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

by Anita Raghavan

  Chapter Thirty-Eight

  Et Tu, Kumar?

  Amid a heavy downpour of summer rain, Rajat Kumar Gupta arrived at the federal courthouse at 500 Pearl Street on the morning of Monday, May 21, 2012. As soon as he stepped out of his black sedan, carrying a big dark umbrella, it was clear that the ordeal that had begun with a call from Goldman’s general counsel two years earlier had sapped him. In the months leading up to the trial, he had been exercising and doing yoga. He had lost ten pounds and had to buy new clothes, but they didn’t hide the strain. For the first time in his life, he appeared old. At one time, he had an inspiring look of quiet confidence, a steady calm that reassured. In its place now was a deep weariness. The only thing that seemed to sustain him was a stoic determination to clear his name.

  Seven months earlier, he had been arraigned in this courthouse on one count of conspiracy to commit securities fraud and five counts of securities fraud. The charges related to his tipping Rajaratnam about material, nonpublic information in two stocks, Goldman and Procter & Gamble. Since then, well-meaning friends would suggest he plead guilty to the charges—fighting the US government was costly and it ran the risk of a longer prison term if he was convicted. But Gupta would not think of it. He passionately believed in his innocence and was quietly optimistic that he would prevail in court. From the beginning, his lawyer Naftalis had said that he had never seen a case with such a paucity of evidence. Now, after enduring a very public two-year government investigation, he welcomed the opportunity to defend himself.

  Since the government had first charged Gupta in October 2011, it had expanded its case. In February 2012, it unveiled a new indictment contending that in March 2007 Gupta called into a Goldman audit committee meeting from Galleon’s offices. During the call, the members of the panel previewed Goldman’s first-quarter earnings, set to be released the next day. About twenty-five minutes after Gupta hung up the phone, Galleon bought approximately $70 million of Goldman stock.

  The new indictment appeared to strike at the heart of Gupta’s defense. Gupta’s lawyers had been arguing that by the time the government’s allegations of insider trading activity occurred in the fall of 2008, their client was in a dispute with Rajaratnam over Gupta’s $10 million loss. But in March 2007, Gupta felt comfortable using a Galleon phone to call in to hear confidential reports from Goldman Sachs. It would appear that the two men were still amicable business partners.

  In a way, the new charges didn’t matter. When the tape of Gupta’s conversation with Rajaratnam about discussions at a Goldman board meeting had been aired at the Rajaratnam trial a year earlier, McKinsey and its partners turned on him. Old friends whom he had entertained in his own home and whose children he had helped stopped taking his calls.

  One of many stinging betrayals came from Adil Zainulbhai, the chairman of McKinsey India, whom Gupta had personally mentored when they were both in Chicago. Gupta recommended each of Zainulbhai’s children for the University of Chicago, whose board he was on, and he later helped guide them in their search for jobs. But when the Gupta-Rajaratnam tape surfaced, Zainulbhai went into overdrive with his clients, telephoning and sending emails saying that Gupta no longer had any ties to the firm and had not been an active partner for years. McKinsey also quickly moved to sever its links with its three-time managing director. After a meeting lasting no more than an hour with his successor and friend Ian Davis, Gupta learned that McKinsey was moving to take away all his benefits—right down to his secretary and his phones. He was even removed from the McKinsey alumni directory. Gupta was devastated. He told friends that he could not believe an unblemished thirty-year career was wiped out in a short meeting.

  “During these times, you get to know your real friends,” he wrote in an email. What he didn’t appreciate was that his former colleagues felt equally betrayed. As bad as his actions were, what was more disappointing was that he showed no contrition.

  Even among the Indian community, where there seemed to be greater sympathy for Gupta than outside it, some leading lights distanced themselves. Earlier in the year, when friends of Gupta’s started a campaign to solicit signatories for a website supporting him, Vinod Khosla, the renowned venture capitalist and fellow IIT alumnus, asked the organizers of the website not to use his name. He was upset that Gupta’s actions had sullied the reputation of the Indian diaspora in America.

  Aside from these professional humiliations, there were legal setbacks. On May 16, Jed S. Rakoff, the federal judge presiding over the case, said he intended to allow the jury to hear three potentially incriminating wiretapped recordings between Rajaratnam and his lieutenants. Gupta’s lawyers had argued that these conversations should be deemed inadmissible, hearsay evidence. But Judge Rakoff subscribed to the government’s argument that the wiretaps were allowable because they reflected conversations of a coconspirator in furtherance of an insider trading scheme. The ruling would turn out to be a blow for Gupta.

