playing field for kids.” Canada’s personal recounting of his relationship with Rajaratnam appeared to engage the jury more fully than the tedious testimony of the defense’s central witness, Gregg Jarrell, a University of Rochester professor and an expert witness for hire.

  By the time he testified, Jarrell had been paid about $200,000 by the defense, and the firm that helped him with his analysis received $730,000 for work done through February 2011. Jarrell, whose role was to bolster the idea that Rajaratnam’s market-beating investments were rooted in piecing together bits of a “mosaic,” said he found after an exhaustive analysis that Rajaratnam’s trading in the stocks at issue was “consistent” with widely available public information. To make his point, Jarrell relied on an impressive array of slides, but at times the message he delivered was lost in the blizzard of information. On Monday, April 18, a week after it started and five witnesses later, the defense rested its case.

  A day earlier, on Sunday, April 17, Reed Brodsky was in the delivery room at Weill Cornell hospital waiting for his wife, a public school principal in the Bronx, to give birth and writing his summation. After she delivered a healthy baby daughter, his wife said to him, “What are you doing here? You are not really here.” At 5 p.m. the prosecutor left the hospital and headed to the office. Four days later, he was standing in a packed courtroom, with his boss, Bharara, looking on, presenting the prosecution’s closing arguments.

  Brodsky accused Rajaratnam of wanting to “conquer the stock market at the expense of the law…In a world of uncertainty, he had certainty because he had insiders who knew tomorrow’s news today.” Then, using flip charts, Brodsky walked the jury through the cases of insider trading at issue in this trial. More than once, he said, “Let’s go to the tapes,” drawing on powerful excerpts from the wiretaps to support the prosecution’s case.

  Lacking scintillating wiretaps to buttress his client’s arguments, Rajaratnam’s defense lawyer, John Dowd, resorted to exaggeration. He called Anil Kumar “the greediest man,” who “giggled” his way through his testimony. “He lied to make Raj look dirty,” Dowd declared. He said Galleon portfolio manager Adam Smith’s “story has changed so many times it’s hard to keep it straight.”

  Then, referring to the provenance of the information that was at issue in the case, he delivered a simple maxim: “If it’s public, you must acquit.” What he was saying was that if it was information in the public realm that drove Rajaratnam’s trading, then no crime had been committed. With that and an instruction from the judge, the case went to the jury.

  * * *

  On the morning of Wednesday, May 11, 2011, the jury in the United States of America v. Raj Rajaratnam trickled into a small anteroom at the back of Courtroom 17B, which fittingly overlooks the roof of the Metropolitan Correctional Center. On sunny days, inmates can be seen playing basketball on the MCC’s roof.

  That bright May morning, subway snafus had delayed a couple of jurors. As the others waited for the stragglers, the foreman asked for the day’s lunch menu. Besides the in-house cafeteria, there are seven restaurants around the courthouse that are authorized to deliver lunches for sitting jurors. After the jurors pick a restaurant and put in their food orders, William Donald, Judge Holwell’s courtroom deputy, heads downstairs to collect the food deliveries, which pass tight security: they are X-rayed. Over the past two weeks, ever since the jury had started its deliberations, word of the jury’s lunch plans took on a form of legal Kremlinology. As long as the jury was ordering lunch, deliberations would likely drag into the afternoon.

  At 10 a.m., the jury foreman handed back the menus. He told the court security officer they wouldn’t be needing them. Twenty minutes later, the jury foreman sent a note to Judge Holwell. After eleven days of deliberations that were restarted midway because a sick juror had to be replaced, the jury of eight women and four men had reached a verdict. As the jury shuffled into the courtroom, weary after a two-month trial, five deputy US marshals took their place at the back. Judge Holwell asked the foreman if the jury had reached a unanimous verdict.

  “Yes, we have, Your Honor,” replied the foreman.

  Then Judge Holwell asked his courtroom deputy, Donald, to read the verdict into the record.

  As to count one, “Guilty,” said Donald, reading from the verdict sheet. As to count two, “Guilty.” He went on for twelve more counts. Each time, with deafening repetition, he sounded the same word: “Guilty.”

