The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (33 page)

As quietly chaotic as life at the Galleon offices was, no one was in more distress than Raj Rajaratnam. When he was arrested, Rajaratnam was caught off guard with no emergency
if I’m ever arrested
plans in place. He didn’t even have a criminal defense attorney to call. So he arranged for a call to be made to Dennis Friedman, cochair of Gibson, Dunn & Crutcher’s mergers and acquisitions practice. Rajaratnam had worked with Friedman, who had advised on a number of technology deals over the years.

Friedman enlisted Jim Walden, the cochair of the firm’s white-collar defense and investigations practice, to go to Twenty-Six Federal Plaza to represent Rajaratnam. By the time Walden arrived downtown around 9 a.m. Friday, a support group for Rajaratnam had already formed. His wife, Asha, naturally anxious, was there. So was his brother Rengan. Over the course of the day, others showed up: his lieutenant Rick Schutte; Galleon’s chief operating officer, George Lau; his sister; Geoffrey Canada, the chief executive of the Harlem Children’s Zone; and others. By the middle of the afternoon, when Rajaratnam was expected to be presented before a US magistrate judge and his bail terms set, there were more than twenty friends and family members milling around in Courtroom 5A, a small, low-ceilinged room on the fifth floor of the federal courthouse at 500 Pearl Street. US magistrate judge Douglas F. Eaton was presiding that afternoon.

Shortly after 3 p.m., amid loud sounds of metal clanging, a door in the wall of the courtroom opened. Two deputy US marshals emerged with Rajaratnam and Kumar in tow. Moments earlier, they had been released from the lockup cell just outside. They were held together in the minutes before their court appearance. It was the first time they’d seen each other since the week before when, returning from a wedding, they stopped off and relaxed at Rajaratnam’s luxury condo in South Beach.

After recovering from that morning’s fainting spell, Kumar looked devastated and was livid. It later emerged that he blamed Rajaratnam for getting him into the mess. Rajaratnam’s wife admitted as much in a text she sent to Kumar’s wife, Malvika, after the arrest. “I’m sorry,” Asha wrote. Rajaratnam was also furious. He was angry at the way he had been treated by the FBI agents. When he was first arrested and brought downtown, he was not allowed to use the bathroom.

Neither Rajaratnam nor Kumar was handcuffed, but as they sat at the same defense table, flanked by their respective lawyers, there stood a deputy US marshal behind each of them in the event either had an urge to flee.

Jon Streeter, the assistant US attorney who was handling the bail proceedings for Kumar, kicked off for the government and divulged that it had already reached a bail package for Kumar—a $5 million personal recognizance bond signed by Kumar, his wife, and his son, Aman. The bond would be secured by his home, valued at $2.5 million, upon which there was only a $500,000 mortgage remaining. His passport was seized by agents upon his arrest.

“It would be a violation of your bail conditions if you were to attempt to acquire a new passport of any kind, or indeed, to buy a bus ticket, or a train ticket, or a plane ticket that would take you outside the forty-eight states. Just attempting to do that would subject you to re-arrest for violating your bail conditions,” Judge Eaton warned Kumar before the defendant left the courtroom to do the paperwork.

Then Eaton turned to Rajaratnam.

“We have a grave concern in this case about flight risk,” said Joshua Klein, the assistant US attorney for Manhattan who was handling the Rajaratnam bail proceedings. He recommended that bail be denied. Not only did Rajaratnam have the incentive to flee, Klein argued, but he had the means to escape. “This is someone who is a Sri Lankan citizen, in addition to being a US citizen. He owns property in Sri Lanka. He holds a brokerage account in Sri Lanka. In effect, he’s got a life in Sri Lanka that’s waiting for him should he choose to flee.”

Jim Walden, Rajaratnam’s attorney, the first of several lawyers representing Rajaratnam, countered, painting a different picture of his client, a man who had been married to one woman all his life, who had given more than $20 million to charity over the last five years, and who cared for his two elderly parents, “aged eighty-one and seventy-seven, not in some far-away nursing home, but living under his roof…He is a respected member of this community. He is an intrinsic member of this community.” Walden said that Geoffrey Canada, the Harlem Children’s Zone head, looked him in the eye and said, “Mr. Walden, I don’t have much, but what I have I can tell you I would bet on Mr. Rajaratnam coming back to court any day of the week.”

