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January 31 - February 12, 2022
It recruited the top 5 percent of the graduating Harvard Business School class, so-called Baker Scholars such as unsuccessful presidential candidate Mitt Romney. (Despite stellar grades in his first year, Gupta was not a Baker Scholar.)
It needed analysts who could understand the sophisticated products and technologies of the corporations they analyzed—and not simply swallow the spoon-fed and curdled explanations that companies served them. With their highly quantitative backgrounds, the new emigrants from South Asia were perfect for the job.
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.
“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.
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.”
In 1991, George Needham, impressed with the deals Rajaratnam was winning, promoted him to president. As a boss, Rajaratnam drove employees—and himself—hard. One time, when an analyst returned home to take a nap after a red-eye flight, Rajaratnam chewed him out. “You don’t show people that you are tired or you are beat,” he told the analyst. Rajaratnam understood the importance of appearances.
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 n...
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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.
“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.”
Within a decade after he set up Galleon, assets at hedge funds would swell to nearly $1.5 trillion compared to $257 billion in 1996, and the number of hedge funds would triple to a little over seven thousand from about twenty-four hundred.
When Rajaratnam started, he worked out of a cramped and shabby office on Lexington and Fifty-Seventh Street, about a block from his old company Needham, managing about $350 million that he cobbled together from close friends and family. His firm was called Galleon Group after the large ships that traded in spices and ivory with Sri Lanka, his birthplace, known long ago as the Isle of Serendip. Galleon stuck to its knitting. It drew on Rajaratnam’s expertise, technology stocks
He liked to reduce grown men to quivering sacks of jelly, but only when appropriate. A keen leader, Rajaratnam also knew when it was best to be ice-cold.
Rajaratnam told prospective investors that the fund’s returns were driven by “bottoms-up research” carried out by a team of analysts who visited more than three hundred companies a month. Analysts were urged to travel as much as they wanted and to visit as many companies as they could. Rajaratnam had only one requirement: at the end of the day, the analysts had to email or fax an explanation of what they learned during their company visit. If they didn’t, their travel expenses were not reimbursed.
At McKinsey during the late eighties, there were several avenues for advancement. Some rose by building tight client relationships and bringing in new assignments. Others moved ahead on the force of their intellect, creating studies that could help rethink entire industries. The least likely path to being a mover and a shaker was through managing. Gupta had built a reputation as a consummate manager, but he was at a company where managing was not revered.
Still, the old guard were blindsided by his elevation. Some of the elder statesmen who had squarely placed their chips on more traditional candidates tried to discount Gupta’s victory. They claimed that there was a campaign to elect Gupta, an effort that involved heavy lobbying and phone calls between directors in various offices. McKinsey never formally educated its voting directors about the candidates. While it was not uncommon for there to be phone calls among various offices about potential candidates, some of the old guard felt that the lobbying before the 1994 election was
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Rather, what they sought was the firm’s cachet.
They wanted to be able to broadcast to others—their customers and their friends—that they had the wherewithal to hire the US consulting giant.
As eager as companies were to use McKinsey’s services, they were less excited to pay for the work. By Indian standards, McKinsey’s fees—though discounted for the Indian market—were astronomical. One week of a McKinsey engagement equaled the salary of some Indian companies’ CEOs. In the early days, Puri used to joke that he was not sure if he was the strategic adviser of the companies McKinsey served or their banker. The reason: he had overdrafts from all of them.
Rajaratnam enjoyed kicking back with a toke.
By August, thousands of pages of phone logs arrived, yielding about eight thousand “interesting” phone numbers. Every one of them had to be examined. It was painstaking grunt work—the kind of labor that would be done at a private law firm by an associate.
Law firms also owned sophisticated software programs that allowed a user to load phone logs and search them electronically. Sanjay Wadhwa checked with his tech support team and discovered that the SEC did not have the money to buy the software. So Friedman spent hours and hours scouring hard copies. With a ruler in hand, he would match up phone calls between two parties within a window of time around the suspicious trades Rajaratnam had made. As
Without setting out to do so, it appeared that the SEC was on the verge of untangling the biggest South Asian insider trading ring in the history of the US securities industry.