  Rajaratnam, seated at the defense table, was expressionless except for his eyes. They kept blinking over and over again.

  Chapter Thirty-Seven

  An Unhappy Diwali

  Manhattan US attorney Preet Bharara, soaking in the adulation from his office’s victory in the Raj Rajaratnam case, urged his prosecutors not to waste any time in getting a grand jury to indict Rajat Gupta. “When are we charging Gupta?” he would ask them from time to time.

  Compared to a fringe player like Rajaratnam, Rajat Gupta was the establishment. After the Rajaratnam trial, at which Gupta played a starring role as an unindicted coconspirator, the US attorney’s office was bombarded with questions from the press about why Gupta had not been charged. In the wake of the 2008 market meltdown, no major Wall Street figure had been sent to jail, and Bharara was sensitive to the criticism that he had not taken on the architects of the worst financial crisis since the Great Depression. In an article in the June 27, 2011, issue of the New Yorker, George Packer wrote that when he asked Bharara about the lack of financial crisis prosecutions, “his even manner gave way to pent-up annoyance at ‘ideologues.’” Then Bharara said, “It bothers me a little bit when people suggest, without knowing anything, that we’re not even bothering to look.” Getting a grand jury to indict Rajat Gupta would certainly not answer the critics looking for a big bank scalp. But by not charging Gupta, the Manhattan US attorney could open himself up to worse: critics clamoring that he wasn’t doing his job.

  With the Rajaratnam conviction nailed, everyone in the office expected Jon Streeter to exit for private practice, making Reed Brodsky the lead prosecutor on the Gupta case. Before bringing charges, Brodsky wanted to conduct a full-blown investigation. He asked Goldman and Procter & Gamble to make available all their board members so he could interview each and every one. At first, P&G asked if it would be sufficient for prosecutors to question just one director.

  “No,” said Brodsky, who has a reputation as a workaholic and a tireless digger. It was Brodsky who during the Rajaratnam trial discovered the well-timed investments by Rajaratnam and his family in the fledgling hedge fund started by Richard Schutte, Galleon’s president and a key defense witness. On the Friday before Schutte was set to testify, Brodsky, over the grumbling of his colleagues, started rooting around in his background. He learned from Adam Smith, a cooperator, that Schutte had started a hedge fund called SpotTail. Smith didn’t know a lot about SpotTail, but he gave Brodsky a presentation about the fund. On it was the name of the fund’s outside auditor. Brodsky subpoenaed the auditor for information on the fund and its investors, and two days later, on a Sunday, he dispatched FBI agent Kang to pick up the documents from the auditor’s home. By going the extra mile, Brodsky had succeeded in discrediting one of Rajaratnam’s best defense witnesses.

  In insider trading cases, besides showing that nonpublic information was passed, prosecutors have to prove two elements: the tipper violated his duties in disseminating the information, and the tipper received some benefit as a result. In the Gupta case, the benefit was nebulous. Even if Gupta had given Rajaratnam inside information, what had
he received in exchange? There was no money trail linking the two as there was with Kumar and Rajaratnam. There was no clear tit for tat. Brodsky would have to use the business ties between Gupta and Rajaratnam to show that there were a variety of ways that Gupta benefited from his relationship with Rajaratnam. The most tangible way was through the role Gupta played at Galleon International.

  After the Rajaratnam trial, Brodsky took two days off. By Monday, May 23, 2011, he and Michaelson were back to putting in eighty-hour workweeks to build the case against Gupta. To paint a clearer picture of the relationship between Gupta and Rajaratnam, Brodsky told Michaelson, “Let’s talk to the secretaries.” In July 2011, they met with Rajaratnam’s executive assistant, Caryn Eisenberg, and asked her if she remembered anything about the afternoon of September 23, 2008, the day of the Buffett investment in Goldman.

  “I remember it very clearly,” she replied. Then she went on to tell a riveting story of the events on that fall afternoon. Brodsky and Michaelson were nonchalant as she spoke, but at that moment they knew they had their star witness in the Gupta case.

