The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (12 page)

In the summer of 2008, as the economy was quickly sliding into a recession, Rajaratnam gave a junior female employee an interesting assignment: he supplied her with a budget to buy clothes and accessories from retailer Lululemon Athletica. At the morning meeting, Rajaratnam, feigning sincere analysis, remarked that he thought few consumers would pay for the pricey gear in a recession. Then Rajaratnam pushed the woman to explain to the mostly male analysts and portfolio managers the reason the company’s clothes resonated with consumers. As part of her presentation, she donned a black Spandex outfit and did a turn around the room. When someone suggested she should stand up on the conference table and model the outfit as if she were a fashion show runway model, Galleon’s chief operating officer, Rick Schutte, pressed for the display to stop.

In many traditional ways, Rajaratnam conducted business at Galleon just as he had done at Needham. Like his mentor, George Needham, he pinched pennies, hounding assistants about the amount of money the office spent on essentials like paper. Employees were required to fly economy, and when they stayed in hotels they were not allowed to use the minibar. A budget for travel had to be approved before the trip was taken. He also adopted the fast-and-loose operating style that had worked so well for him at Needham. In early marketing materials, pitching his new fund to investors, he laid out his historic returns even though Galleon had come into existence only in January 1997. In making his claim, Rajaratnam relied on the performance he had generated at the small hedge fund he ran at Needham.

Deep analysis and a lean expense ledger were not the only core competencies at Galleon. Rajaratnam’s secret sauce was that he was an expert manipulator. He knew just the right way to push corporate insiders to pass along confidential financial information long before it was publicly released. And with his own money riding on Galleon, he squeezed them harder than ever before.

James Bagley met Rajaratnam in the early 1990s when he was president and chief operating officer of Applied Materials, a Santa Clara, California, maker of silicon-chip-manufacturing machines. “He was always just a little bit slick for me,” says Bagley. “He was always kind of pressing you for information.” He wanted details about customers and other companies that Bagley declined to answer. Often, Bagley says, Rajaratnam would present him with a nugget of information and “then he would want you to confirm it.” “Several times,” particularly after Rajaratnam moved to Galleon, he would suggest trades of information, but Bagley says he stayed clear. “I didn’t want to have anything to do with him,” he says.

Not everyone felt that way. In his decade in the banking industry at Chase and then at Needham, Rajaratnam had developed close ties to Silicon Valley’s expatriate South Asian community. Like Rajaratnam on Wall Street, many of them started in Silicon Valley in the early 1980s, when South Asians were rare. Segregated from their Wonder Bread colleagues, the new arrivals from South Asia bonded easily, forging intimate friendships in the workplace.

Unusual alliances arose—even between Hindus and Muslims—more often out of mutual need than real kinship. To get ahead, one needed connections. Besides the Atmel Corp. executive Kris Chellam, one of Rajaratnam’s best “friends” in Silicon Valley was a thirty-nine-year-old product-marketing engineer at Intel named Roomy Khan.

Like other South Asians, Khan, who traced her roots back to New Delhi, came to America in the fall of 1982 to study. She was twenty-four years old, past the perfect age to find a suitable boy. But Khan had never been the kind to hew to convention. Even as a young girl, she was plucky, vivacious, and every bit as driven as the men around her—not exactly the best résumé for marriage in a country like India, where arranged unions were still commonplace. When Khan got a scholarship to study in the United States, she jumped at the opportunity. She told her parents that if they didn’t give her the money for the plane ticket, she would borrow it and go.

Rajaratnam and Khan first got to know each other in 1995, when Khan was working in Intel’s microprocessor group and Rajaratnam was still at Needham. As part of her job, Khan tracked expert analysts in the semiconductor industry, and there was no one as well regarded in the tech space as Rajaratnam. One day, Khan telephoned Rajaratnam about Advanced Micro Devices, Intel’s rival in semiconductor production. The two hit it off and found they had a lot in common; Rajaratnam’s wife, a Sikh, was from Punjab just like Khan. When the two women met some time later, they spoke in their native language, Punjabi.

“I wish I had spoken to you a few months ago,” before joining Intel, Khan joked to Rajaratnam. Her dream, she confessed, was to work on Wall Street, not to be carrying out boring market research for a semiconductor company.

