The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (34 page)

As he did with all clients, Morvillo and his second son, Greg, who was enlisted by his father to work on the case, explained to Kumar that if he wanted to cooperate and strike a deal with the government—promising to help with its case against Rajaratnam in the hope of future leniency—he would have to flip fully. Piecemeal measures of cooperation generally don’t work with the US government and more often than not backfire. In Kumar’s case, flipping fully would mean telling prosecutors about AMD’s $5.4 billion acquisition of ATI Technologies in 2006, which produced a nearly $23 million windfall for Galleon and triggered Kumar’s biggest payday ever from Rajaratnam.

Kumar was at a crossroads. He could be an asset to prosecutors: he had given Rajaratnam inside information two years before the court-ordered wiretap was placed on Rajaratnam’s cell phone. Prosecutors suspected Rajaratnam had made money on AMD’s acquisition of ATI using inside information, but they lacked the proof to charge him. Coming clean had a potential downside, though. He could face bigger financial penalties—he had not reported to the IRS the $1 million bonus he had received from Rajaratnam. But his disclosure could also save him from going to jail for a long time.

Kumar was not inclined to go through a protracted legal fight and face a trial. He was clever enough to know that if the case was litigated, he could be wiped out financially, and his reputation, already in shambles, would fray fast. He authorized Morvillo to open discussions about cooperating, and in early December 2009, Morvillo telephoned Klein to give him a short version of the story involving Manju Das.

Within a couple of weeks, Kumar himself was traipsing to the US attorney’s office to tell prosecutors about his half-life of crime. It was a huge breakthrough for the prosecution, early on in the case. All of a sudden, the government had a credible, articulate insider who could walk members of a jury through the wiretaps and tell them about a tip—AMD’s acquisition of ATI—on which Rajaratnam had made a boatload. In Kumar, they found an accomplice of Rajaratnam’s who could deconstruct the evidence and bring it to life in a courtroom.

The McKinsey consultant, they hoped, could also help them chase down promising leads. At the end of his first proffer session, the government lawyers, seeking to build a case against others caught on the wiretaps, asked Kumar about Rajat Gupta. “He would never be so stupid to do what I did,” said Kumar, shaking his head as he spoke.

Getting Kumar’s cooperation made it easier for the government to avoid calling Roomy Khan as a witness in any trial. Besides obfuscating about her Hilton source and getting a cell phone in the name of her gardener after she started assisting the government, prosecutors had recently learned that she and her husband, Sakhawat, had submitted a doctored work schedule in connection with a civil lawsuit that had been filed by their former nanny and housekeeper. If Rajaratnam took the government’s case to trial, Khan’s credibility could crumble amid a mountain of her own lies.

It took prosecutors only two in-person meetings with Kumar before they decided to sign him up as a cooperator. Unlike most cooperators, he told a cogent, linear story starting with Rajaratnam’s overture to him in 2003 straight up to his own embrace of crime with his trading in Starent a week before his arrest. He did not play down or overembellish his criminal activities. He was the first cooperator in a case that until then had been greeted with great skepticism. And soon he would be regarded as the best cooperator. He was as effective a witness for the government as he was an informant for Rajaratnam.

Being Goldman’s chief counsel came with its share of perks for Greg Palm. He had a spacious corner office with a panoramic view of New York Harbor and an eye to the Statue of Liberty. The job also had its tough moments. Earlier in the day on December 11, 2009, he had to break the news to Goldman’s CEO, Lloyd Blankfein, that one of the firm’s most revered board members—Rajat Gupta—was potentially going to be drawn into an ongoing insider trading investigation involving the Galleon hedge fund. After meeting with Blankfein, Palm briefed Goldman’s president, Gary Cohn. Then he and Blankfein informed John Bryan, Goldman’s outside presiding director and the former CEO of Sara Lee. Bryan was also the person on Goldman’s board who knew Gupta the best.

Bryan had been a mentor to Gupta, helping him break into the upper echelons of the global business elite. It was Bryan who got Gupta on the board of trustees of the University of Chicago in 1995 and it was Bryan who introduced Gupta to the World Economic Forum in Davos, Switzerland. Bryan had been the US chairman of Davos three times during the 1990s and thought Gupta might benefit from the global exposure.

Palm told Bryan that the US attorney’s office had evidence that might draw Gupta into the Galleon hedge fund scandal. Worse than that, Palm’s source had reported that the inside information that Gupta had trafficked in came from the Goldman board meeting in which the board had discussed whether or not to approve Warren Buffett’s $5 billion investment in the firm. Bryan did not give the allegation a moment of serious thought. The Gupta he knew was a quiet individual, someone who was deeply steeped in the practice of confidentiality. Under no circumstance could Bryan imagine Gupta leaking information to Rajaratnam.

“It is unfortunate that they are going to try and link Rajat to this,” he told Palm. As big a fish as Rajaratnam was, Gupta was an even bigger fish, the kind of global business celebrity prosecutors would be all too eager to catch in their net.

