The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (21 page)

“The new leadership was basically saying things got out of control under Rajat and we are moving back to the basics of Marvin Bower,” says Byrne today. “To some degree, that was a repudiation of his leadership of the firm.”

Longtime friends sensed that Gupta felt lost.

“He was feeling literally crazy” after he stepped down as managing director, says Bala Balachandran, a neighbor of his in Winnetka and the dean of the Great Lakes Institute of Management in Chennai, India, one of a handful of new business schools that have sprung up in India since the founding of Gupta’s Indian School of Business. Balachandran remembers visiting Gupta after he relinquished his position as global managing director. In previous years, the two sat and talked in his generous and beautifully decorated office on McKinsey’s executive floor. But now Gupta was relegated to a much smaller office on a different floor, and he was obviously embarrassed by the new digs.

He said, “Bala, I am sorry I couldn’t take you to the big office,” Balachandran recalls. His sense of having lost sway and influence was palpable. As Balachandran looks back on his friendship with Gupta, he sees a man who was always “tossed between two forces.” On one side, Gupta was “very humble, accessible, and open,” and on the other side, he was enamored with prestige, power, and the finer aspects of life. He liked to name-drop. “He was very proud of saying ‘I hired Chelsea Clinton—I hired Hillary Clinton’s daughter,’” says Balachandran.

Another case in point: at the turn of the millennium, Gupta and Anil Ambani wanted to expand the campus of the Indian School of Business. Ratan Tata, one of the wealthiest men in India, known for his very modest lifestyle, and an ISB board member, asked the two: “Are you trying to build a five-star luxury hotel for a business school?” Saying that he did not want to build a “Taj Mahal or a mausoleum” for ISB, Tata scaled back his involvement in ISB. Balachandran said Gupta approached him and asked him to talk to Tata. “I said to Rajat, ‘You can’t have your cake and eat it too,’” says Balachandran.

Gupta’s retirement as managing director at McKinsey was a pivotal turning point in his life. “Up to his McKinsey days, he was guided by the McKinsey guidelines and values. He was governed by McKinsey and not Rajat. He was on the right side,” says Balachandran. “After McKinsey, he put his eggs in the basket of money rather than reputation. He stepped up his quest for money because his professional superiority had climaxed.”

In April 2004, Gupta traveled to Columbia University to speak to Srikumar Rao’s Creativity and Personal Mastery class. Much of his talk was devoted to trotting out his usual philosophies, but at one point a student asked him about his attitude toward money and wealth creation. Gupta offered a remarkably honest response.

“When I look at myself, yeah, I am driven by money,” he said. “I like many creature comforts. I want to make sure I take care of my kids well and so on and so forth. And when I live in this society you do get fairly materialistic, so I look at that. I am disappointed. I am probably more materialistic today than I was before and I think money is very seductive…you have to watch out for it because the more you have it, you get used to comforts, and you get used to, you know, big houses and vacation homes, and going and doing whatever you want, and so it is very seductive. However much you say that you will not fall into the trap of it, you do fall into the trap of it.”

That is “very useful information,” said Rajaratnam as he listened intently to Kumar.

Starting in late 2003, just a few months after their discussion at the Indian School of Business reception, Kumar was already delivering: two giant computer companies, Hewlett-Packard and Dell, who were loyal Intel customers historically, were in advanced talks to move some of their business to Kumar’s client Advanced Micro Devices. Over the next couple of months, Kumar kept Rajaratnam abreast of the twists and turns of the negotiations, giving him a heads-up when discussions with Dell fell apart and alerting him when talks with Hewlett-Packard heated up.

On occasion, Rajaratnam would ask Kumar if he would buy AMD stock. Knowing if Kumar would invest his own hard-earned cash in the company would be a good guide for Rajaratnam of whether he should buy the stock. Kumar reiterated that he was not allowed to buy AMD stock under McKinsey’s rules, but he was so excited about the deal, he told Rajaratnam he would buy stock if he could.