  Some of the witnesses they wanted to interview were harder to pin down. Galleon marketing executive Ayad Alhadi was always on a plane and never at home. It took two FBI agents showing up at his home at 6:42 a.m. one day in early August before Alhadi would sit down with prosecutors. Alhadi turned out to be important for the government’s case because he was one of the few Galleon executives who could testify to Gupta’s work for Galleon International, telling of a marketing trip he took to the Middle East in late March 2008 during which Gupta joined meetings one day.

  In the weeks leading up to their decision to charge Gupta, prosecutors redoubled their efforts. They focused on Kumar, the star witness in the Rajaratnam trial, who met with the government more than ten times, making seven visits from California to New York in connection with the Gupta case. Gupta had stayed in touch with Kumar even after his arrest, and at times when Kumar came to Manhattan and needed a place to stay, he would camp out at Gupta’s place on Central Park West. Prosecutors felt that as Gupta’s longtime protégé, he more than anyone could speak to his mentor’s relationship with Rajaratnam and shed light on the dispute between the two men over the failed investment in Voyager. Through Kumar, prosecutors learned of meetings and calls in which the future of Galleon and Gupta’s potential role in it were discussed. Kumar also had been approached by Gupta several times starting in mid-October 2008 about Gupta’s money-losing investment in Voyager; the timing of the approach would be critical to the prosecution’s trying to blunt the defense’s arguments that by late September 2008 Gupta was in a dispute with Rajaratnam.

  In late August, Brodsky and Jon Streeter met with Terence J. Lynam and Samidh Guha, two of Rajaratnam’s lawyers. It was two months before their client was to be sentenced, and prosecutors were asking for a prison sentence of as many as twenty-four and a half years. Lynam and Guha urged the government not to ask for a long prison sentence for Rajaratnam, saying a lengthy jail term would almost certainly kill him. Rajaratnam had diabetes; there was a strong chance he would need a kidney transplant in the next couple of years.

  At the meeting, Brodsky made an unusual off-the-cuff offer. “Why doesn’t Raj cooperate now?” he asked. He didn’t divulge the type of cooperation he was seeking, but he didn’t have to spell it out. It was well known to everyone after the Rajaratnam conviction that one of the top priorities of the US attorney’s office was charging Gupta. Among prosecutors, “cooperation” is a formal word with a specific meaning, and any cooperation with a convicted felon would have required the approval of Bharara in a high-profile case like this. As soon as Brodsky uttered the words, his colleague Streeter shot him a look. Brodsky, as he admitted to Rajaratnam’s lawyers, did not have the authority to make the overture and it was unlikely to have any legs.

  “We will take it back to our client,” said Lynam. He and Guha had talked to Rajaratnam in the past about cooperation, but he was not interested. In any case, chances were slim that Bharara would be willing to consider leniency for someone like Rajaratnam, who had fought the government tooth and nail all the way.

  * * *

  On October 13, more than sixty people packed into a courtroom on the seventeenth floor of 500 Pearl Street to watch Judge Holwell pass sentence over one of the most colorful personalities of the hedge fund world. For the first time, Rajaratnam’s wife was in the courtroom. Rajaratnam declined the opportunity to speak at his sentencing, but Judge Holwell did. He made it clear that he thought the crime Rajaratnam was convicted of was endemic.

  It reflects “a virus in our business culture that needs to be eradicated,” said Judge Holwell. “Simply, justice requires a lengthy sentence.” As Rajaratnam stood, the judge sentenced him to eleven years in prison, the longest sentence ever for an insider trading case. He was impassive, just as he had been during his two-month trial.

  Less than a month earlier, on September 19, in a final appeal to sway the government not to charge Gupta, Naftalis had met with Bharara. He was accompanied by Bharara’s first boss in the office, Mary Jo White, who was the former US attorney for the Southern District of New York when Bharara started there as a young prosecutor in 2000. Naftalis sounded the same legal high notes—Gupta’s “life of probity”—that he had with Canellos at the SEC nine months earlier and in one-on-one conversations with Bharara’s prosecutors over the summer.