  As he approached the biggest test in his adult life, Gupta seemed calm and unflappable. “Today is Friday, May 18th, and my trial starts on Monday, May 21st. As I sit here in my office reflecting on the last year, I am filled with emotions. The overwhelming one is God is putting me through a test, and my duty is to do the very best I can and be prepared to accept whatever outcomes. I know I have done nothing wrong and expect to be fully vindicated.”

  In the same federal courthouse that has seen its share of high-profile cases against boldface names—Martha Stewart and the two Bernies, Madoff and Ebbers—the trial of the United States of America v. Rajat K. Gupta stood out. It was the most uncomfortable trial in recent memory. It pitted one corner of the establishment, represented by Gupta, the former three-time managing director of McKinsey, against the other corner of the establishment, Goldman Sachs & Co. There was no love lost between the two. In the months before the trial, Gupta had come to distrust his relationship with Goldman and view Blankfein with great disdain. On February 24, 2012, Blankfein, accompanied by his usual coterie of lawyers, arrived at the midtown offices of Kramer Levin to be deposed by Naftalis in connection with the SEC’s civil case against Gupta, which after being dropped in August 2011 was filed in federal court on October 26, 2011, the same day that criminal authorities unsealed their indictment against Gupta. When Blankfein entered the conference room, he was taken aback. There sat his former board member Rajat Kumar Gupta. The two men didn’t say a word to each other, but in an unusual move, Gupta sat for nine hours and listened in on Blankfein’s deposition.

  Although the Gupta case was to be decided by a twelve-person jury, it was clear from the beginning that the indomitable Judge Rakoff would be dominating proceedings in Courtroom 14B. Never one to shy away from controversy, Judge Rakoff reined in lawyers when they strayed from the law and jumped in and elicited testimony when they got tongue-tied. Through it all, he entertained the spectators and jury with his witty rejoinders.

  “You look so much taller than Napoleon,” Judge Rakoff said as the lead prosecutor, Reed Brodsky, rose to speak on the first day of the trial. The courtroom broke into quiet laughter. Just that morning, the Wall Street Journal had run a profile of Brodsky noting that his dogged pursuit of a conviction of Rajaratnam had prompted jurors in that case to nickname the fresh-faced, dark-haired, five-foot-nine-inch prosecutor from Long Island “Napoleon.”

  Some of the best banter, though, occurred between Judge Rakoff and Gupta’s lawyer Gary Naftalis, who are old friends. Before Naftalis started his opening arguments, Brodsky sought to confirm that his adversary would not be able to speak at length about Gupta’s many philanthropic pursuits. Naftalis had wanted some leeway to expound on Gupta’s charitable endeavors to dispel “the phony picture” created by the prosecution.

  “Your Honor, just to be clear, he won’t mention AIDS, malaria or tuberculosis,” said Brodsky.

  “Or the bubonic plague,” shot back Judge Rakoff.

  “Or even scurvy,” piped up Naftalis. Even the impassive-looking Gupta cracked a smile.<
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  In the large and clubby New York Bar, it is common for prominent and powerful attorneys to know judges well, and it was no secret that Naftalis and Judge Rakoff went back a long way. Judge Rakoff joined the US attorney’s office in Manhattan in 1973, fresh from Harvard Law School and a master’s in philosophy from Balliol College, Oxford University, where he studied Indian history. Naftalis, then assistant chief of the Criminal Division, was Rakoff’s boss. The two overlapped for a year—Naftalis left the office in 1974—but have been friends ever since. In 2009, Judge Rakoff presided over the wedding of one of Naftalis’s sons, who had clerked for him.

  The sixty-nine-year-old Judge Rakoff, with his snowy white hair and beard, is an old pro at insider trading cases. He’s seen them from all sides, as a judge, a prosecutor, and a defense lawyer. Twenty-five years ago, Rakoff, then a defense lawyer, was hired by former Kidder, Peabody & Co. mergers and acquisitions banker Martin Siegel to represent him in the headline insider trading case of the time. Siegel, who pleaded guilty to securities fraud, was accused of passing inside information to arbitrageur Ivan Boesky in exchange for briefcases filled with dollar bills. The case against Gupta, who had never received cold cash from Rajaratnam for the alleged insider tips he provided, was downright dull in comparison.