Kumar had long reveled in his role as consigliere to some of America’s biggest technology companies, and one of his most cherished clients was Advanced Micro Devices, Inc., a Sunnyvale, California, company that supplied chips to personal computer companies. AMD was founded in 1969 by the colorful tech entrepreneur Jerry Sanders, who received as much notoriety for his parties, fancy cars, and Beverly Hills mansions as he did for taking on semiconductor giant Intel Corp. When AMD prospered, Sanders built a shrine to himself: an opulent headquarters building in Sunnyvale that came to be known as “Jerry’s White House.”

In the world of semiconductors, the rivalry between AMD and Intel is legendary. AMD was the David to the Goliath Intel. Together, they control the chip market. During most of their historic rivalry, AMD was the long-suffering laggard, but in 2003, AMD executives champed at the bit, excited because the company had devised a new computer chip, Opteron. It was their lethal weapon in the fight to win market share away from Intel. Within AMD, secrecy naturally surrounded the new product. Thanks to Opteron, AMD was on the cusp of winning a big order from one of Intel’s most long-term and loyal customers, Hewlett-Packard Co.

After overtures from AMD’s most senior executives, HP was coming to the view that AMD’s new chip was the best for some of its server systems. But the deal was not sealed yet. So as not to run the risk of a leak that would let Intel retaliate and sabotage its plans, AMD gave its efforts to grow market share the code name MAID, an acronym for Microsoft, AMD, IBM, and Dell. The companies represented the firms that were integral to the efforts to gain market share. From the beginning, only a few people knew about the MAID initiative. One happened to be Kumar.

Unlike rival consultants, Kumar enjoyed a privileged perch at AMD. He was a confidant of the company’s chief executive, Dr. Hector Ruiz. Kumar and McKinsey did work for Ruiz when he was the president of Motorola’s semiconductor unit. Though the two came from different socioeconomic backgrounds, they were alike in one important way: they were nerds. Ruiz, the engineer, had a PhD in quantum electronics. Kumar, the consultant, had a master’s degree in applied mechanics.

At AMD, Ruiz treated Kumar as a strategic sounding board and often called him, sometimes at home, to bounce ideas off him. Among the coterie of obsequious advisers who tried to pitch their services to AMD, Kumar was by far the most knowledgeable, a bold and big thinker whom Ruiz trusted implicitly. Like Ruiz, who, after he was widowed, met his second wife at a daycare center where they both took their children, Kumar was a family man. Both men were immigrants to the United States, though Ruiz had a far more inspiring tale of hope and triumph, which lent a soft edge to an otherwise imperious facade. Ruiz was born into a poor Mexican family. As a young man, he would walk across the border every day from his home in Piedras Negras to attend high school in the South Texas town of Eagle Pass. He didn’t start learning English until he was sixteen, but he graduated as valedictorian.

Not long after Ruiz assumed the reins in 2002, Kumar appeared at AMD. When he was at Motorola, Ruiz was known as “Hector the Dissector” for his large-scale job cuts. At AMD, he also embarked on a program to slash costs and enlisted McKinsey’s help. Longtime AMD employees marveled at the access Kumar and McKinsey were given. They were shown product road maps and future financial projections, even though some of the advice they served up bordered on the absurd. During one of its first projects for AMD, McKinsey briefly considered an idea to cut costs by unscrewing every other lightbulb in AMD’s offices.

In a sign of their elevated importance, the men from McKinsey were installed in a conference room just outside Mahogany Row, the wood-paneled executive floor at AMD’s Sunnyvale headquarters. Sanders personally recruited Ruiz to be his successor at AMD, but before Ruiz arrived, the company for the most part avoided consultants, which made Kumar all the more obvious. Without notice, he would appear at executive events like the once-a-year gathering AMD held for its 250 employees who were at the level of vice president and above. Kumar milled around, not participating in the formal presentations, but he was unnervingly visible to employees, who sensed that the McKinsey man’s presence could mean only one thing: cost cutting. Their fears were quickly borne out. In November 2002, Ruiz announced that the company would lay off two thousand staffers, or 15 percent of its worldwide workforce.