  It was vigorous legal advocacy, but it didn’t sway Bharara and his lieutenants. There was one wiretapped call in which Gupta gave information freely to Rajaratnam, and there were countless other instances of circumstantial evidence—board meetings followed by calls to Rajaratnam. It was hard to argue there was no smoke.

  White, whom all the lawyers in the room deeply respected, at least acknowledged the government’s case. “For the sake of argument, even if what you say he did is true, it isn’t criminal,” she said. Besides showing benefit and breach of duty in an insider trading case, a prosecutor has to demonstrate that there is criminal intent. After meeting for about an hour, Naftalis, White, and an army of lawyers left.

  Late on the afternoon of Tuesday, October 25, Naftalis got a call from Brodsky. The prosecutor confirmed what Naftalis had heard a little while earlier from a New York Times reporter. Gupta had been indicted and the government was planning to unseal the indictment the next day. “We are not looking to have a perp-walk kind of thing,” Brodsky told Naftalis. But “you need to come in and have him surrender.” If he didn’t, Brodsky said, FBI agents would go out and arrest him. Brodsky didn’t tell Naftalis that there had been some behind-the-scenes griping at the FBI about Gupta being allowed to turn himself in. Arresting high-profile defendants and parading them in handcuffs are among the few things FBI agents do that get public visibility.

  When the Guptas learned of the indictment, they were stunned—and not just because the government was planning to charge Gupta criminally. His family had been aware for some time that there was a very real possibility that Gupta would be indicted. The only bright spot in a summer of bad news was on August 4 when the SEC dismissed its administrative proceeding against Gupta. The dismissal came in response to a civil lawsuit Gupta had filed in March after the SEC’s action. In his suit, Gupta accused the SEC of denying him his right to a jury trial and treating him differently from the other defendants in the Rajaratnam case, who were all sued in federal court.

  In July 2011, federal judge Jed S. Rakoff ruled that Gupta’s suit could proceed and criticized the SEC for bringing an administrative action. Naftalis welcomed the news: “Mr. Gupta is very pleased that as a result of his lawsuit, the SEC has dismissed its administrative proceeding and he will no longer be singled out for disparate treatment.” The victory was a hollow one, though, because the criminal probe was heating up. The SEC action was the least of Gupta’s worries.

  What really upset the Gupta family was that the government was planning to indict Gupta on the biggest Hindu religious holiday, Diwali, the festival
of lights. It struck the Guptas as insensitive, especially coming from a US attorney who was Indian. Kanchan Gupta, Rajat’s younger brother, was driving home from work when his brother called to tell him the news. He quickly went home and collected his wife, who was a doctor, just as he was, and headed to the Gupta homestead in Westport. When they arrived, the mood of his sister-in-law Anita and his nieces was very somber. The family already felt that the government had treated Gupta shoddily. Its latest move left them fuming. But Gupta was surprisingly calm. As telephone calls streamed into the house, he reassured the anxious callers. When Bharara later got wind that the Guptas and other Indians, including his own father, were upset that Gupta had been indicted on Diwali, he confessed that it was unintentional. He didn’t know it was Diwali and Naftalis had not enlightened Brodsky. (Naftalis wasn’t aware it was Diwali either.)

  On Wednesday, October 26, 2011, Rajat Gupta left his home in Westport, Connecticut, at daybreak. He was accompanied by his wife, daughters, brother, and other members of his immediate family. Together the group made their way to his pied-à-terre on the twenty-second floor of the Century Building, which he’d bought in 2000 for $1.65 million. The understated art deco Century stands next to one of the most venerated addresses in New York: 15 Central Park West, home to hedge fund impresarios including Daniel Loeb and Wall Street titans Goldman chief executive Lloyd Blankfein and Citigroup’s Sandy Weill. Shortly before 8 a.m., Gupta hugged and kissed his family good-bye. Expecting his appearance in court would trigger a media circus, he asked his loved ones to remain in the apartment. All his life, from the time he was a young boy, he put his family first; he wasn’t going to change that even in his darkest hour.

  Then, impeccably dressed in a blue suit and salmon-colored Hermès tie, he walked out of the bank-vault-like doors of the Century, jumped into a car with his lawyers, and headed downtown to surrender to the FBI.