  By 2 p.m., a jury of four men and eight women were seated. Among the New Yorkers deciding Gupta’s fate were an executive at a nonprofit organization, a fourth-grade teacher, a nurse, and a freelance beauty consultant. Gupta, who knew his way around the corporate boardrooms of America, appeared unsure of the customs of a courtroom. When the jury first walked in, he did not rise from his chair. Only when one of Naftalis’s colleagues, Alan Friedman, signaled for him to get up did he quickly comply. It was a slipup he wouldn’t make again.

  In their opening arguments, the lawyers painted two competing pictures of Gupta’s life. As his wife, Anita, and their four daughters looked on, Reed Brodsky took the floor and declared, “This is a case about illegal insider trading.” Then, pointing to an expressionless Gupta, he said, “It is about how this man, Rajat Gupta, violated his duties and abused his position as a corporate insider” so his friends could make money on the financial crisis.

  Seeking to leave no doubt that Gupta benefited from his relationship with Rajaratnam, Brodsky told the jury that “the more money Galleon funds made, the more money Gupta and Rajaratnam made in Voyager.” By tipping off Rajaratnam, “Gupta cheated. Gupta violated his duty to those public companies and their shareholders. That is called insider trading. It is securities fraud. It is a serious crime.”

  In his opening, Naftalis countered, saying the government was offering the jury a “cropped photo” of Gupta.

  “He is not an insider trader…He has not defrauded anybody. He has not cheated anybody. He doesn’t belong in this courtroom.” Naftalis said the government’s case was characterized by an “absence of real hard direct evidence…Indeed this is a very strange insider trading case because the evidence will show that Rajat Gupta did no insider trading. Let me repeat it. Rajat Gupta did no insider trading.” There are no wiretapped conversations, firsthand testimony from any witnesses of Gupta giving them inside information, or documents showing him tipping off Rajaratnam. “Zero,” emphatically asserted Naftalis. “Strike out there as well.” Rather, the prosecution’s case was based on “speculation” and “guesswork.”

  “We don’t guess people into guilt in America,” intoned Naftalis. “Even if there was a crime, Rajat Gupta had nothing to do with it. You have the wrong man on trial here.”

  Sitting in the back of the room as Brodsky and Naftalis spoke was the SEC’s Sanjay Wadhwa. With his backpack slung over his shoulder, he had made the fifteen-minute crosstown trek from his office at Three World Financial Center even though he and his team were busier than ever. As prosecutors were preparing for the Gupta trial, Wadhwa and his colleagues were building a civil case against SAC Capital. In May, they deposed SAC Capital’s founder, Steve Cohen, for seven hours; it would be a first step leading to SAC paying a huge $616 million civil penalty to settle two insider trading cases. When SAC first learned in 2012 of possible charges against the firm, Cohen said he acted appropriately.

  Unlike Manhattan US attorney Bharara, Wadhwa didn’t have to worry about anyone noticing him. Barely anyone knew who he was. He didn’t attract a media spectacle whenever he stepped into the public eye, but he was keen to be present for the opening arguments because he and his team of lawyers had assembled much of the circumstantial evidence at the heart of the government’s case. Unlike with Rajaratnam, the government had only one wiretap on which Gupta was heard relaying discussions at a Goldman board meeting to Rajaratnam. Most of the case was rooted in evidence of board meetings followed quickly by phone calls and wiretap recordings of Rajaratnam boasting to associates that he had received information from a Goldman board member, the “hearsay” evidence that Gupta’s lawyers had tried to get Judge Rakoff to exclude.

  Meanwhile, Bharara, who studiously attended the Rajaratnam trial, appearing for both opening and closing arguments, was noticeably absent in the Gupta case. On one occasion in the middle of the trial, he stopped by. When he walked into the well during a break to consult with his prosecutors, Rajat Gupta was standing alone nearby. As soon as Gupta caught a glimpse of Bharara, he walked out of the well.