“Oh, you can still do that,” replied Rajaratnam.

As it happened, when Khan approached him, Rajaratnam was in the market for a semiconductor analyst and Khan fit his hiring profile. She was highly educated—after Kent State, she got a master’s degree in electrical engineering from Columbia University and an MBA from Berkeley—and, more important, she’d worked at a number of companies in the tech space, including the biggest player, Intel. Later in the year, Rajaratnam met her in Menlo Park and, just as he had promised, he offered her a job. The only condition was that she would have to move to New York to train.

Khan was torn. She wanted to break into Wall Street, but she knew if she accepted the offer it would probably mean the end of her marriage. Her husband, Sakhawat, was a traditional Asian Muslim man who liked to have his wife by his side, not burnishing her career three thousand miles away. She turned down the job, but Rajaratnam kept her in mind. From time to time, he would help her get interviews for analyst positions at brokerage firms such as Prudential Securities and Robertson Stephens. Unlike other analysts Khan knew, Rajaratnam was more of a friend than a business acquaintance. The two would have dinner together, sometimes with their spouses, when Rajaratnam visited California.

For Rajaratnam, it was part of doing business. His cultivation of Khan as a future source of inside information was perfect. Even before he ever asked her for anything, he made her feel that she owed him. He had gone out of his way to help her get a job on Wall Street, something she desperately wanted, making introductions to other companies and even offering her a job himself. So one day, when he would turn around and quiz her about the inner workings at her employer, Intel, she was happy to repay the favor. But answering one question made answering the next one easier. In December 1996, Khan called Rajaratnam and discovered he was leaving Needham to set up his own company. He suggested the two stay in touch.

Rajaratnam’s first year at Galleon was heady. Four months after the hedge fund opened its doors, it was up 3 percent. Money started flooding in; investors were drawn by Galleon’s impressive returns and the growing hype over tech. “Ask around the street about the market’s hottest tech investor, and the name you keep hearing is Raj Rajaratnam,” gushed
Barron’s
in November 1997.

The glowing review masked a rocky patch that Galleon hit in the fall of 1997. Galleon was long—or had bullish bets—on technology stocks. After the Asian financial crisis triggered uncertainty, investors ran to less risky assets and shed their tech positions. In October alone, Galleon lost between 10 and 12 percent of its value. Rajaratnam needed to right his Galleon or the $800 million fund would sail away from him.

Rajaratnam picked up the phone and lobbed a call to his old friend from Intel, Khan. He flat out wanted to know how Intel was doing.

In all the years Khan had known him, Rajaratnam had never broached the topic of Intel with her. As he was not shy in his questioning with others, his behavior seemed to indicate that he saw Khan as a Hail Mary ask—the one favor to call in only if he absolutely had to. In her position, Khan had access to Intel’s microprocessor bookings, which provide a snapshot of Intel’s customers’ expectations of their future demand: how many chips they would need in the coming months—not firm purchase orders, but estimates for Intel to keep a handle on its production. The reports list the top twenty personal computer customers and their upcoming demand for Intel processors. For a stock investor making a bet on a company’s future performance, the reports were a gold mine. They could be used to figure out the anticipated revenue numbers for Intel (number of chips sold multiplied by the wholesale price equals revenue).

From then on, Rajaratnam brazenly called Khan every week at her Intel office to get the booking reports. He would ask Khan to verify rumors he was hearing in the market about Intel. Soon she was volunteering information. She passed along data she gleaned from colleagues. At first she was careful, communicating only over Intel’s logged telephone line. It didn’t raise eyebrows; her job as a market researcher involved talking to hedge fund managers and analysts. But later, strapped for time, she would fax documents to him. Khan never asked Rajaratnam what he did with the information, but given the business he was in, she naturally assumed he used it to trade stocks. Now when she complained about working at Intel, Rajaratnam would urge her to stay. He even offered to give her some extra money if she remained.