At Ruiz’s behest, Kumar was invited to attend meetings of AMD’s strategic council, which gathered every four to six weeks, sometimes overseas, to hash out the company’s most pressing strategic challenges. He was part of a coveted inner circle, the only non-AMD executive present among the cabal of top executives. “I was at the heart, inside almost the body of the company,” Kumar would gush. Over the years, Kumar came to identify personally with his client’s long battle with Intel. He fervently believed that AMD’s new chip was better than Intel’s microprocessor, and he liked Ruiz personally and was rooting for him to succeed. In title, Kumar was a consultant to AMD. But in his heart he was an insider. All his life, Kumar had struggled to be appreciated and recognized. Finally, at AMD he was.

“I am being treated like a confidant by the CEO,” he bragged to Rajaratnam. “I am part of his senior-most four, five, six people thinking through how AMD is going to win in the marketplace.” Like everyone who knew Kumar, Rajaratnam had grown accustomed to indulging his friend’s sense of self-importance, though at times it was tiring.

Stroking Kumar’s bruised ego would eventually allow Raj Rajaratnam to lure Kumar into his web of tipsters. Ever since Kumar had returned to Silicon Valley from India, Kumar and Rajaratnam had casually swapped insights about the technology space. From time to time—about three or four times a year—Rajaratnam would pick Kumar’s brain and ask him questions with unknowable answers, such as: are the lofty prices in the technology sector a sign of a bubble, and if so, will the bubble burst?

For his part, Kumar shared his thoughts on the Internet and explained the way it would transform companies. Kumar appreciated the give-and-take; Rajaratnam was very knowledgeable about technology, and the idea that he would be interested in Kumar’s perspective inflated Kumar’s sense of importance. Naturally, Rajaratnam was delighted to hear that Kumar was in the inner sanctum of AMD. By early 2004, the details of the “consulting” arrangement between Rajaratnam and Kumar were finalized. When Rajaratnam first floated the idea that Kumar moonlight for him and get paid for it, the issue that made Kumar lose sleep was that McKinsey might come to know. Rajaratnam helped ease his worry. All Kumar had to do was to find someone else who would be willing to enter into a consulting arrangement with Rajaratnam.

Since Rajaratnam planned to pay for Kumar’s services with soft dollars—rebates from trading firms—the money could not be funneled directly to Kumar’s housekeeper, Manju Das. There had to be a conduit, an entity that appeared to provide consulting services to Galleon, through which the money passed. After some effort, Kumar found someone in Europe willing to enter into a consulting agreement with Galleon. The firm, Pecos Trading, would bill Galleon for its services and transfer the money it received to an account in Kumar’s housekeeper’s name, at Galleon. As part of the setup, Kumar would be the custodian of his housekeeper Manju Das’s account at Galleon. The beauty of it all was that there would be no paper trail leading back to him at McKinsey.

On January 16, 2004, Pecos Trading received its first payment of $125,000. Soon, just as Kumar had predicted, Hewlett-Packard unveiled a $400 million trial order to use AMD’s Opteron chip in some of its existing servers. It was a huge order. Hewlett-Packard was a behemoth, so any shift of orders, even a small one, by the Palo Alto–based company would buoy AMD’s business and dramatically reshape the semiconductor landscape.

But the honeymoon between Rajaratnam, the handler, and Kumar, the mole, was fading fast. Now that Kumar was a paid consultant, Rajaratnam wanted to speak to him more than a few times a year. And he was no longer content with hearing Kumar’s eggheaded musings on the big-picture trends in the technology industry. When they chatted, Rajaratnam came to the conversations armed with a battery of questions about AMD. How was the quarter going? What were their strategic plans? Did they have any thoughts of buying another company? He was particularly interested in what AMD was going to tell Wall Street about its future prospects.