The sudden wealth gave the Khans a foothold in a new and unfamiliar world of opulence. Roomy liked to spend money, and she spent it extravagantly. She bought a seventeen-carat diamond at Neiman Marcus. For running up a shopping tab of more than $1 million, the department store gave her a BMW.
In 2000, the couple splurged on their biggest purchase yet, a nine-thousand-square-foot mansion with six bedrooms and six and a half bathrooms and more than half a dozen marble fireplaces, in Atherton, California, the richest town in Silicon Valley, which locals call the “home of the bazillionaires.” The price tag was $10.5 million. The Khans paid all cash. Their new house was on Isabella Avenue, several doors down from Oracle billionaire Larry Ellison’s exquisitely simple but exorbitantly expensive Japanese-style abode.
After she had left Galleon, she pleaded guilty to wire fraud in April 2001 for her theft of corporate secrets from Intel—secrets she’d passed to Rajaratnam. It was a crime that carried a maximum prison sentence of five years and a fine of $250,000. But a year later, when Khan was sentenced, she was given probation
Sanjay Wadhwa was taken aback by Rajaratnam’s nerve–apparently, the higher the risk of breaking the law and getting away with it, the less the worry of being caught.
“Remember never grow up—and nothing is more serious than the pursuit of fun!!!”
Two stocks, Polycom and Hilton, offered the most glaring examples of trading on inside information, but all the evidence that Michaelson and the two Friedmans—Jason and Israel—had developed was still circumstantial.
With an individual who is an occasional trader of stocks, that would not have mattered, but hedge funds like Galleon dive in and out of stocks all day, so it would be hard to tie the trades Galleon made to any one piece of information without the help of an insider.
America, forced to reinvent itself amid the decline in manufacturing, was on the cusp of embarking on two new tracks, finance and technology, that coincidentally played to the strengths of the new Indian immigrants.
“The attitude that underlies this community is that we are great because we are really talented, not because a special set of circumstances made us great.”
The risk, of course, is “if a person goes through life believing struggle is irrelevant, you don’t have to work for anything, then why not take more than you are offered? This is the twice-blessed generation, and my sense is some of them took this twice-blessedness literally, and this was their undoing.”
They sneered at the “OTBs” (off the boats) or “FOBs” (fresh off the boats) with their thick accents and their geeky ways. In their minds, they were cool and the new immigrants from India were definitely uncool.
They had a sense of belonging and an identity, born out of a vibrant five-thousand-year-old culture with a history rich in learning, music, and art.
They looked upon the Indians who were raised in America with contempt and mocked them as ABCDs—or American-Born Confused Desis
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.
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.
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.
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.
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.
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.
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.
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
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.
When Kumar moved to India, he had lost touch with Rajaratnam but had heard through the grapevine that his classmate from Wharton profited spectacularly well during the dot-com boom. News of success traveled fast among South Asians. By 2001, the assets at Rajaratnam’s Galleon fund made it one of the ten biggest hedge funds in the world.
Compensation per partner is hardwired to two economic statistics—hourly billing rates and the ratio of deployable associates to partners. “You want LOTS of associates per partner,” explains Skilling. Between the mid-nineties and 2000, the ratio of directors to consulting staff, which includes associates, increased to 1:17 from 1:12. Even as revenues grew by more than three and a half times, the partnership grew more slowly, by about two and a half times,
Davis, an upright Englishman with a degree in PPE— philosophy, politics, and economics—from Balliol College, Oxford, was keen for a return to the “values-based” McKinsey, not a growth-at-all-costs McKinsey. He was viewed as being disenchanted with McKinsey’s growing and obvious commercialism and was not a big fan of Kumar, whom some colleagues felt embodied the business-driven culture that had seeped into the firm over the previous decade.
A Gupta principle that he drew from the Bhagavad Gita holds that man has a right to work but not to the fruits that arise from his labor.