On March 6, 1998, Khan faxed a number of sheets of paper marked “Intel Confidential” to a fax number in New York. The papers laid out in great detail Intel’s most sensitive and closely guarded customer order information. The “book to billing” reports not only listed the number of chip orders booked by several dozen major PC makers; they listed the actual number of chips shipped. With this information, any savvy analyst could divine Intel’s future financial performance. More than two weeks later, on March 24, Khan faxed several pages of handwritten notes to a number Intel later learned belonged to Galleon. The notations on the faxed pages showed Intel’s average selling price and the units sold for the first quarter of 1998. By doing some simple math and multiplying the two numbers, an analyst could arrive at Intel’s revenue for the quarter. Comparing the confidential information about Intel’s average selling price to similar reports for previous publicly announced quarterly information would give an ordinary analyst an extraordinary window into Intel’s business. With a little work, an analyst could quickly figure out how well Intel’s newer and more profitable computer chips were selling. Unbeknownst to Khan, each time she faxed anything, the hidden camera that Intel had fixed above the fax machine captured her every movement.

After turning around Scandinavia, Rajat Gupta had the pick of his next McKinsey posting in the United States. Instead of returning to New York, he decided to try Chicago, a city he barely knew. A partner he was close to in the New York office had moved to the Chicago office some years earlier and suggested Gupta join him. As he did when he moved to Scandinavia, Gupta asked a colleague to buy him a house. This time, he didn’t even go on a house-hunting trip. His colleague and his wife recommended a home for the Guptas and he bought it sight unseen. Happily for the colleague, the Guptas loved it.

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.

McKinsey always accorded the highest respect to partners who served clients well. It was rare for a successful partner to aspire to a leadership role within the firm. But Gupta knew his selling point at McKinsey was as a leader. What made him successful in Scandinavia despite his outsider status was his ability to marshal the resources of the firm, connect colleagues from all over the McKinsey universe, and effectively help his team deliver for the clients they served. Not unlike his father, Ashwini Gupta, who could deliver eight tickets on a sold-out train to a needy group of young men, so could his son Rajat deliver the goods for a needy client.

And at a very young age, when most of his colleagues were sharp-elbowing each other in a bid to get ahead, Gupta mastered the art of enlightened management. He learned that he would succeed by making others successful. In his early years, when he struggled as an associate, he focused on pleasing his superiors rather than shining a light on his own work. As he matured, he fell back on lessons he’d picked up as a young boy following his father to Nehru’s press conferences. Rajat observed that the Indian prime minister would make a point of working his way through a line and meeting everyone. Years later, he would do the same, making every person feel important, just as Nehru had, with great success.

Three years after Gupta got to Chicago, the office manager, Michael Murray, a friend and mentor, rotated off the job. Heading an office or being a member of one of McKinsey’s personnel committees was always a highly coveted and powerful position. The personnel committees controlled promotion and in some instances compensation too. Office managers could make or break careers at McKinsey. Their power came from their control of staff assignments. They chose who got to work for which clients. Favorites got plum projects, while those not in the manager’s inner circle got the rest. “Think of political patronage,” says Skilling.

Gupta came to learn that Fred Gluck, then managing director, planned to name a new head of the Chicago office and that it was not going to be him. Gluck was of the view that after Scandinavia, Gupta did not need more management experience; moreover, he had someone else in mind for the Chicago job. It was a young director named Dick Ashley, a veteran of the Chicago office who knew the city well.

Gupta chewed over the prospect of the position going to someone else without having a chance to vie for it.
This is not right
, he thought to himself.
I do want to manage the Chicago office.
Even though he hadn’t been in Chicago for long, he had earned the respect of his colleagues. The consultants in Chicago were a tight group; many, including Gupta, lived near each other in the affluent Chicago suburbs of Winnetka or Wilmette. On weekends, they socialized together with their new and growing families in tow.

Besides Geetanjali, the Guptas by now had two other daughters, Megha and Aditi. Despite the grueling travel regimen that accompanied a life in consulting, Gupta always found the time to change diapers, give baths, and soothe colicky babies. Often his wife, Anita, would find her jet-lagged, sleep-deprived husband lying on the family room couch with a baby resting on his chest.