In the investment world, a company’s statement about its future business is known as “guidance.” Often, even if a company reports blockbuster earnings, negative “guidance” can bury a stock because investors in stocks are making a bet on a company’s future performance. Rajaratnam told Kumar that “guidance” was a key fact and he wanted him to get it as often as possible.

At first, Kumar felt at sea. He was a consultant at heart, preoccupied with weighty subjects like a company’s strategic direction. He had little interest in picayune day-to-day matters like a company’s quarterly profits. He knew that “guidance”—the company’s forecast of its future, the nugget that Rajaratnam singled out as important—was difficult to come by because it was typically set by companies late in the earnings reporting process. But Kumar felt like he owed Rajaratnam something now that he was being paid and he had to try as hard as he could to get the information Rajaratnam wanted. Ironically, his old Doon School values kicked in. If he was being paid to do a job, he had to perform to the best of his ability.

When Rajaratnam first offered to compensate Kumar to keep a list of investment ideas and call him once a month, he told Kumar that he knew Kumar would keep his promise only if he was paid. “You will not remember to keep a list if you don’t get money from me,” Rajaratnam said. Rajaratnam knew that the only currency sealing the bond between him and Kumar was cold cash. Kumar always looked upon Rajaratnam with a certain disdain. He didn’t think Rajaratnam was his intellectual equal. Few people rose to that level. “I have all the brains and you have all the billions,” he liked to tell Rajaratnam, repeating a variation of a line he often used with his Wharton friends who had made it big on Wall Street.

If there was one thing the two men could agree on, it was that they couldn’t have been more different. Rajaratnam’s billions had made him loud and boorish. He rarely censored himself now—even with clients whose business he was seeking to win. One evening in 2005, he met with two former executives of the London hedge fund company Man Group PLC for cocktails at Opia, an upscale French restaurant in Manhattan that Rajaratnam was invested in. At some point, the conversation invariably digressed to women. Rajaratnam regaled his guests with his sexual joking. An attendee recalled him saying his idea of a good time was to get a few girls on his lap and spank them. He made a motion with his hand to show the executives exactly how.

Had he been there that evening, Kumar would have been appalled. In all the years Rajaratnam knew him, he never saw Kumar laugh and be really happy. He was so stiff that one former colleague of Kumar’s described him as trapped in the “prison of his personality.” He fancied himself a Renaissance man who could speak eloquently about art and drama. He was formal to the point of awkwardness. When his high school class at Doon was putting together a directory for their thirty-fifth reunion in 2009, Kumar supplied his secretary’s contact details and his address at McKinsey in New York. Almost everyone else in Kumar’s class provided their personal contact information.

Though there was little in the way of shared interests, Kumar was now inextricably tied to Rajaratnam’s largesse, so he scraped around for morsels of tradable information. From time to time, when he attended meetings with AMD’s senior executives, he would overhear snippets—“We are doing quite well” or “Intel is fighting us and hurting profits, so this quarter will look bad.” He slipped the tidbits to Rajaratnam.

At times, Rajaratnam tried to reciprocate. He treated the informants in his financial underworld much like a mafia capo controls his foot soldiers. He made sure that he always had something on them, and he liked to tie them as closely to him as he was to them. Sometimes lending a hand—helping them with their work—was a way to draw his informants deeper into his web. On two occasions, Rajaratnam FedExed packages of slides running fifty pages long detailing new product plans for AMD’s archrival, Intel, to Kumar. He didn’t tell him beforehand he was sending the slides.

When Kumar opened the package, he was terrified. There was an open-door policy in his office at McKinsey in Silicon Valley. What if one of his colleagues walked in and saw the confidential Intel documents lying around? What would he say if he was asked where they came from? Kumar quickly asked his secretary to shred the slides. He couldn’t admit to himself just how dirty his business was with Rajaratnam. He had to keep up the charade that he was only providing big-picture pontifications to Galleon, not inside information, but the lies he told himself were getting harder to believe every day.