In his arguments, Walden also took a swipe at the government case and resorted to the
they just don’t get it
defense common among lawyers fighting insider trading charges. Prosecutors “misunderstand words like use your Rolodex, and be radio silent, and we need an edge, because they don’t understand the business that Mr. Rajaratnam is legitimately employed in,” Walden told the court.

Walden had proposed a $5 million bail package that would be secured by Rajaratnam’s apartment. But Klein felt the bail was too low. Judge Eaton agreed with Klein. He set bail at $100 million and released Rajaratnam providing that he, his wife, and four others sign a personal recognizance bond, a promise that the defendant would return to court when required. He also limited Rajaratnam to traveling within a fifty-mile radius of New York City. Walden appealed to Judge Eaton to extend the mileage limit “a bit.”

“Tell me why,” said Judge Eaton.

“Mr. Rajaratnam’s daughter is at Penn” and he would very much like to visit her, Walden explained.

“So if you could at least extend to the Philadelphia area,” continued Walden.

“Yes, that’s about a hundred and five miles. Yeah,” Eaton agreed.

“We’re grateful, Your Honor. Thank you,” responded Walden.

Rajaratnam started his day looking forward to a trip to London to attend a movie premiere. He ended that same day trying to get permission to travel to Philadelphia.

The following week, Rajaratnam returned to the Galleon office a changed man. He hardly looked anyone in the eye, and instead of walking with the usual spring in his step, he trudged the corridors with shoulders slouched. Galleon employees were struck by his gait. Rajaratnam was not a trudger.

Speaking at the morning meeting, he was angry and defiant. He declared that he was innocent and his trades in stocks were rooted in the “mosaic” method, a style of investing that pieced together tiny bits of information to develop a larger investment thesis about a stock, and not on inside information. Oddly, he also spoke about the money he had given to Sri Lanka, prompting some to wonder if he believed the insider trading charges were linked to his financial support of the Tamil Rehabilitation Organization.

Back in the office, Rajaratnam also sought to take care of some important unfinished business. A week after his arrest, Rajaratnam brought a fax to Smith and said he hoped Smith could deal with it. The fax contained research notes from an analyst in Taiwan who generally transmitted his work, which at times contained confidential information, via fax rather than email so that there would be no electronic trail. Smith didn’t know if this fax had inside information, but he understood his boss’s instruction: he threw the fax in the trash.

Knowing that it would be impossible to resuscitate Galleon, Rajaratnam quickly reduced the firm’s liabilities. He laid off employees and shifted the skeleton staff to a shabby building that housed its back-office operations. There, in a small, windowless room, he worked on building his defense. He talked to colleagues about digging up the tiny bits of “mosaic” that he was convinced supported his investment decisions. Sometimes his own colleagues found his efforts absurd. He tried to pin his last-minute purchases of Goldman stock on September 23, 2008, to optimism over the Troubled Asset Relief Program. He claimed to friends that he paid a consultant in Washington, DC, who told him that day that TARP would fly. To the rest of the market, it was weeks later when TARP seemed like a viable proposition.

Meanwhile, with the bail hearings behind them, Jon Streeter, Joshua Klein, and the SEC lawyer who’d been working the investigation since 2006, Andrew Michaelson, poured their energies into building their legal cases. They got help from a committed new source, McKinsey.

Blindsided by the arrest of one of its most senior partners, McKinsey suspended Kumar indefinitely (he’d leave the company completely in one-and-a-half months) and immediately launched an internal investigation of Kumar’s guilt. In November, less than a month after the arrests, McKinsey’s lawyers at Cravath, Swaine & Moore went to the US attorney’s office at One St. Andrew’s Plaza to present their findings to Streeter, Klein, and Michaelson.

Though McKinsey was not charged in the complaint—only one of its senior employees was named—firms face the possibility of being criminally charged for the sins of their employees. The government considers several factors in weighing whether to charge a firm, including who at the company was aware of the wrongdoing and how pervasive it was. A decade before—in a case that McKinsey’s lawyers were no doubt familiar with, given McKinsey’s work for the same client, Enron—Arthur Andersen, Enron’s auditor, was convicted of shredding documents related to the fallen energy giant. Though the Supreme Court later overturned the conviction, the damage was already done. Arthur Andersen went out of business. Since the Arthur Andersen case, savvy firms had learned that it was best to get on the good side of law enforcement early on, even though in McKinsey’s case there was little risk of the firm being indicted. Invariably, whenever firms cooperated with the government, they wound up casting charged employees as “bad apples” among unsuspecting management. It was a tack McKinsey would take with prosecutors.