As the Gupta girls grew older, their father played a hands-on role in their education. His specialty was mathematics. Every Saturday morning Gupta would wake up early, often after flying back late Friday evening, so he could tutor Geetanjali, the eldest, in math. It was important for their father to spend the little time he had “with us, not merely around us,” recalled Aditi. In a family of voracious readers, Gupta would urge his daughters to put down their books so they could participate in joint activities such as family breakfasts and team cleaning. “Moral support” was one of his buzzwords. If one daughter was assigned a tedious task like cleaning her room, Gupta encouraged anyone hanging around to keep the other company. “If we resisted, it was pointed out that this was a breach of one’s ‘moral support’ duty,” recalled Megha.

As he had in his student days at Harvard, Gupta struck a balance between assimilating and retaining his Indian values and lifestyle. The Guptas decorated their home with Indian artifacts and paintings, and their daughters addressed their dad as “Baba.” He in turn would call them by their Indian pet names.

When the Guptas first arrived in the United States, Christmas and Thanksgiving were just days off. But as the girls grew up, the family started celebrating the Western holidays as exuberantly as they did Diwali, the Hindu festival of lights. Extended family would descend from all corners of the country. Stragglers were welcomed too. The day before the holiday, the group, numbering thirty or so, would do the shopping and start preparing the feast. Gupta, the patriarch, who at home liked to slip into a long, loose, collarless shirt with matching pants known as a kurta pajama, pitched in.

During the feast, Gupta was one of the quietest members of the party. But after dinner he liked to draw his guests into playing cards or a board game like Scrabble or Pictionary. In the throes of competition, he came to life. Amid a game of Pictionary, the quiet Gupta could outshout anyone. Friends suspected that Gupta, a bridge fanatic, enjoyed the intellectual challenge as much as the thrill of winning. Scrabble to him was not just a sport of words; it was an exercise in gamesmanship. He always had an uncanny knack of knowing which tiles remained in the bag. And whatever the game, he approached it with the same focus that he applied to everything in life. Once a son’s friend was obsessed with yo-yos and adept at performing all sorts of tricks with them. Gupta wanted to do the same, so he took directions from an eleven-year-old and practiced until he perfected the art of yo-yoing.

Like other Indian immigrants, the Guptas placed a high premium on education and family—not just the immediate Gupta clan but the extended family too. Gupta was “Baba” to his kids and “Big Baba” to a passel of nephews and nieces in India. They remembered his visits as Christmas come early. He and Anita would arrive with huge suitcases stuffed with gifts and chocolate and clothes. In the scarcity-filled India of the 1970s and 1980s, the Guptas knew their presents meant a lot. Over time, the Guptas lavished more expensive gifts on their families—a MacBook Pro, for example. In doing so, they were typical of an up-and-coming generation of Indian immigrants who were starting to prosper in the United States and wanted to share the fruits of their success with their families back in India.

In 1984, Gupta’s father-in-law died unexpectedly, leaving the Mattoo family without a patriarch. Gupta assumed the mantle immediately, doing everything from making sure the Mattoo family could live one more year in government employee housing to taking on the role of baba to Anita’s youngest brother, Arvind, who, like Gupta, was a teenager when he was orphaned. During the holidays, their home in the United States became his home. When Anita’s younger sister came under pressure to marry after her father’s death, Gupta suggested another path: come to America and go to business school. He helped her pick the schools, guided her through the treacherous application process, and then lent her the tuition.

Gupta knew he would have the support of the Chicago office if he was named its head. But to stick up his hand for the job ran counter to the culture of the firm. “It is your decision,” Gupta told Gluck. But “I don’t want to take myself out of the running. I won’t make it easy for you. You really have to decide whether you want to have me” or someone else.

Gluck, who had grown up in a one-bedroom apartment with his parents, grandmother, and five siblings in Brooklyn, was not easily swayed. But as he mulled the Chicago position, a number of senior consultants in the office approached him and told him that they would prefer Gupta over his pick, Ashley. At one point, Gluck got a call from Mike Murray, the outgoing office manager, who said he was acting as a spokesperson for the Chicago office. His advice? Pick Gupta for the job.

In the end, Gupta believes Gluck asked him to lead the office “against his wishes—in the sense he wanted to make somebody else the office manager…not because he didn’t like me or anything like that.” However, “clearly I had the experience and I had the followership and he couldn’t do anything else.” The episode was instructive. Gupta easily could have let things lie, but he was happy that he was honest with himself and had spoken up to Gluck about his aspirations.