  On Tuesday, May 22, the first day of evidence in the trial, the government called Caryn Eisenberg, Rajaratnam’s executive assistant. Eisenberg, dressed in a black halter top and sequined cardigan, walked to the witness stand and was sworn in. Soon after starting her testimony, she dropped a bombshell. A few days before the trial was set to begin, Eisenberg found a red notebook in which she had scribbled Rajaratnam’s VIP callers—the people who were so important that Rajaratnam had told her to find him if they called.

  Gupta’s name was second on the list, just after Rajiv Goel, the former Intel Treasury executive and Rajaratnam informant who had pleaded guilty.

  Among the others: Parag Saxena; Stanley Druckenmiller, whose name Eisenberg had starred, though she could not remember why; and Anil Kumar. Ironically, the notebook, which surfaced in response to a defense subpoena of documents from Eisenberg, bolstered the government’s contention that Gupta and Rajaratnam were far closer than Gupta was willing to admit.

  It got worse for Gupta.

  Eisenberg testified that on the afternoon of September 23, 2008, she remembered getting a call about ten minutes before the market closed. The caller, a man, said it was “urgent” and that he needed to speak to Rajaratnam. Eisenberg said she recognized the man’s voice as someone who was on the list of important callers, a person who telephoned frequently, but she could not recall his name. She put the call on hold and went to find Rajaratnam. He returned to his office quickly, closed the door, and had a brief conversation with the man.

  Eisenberg testified that moments later Rajaratnam called his lieutenant Gary Rosenbach into his office. The door was closed again and Eisenberg could not hear their conversation, but when Rosenbach walked out of Rajaratnam’s office, he barked an order to the entire trading desk: “Buy Goldman Sachs.” Eisenberg said she heard Rosenbach repeat the order a few times and, for emphasis, she said it again: “Buy Goldman Sachs. Buy Goldman Sachs.”

  The trial had hit a fever pitch on its first day of evidence. Minutes after her testimony, the words “buy Goldman Sachs, buy Goldman Sachs” echoed through the quiet, high-ceilinged courtroom. After Rajaratnam received the call, he was “smiling more,” Eisenberg added. It was a small detail that seemed to take away from the credibility of her testimony rather than add to it.

  Under cross-examination, David Frankel, a soft-spoken defense lawyer who contemplated a PhD in English before settling on being an attorney, tried to undermine Eisenberg. The best he could do was to elicit that she had worked as a party planner for a year after college. But he succeeded in drawing out that a Goldman salesman, David Loeb, was also on her list of important callers. Loeb was under inve
stigation by the government for passing inside information about Intel, Apple, and Hewlett-Packard to Rajaratnam. He has not been charged with any wrongdoing, and since the trial ended the investigation into Loeb has been closed. But Loeb quietly left Goldman in early 2013.

  In a bid to show that the government had the “wrong man on trial,” the defense suggested that the tip-off to Rajaratnam could have come from Loeb. Eisenberg swiftly doused that theory. When Loeb called, “he always said hello to me and was extremely friendly,” she recalled. The manner and style of the person who called just before the market closed was different.

  The drama continued. Some of the witnesses the government put on during its three-week case appeared to walk out of central casting. Ananth Muniyappa, a Galleon employee who provided important testimony about getting an order from Rajaratnam to buy Goldman stock just before the market closed on September 23, 2008, played the part of the cocky young hedge fund trader. He took the stand wearing an untucked plaid shirt and sporting designer jeans. Byron Trott, the Goldman banker who had helped craft Warren Buffett’s investment in the firm, was predictably tall, handsome, and smooth-talking. He came to court dressed in a dark suit, tie, and white shirt. In an amusing and somewhat absurd sidebar that highlighted the familiar give-and-take between Naftalis and Judge Rakoff, Naftalis took issue with Trott’s characterization of Buffett.

  “I don’t think it is appropriate for this witness and the prosecution to be characterizing Warren Buffett as the most respected investor in the world,” joked Naftalis.

  “Well, we corrected that, and I know your broker disagrees strongly,” countered Judge Rakoff.

  “Warren has not done so well lately, we all know. He is a little played out,” said Naftalis. Few in the courtoom knew it, but in the early nineties, when Naftalis represented Salomon Brothers, which was embroiled in a Treasury bond rigging scandal, he accompanied Buffett and two top Salomon lawyers to make a presentation to Manhattan US attorney Otto Obermaier, successfully persuading him not to indict Salomon.