Armed with a thick binder of emails and other documents, the Cravath lawyers showed prosecutors what they had found. The revelations were startling. McKinsey’s lawyers discovered that Manju Das—the name Michaelson had spotted a couple of years earlier on Galleon’s investor list—was actually Kumar’s housekeeper. Despite Kumar’s assertions to Morgan Stanley that Das lived in India, McKinsey had evidence of the lie. McKinsey found Das’s immigration card indicating she had come to the United States as the Kumars’ housekeeper. Among the personal details listed on the card was that Das had buckteeth.

“You would think if she was getting $125,000 a quarter she would fix her buckteeth,” joked one of the Cravath lawyers. For the first time since they’d started focusing on Kumar nearly two years before, prosecutors had a possible money trail from Kumar to Rajaratnam through Kumar’s nanny. It was a great sledgehammer to hold over Kumar to flip him.

As careful as Kumar had been to conceal his scheme by sending emails from his Hotmail account, invariably some of the email responses landed in his McKinsey account. In other cases, Kumar had faxes instrumental in pulling off the subterfuge sent to McKinsey India.

With the McKinsey emails now in hand, prosecutors grew confident.

Anil Kumar, meanwhile, was growing increasingly nervous. When Kumar was first arrested he hired criminal defense attorney Charles Clayman to represent him. He actually had no need to worry about his legal bills. Rajaratnam offered him a joint defense, meaning that he would pick up Kumar’s legal tab. When a friend asked Kumar why he didn’t take up Rajaratnam on his offer, Kumar said cryptically, “You don’t know what I know.”

After getting advice from close friends, Kumar changed lawyers. He got himself the biggest gun in town, Robert Morvillo, the seventy-one-year-old dean of white-collar securities fraud defense. After he was released following his arrest, Rajaratnam had reached out to Morvillo to represent him, but at the time Morvillo had to decline. A partner at his firm, Larry Iason, had been retained already by Mark Kurland, the Bear Stearns executive turned hedge manager who was taken into custody that day. When Kurland got a new lawyer, Morvillo became available to represent Kumar.

Like a lot of criminal defense lawyers, Morvillo got his start at the US attorney’s office in Manhattan under the legendary Robert Morgenthau. Under Morgenthau, Morvillo rose to head the securities fraud unit and later became chief of the Criminal Division. In 1973, Morvillo quit the government for the more profitable pastures of private practice. At a time when representing white-collar criminals was sneered at by white-shoe firms, Morvillo set about making a respectable and pioneering practice out of defending politicians and businessmen with legal woes—most prominent among them AIG chief Maurice Greenberg and Martha Stewart.

When Streeter learned that Kumar had hired Morvillo, he was dead certain Kumar was going to fight the charge. In his mind, nobody hired Bob Morvillo to flip. In mid-November, Morvillo, new to the case, came to his old stomping ground, the Manhattan US attorney’s office, and met with Streeter, Klein, and Michaelson.

“I am playing catchup football here,” Morvillo told the prosecutors. “You need to tell me what this is about.”

Streeter and Klein laid out some of the evidence prosecutors had assembled—snippets of wiretaps and documents attesting to Manju Das being Kumar’s housekeeper and an investor in Galleon. As powerful as the evidence was, it was not an open-and-shut case. The most important deal involving Kumar that investigators captured on the wiretap recordings was the Arab investment in AMD’s semiconductor manufacturing facility. But the transaction was a difficult one on which to build a compelling case to present before a jury. Rajaratnam and Galleon had actually lost money playing the deal because AMD’s stock dived in the fall 2008 stock market sell-off.

Morvillo believed he could fight the wiretaps. Without someone to piece it all together, a jury would have a hard time deciphering the recordings. And the money-losing tip on AMD wasn’t exactly a brilliant example of insider trading. But the money trail—the offshore payments of cash and the evasion of taxes—would be harder to defend. The government would struggle to prove the payments to Kumar since all the individuals who could speak to the money trail were not likely to be available to testify. Many with knowledge of the arrangement lived in Switzerland. But there was still the huge risk that a jury would ask, If Kumar had nothing to hide, why was he getting paid in a Swiss account?