“Frankly, if I had not done that, I would have always regretted it,” he said years later.

By the late 1980s, Gupta’s career at McKinsey was picking up speed. Gone was the shy and slightly awkward HBS grad. As the head of the Chicago office, Gupta developed a reputation as a quietly effective manager. Even though McKinsey operated under the “one firm” policy, meaning that its partners were compensated based on the overall performance of the firm, people knew by the late eighties that Chicago—and Gupta’s previous stomping ground Scandinavia—was highly profitable. If they weren’t making money, McKinsey would not have staffed up.

The commercial success helped Gupta get noticed. In 1988, when Gluck was elected managing director, Gupta was actually one of the candidates on the nominating “slate of seven.” At the time Gupta was placed on the ballot, he was in his late thirties; his rivals were a decade older than him.

“It was kind of a three-hundred-and-sixty-degree circle. I remember a time where I was late for everything in the firm,” said Gupta several years later. “And this time, it seemed I was early for everything in the firm.”

Though it was not apparent to the outside world, there was a generational shift going on at the firm during Gupta’s years in Chicago that was an outgrowth of the economic pressures the firm faced during the early seventies. An older, client-focused generation was giving way to one that was more focused on revenue. And wherever Gupta went—be it Scandinavia or Chicago—revenue followed.

By the time Gluck was set to retire, McKinsey had grown significantly—its revenues doubled in his six years in the job to $1.2 billion. But in a harbinger of the future, 60 percent of that revenue came from overseas. The field was wide open for a new managing director to be a non-American—a first. John A. Byrne, writing in
BusinessWeek
magazine in September 1993, offered a rare peek into the succession dance. “Many insiders believe McKinsey may well elect the first non-American to head the firm. Among the front-runners: Christian Caspar in Scandinavia, Lukas Muehlemann in Switzerland, Norman Sanson in London and Henzler in Germany.” Besides the four foreigners, there was an American candidate too, Don Waite, the head of the New York office. But the ultimate McKinsey insider had yet to commit to anyone.

It was well known that Caspar was a long shot. Even after Gupta’s growth push, Scandinavia was still too small to matter. Sanson was seen as more of the same: another Anglo-Saxon candidate. And near the eleventh hour, Lukas Muehlemann, McKinsey’s Swiss chief, bowed out of the race. Following a path taken by many before him, he left to take the CEO job at a client, Swiss Re.

As a member of the same generation, it was clear that Waite, the chairman of McKinsey’s all-important Directors Review Committee, was Gluck’s pick. And there was no doubt that he had the support of his troops in New York, one of the most powerful constituencies at McKinsey. Waite was considered and circumspect; since the mid-seventies he’d focused on building up McKinsey’s banking practice, which at the time represented only 3 percent of the firm’s client activities. By 1983, the financial institutions practice, which now included the insurance group, accounted for about a quarter of McKinsey’s work in New York and London alone. It was the firm’s largest practice. But if the conservative Waite was elected, there was no question he would put the brakes on growth. He let it be known that he felt the firm grew too fast in the eighties and that it “strained the fabric of the place.”

Unlike Waite, Herbert Henzler was all about growth and being a star. He was larger-than-life—his nickname was “the colossus of Germany,” a moniker that fit exceedingly well. His clients were old-line German giants including the industrial behemoth Siemens and carmaker Daimler—before it became DaimlerChrysler. Everything he did—even skiing—he accomplished with his outsized personality and drive. He was a contender by virtue of his enormous success in building up McKinsey’s German practice. Apart from a brief downward blip following reunification in the early 1990s, Germany was viewed as the firm’s most successful in terms of new recruits, client size, and penetration outside the United States.

But few actually thought Henzler would win the support of the partnership and be elected to the top spot. He was a maverick who spoke his mind. When asked to evaluate McKinsey’s New York office, he rankled partners with his scathing critiques. From time to time, for instance, McKinsey would look at metrics like the number of Fortune 500 companies headquartered in big cities. New York was off the chart. Henzler would openly point to some of the large corporations in Manhattan that his colleagues in New York were not serving. The shot across the bow was on target but not a tactic that won friends.