“Call Rajat and tell him,” Bryan urged Palm. He suspected it was all a big misunderstanding that would get sorted out quickly. Palm was not so sure. Palm’s gut told him that there was something there. His source and Goldman’s outside lawyer Steve Peikin had pointed to a call being made from Gupta’s McKinsey phone to Rajaratnam’s line straight after a Goldman board meeting.

Palm caught up with Gupta as he was at the airport. Palm started off his call with Gupta on December 11, 2009, with two unusual disclosures—tip-offs that the conversation they were about to have would be uncomfortable and could potentially make Goldman and Gupta adversaries. Palm told Gupta that he had arranged to have a colleague on the line to listen in on their conversation. Typically, Palm liked to have one-on-one conversations, but he had decided that since the topic was very sensitive it was important that there be an extra set of ears and an extra pair of hands to record exactly what was said and to monitor Gupta’s reaction.

If Gupta had still not registered that this call would be different from any other he had had with a Goldman official, Palm said something else that should have put him on notice.

“We are representing the corporation, and not you,” Palm told him.

Palm wanted to make sure that there was no doubt in Gupta’s mind that this was not a privileged conversation that would be protected by lawyer-client confidentiality. If the matter evolved into something much bigger, as Palm was expecting, the contents of his conversation with Gupta could be handed over to law enforcement officers investigating the matter.

“What can you tell me about Raj Rajaratnam, and have you ever provided him with information about what we do?” Palm asked, sticking to a script that he had worked out before the call.

Gupta was clearly taken aback by the question, not entirely sure what Palm was driving at.

“What are you talking about?” he asked.

Palm explained to Gupta that Goldman had come to learn that Gupta may have been in contact with Rajaratnam and provided him with information about the firm.

Gupta did not fly off the handle or turn evasive. He comported himself in exactly the way Palm and others at Goldman had grown accustomed to expect. Very calmly and cerebrally, he denied that he had ever provided Rajaratnam with confidential information about Goldman. Then he went on to explain why the charge was preposterous. He told Palm and the other Goldman lawyer who was listening in on the conversation that he and Rajaratnam at one time had been business partners on a venture called New Silk Route. But the two had had a falling-out and were no longer close. Their parting had stemmed from a soured investment that Gupta had entered into many years back.

Gupta said he had poured $10 million into an investment vehicle with Rajaratnam, who had invested more money in the entity. Rajaratnam, Gupta said he later learned, had taken his money out. Meanwhile, Gupta’s $10 million investment had gone to zero. Gupta said he had hired accountants and lawyers and was planning to sue Rajaratnam but then the Galleon chief was arrested.

“Why would I help out someone with whom I had a dispute?” he asked rhetorically. Gupta said he took the issue seriously and was happy to discuss it more fully with Goldman but he had a flight to catch.

After the two hung up, Palm reviewed the call with his colleague. Gupta, they both agreed, sounded credible. During the fifteen-minute conversation, he had never wavered from his story that he had been swindled out of $10 million by Rajaratnam. Over the course of the day, Palm had more conversations with Gupta. In one, he recommended Gupta get his own lawyer. When Gupta asked if Palm had any suggestions, he offered a couple of names. Andy Levander, who turned out to be conflicted because he was representing another defendant in the Galleon case, and Gary Naftalis, a New York defense lawyer with an impressive résumé and a long history of representing clients in criminal cases.

Two weeks after the exchanges between Palm and Gupta, Sanjay Wadhwa was in his office on the sixteenth floor of Three World Financial Center tying up loose ends after a manic year. He still had a stack of calls to return, some of which had been received before the holidays. Near the top of the pile was a message to call Steve Peikin, Goldman Sachs’s outside lawyer at Sullivan & Cromwell. The law firm had been busy lately, helping Goldman defend itself against a formal notice from the SEC that it was preparing to file civil fraud charges against the firm. The charges related to the bank’s $1 billion Abacus deal that helped hedge fund manager John Paulson make a killing betting against mortgage securities.

On Christmas Day, Peikin finally managed to get away for a vacation in Patagonia with his family. Although he desperately needed a break, it wasn’t working out that way. One day, as he stood on a glacier holding an ice axe, getting ready to climb a mountain, his BlackBerry rang. It was Palm, the Goldman lawyer. (After the episode, Peikin was always skeptical when anyone claimed to be unreachable because of poor cell phone reception.)

Unlike the Goldman lawyer Palm, Wadhwa and Friedman reached Peikin at a more convenient spot: his Patagonia hotel. Peikin said he needed to come in and talk to the SEC because his client, Goldman, had learned that there were wiretapped intercepts of conversations between Rajaratnam and his lieutenants suggesting that Rajaratnam had received information about Buffett’s $5 billion investment in Goldman from a director. The news was a huge revelation to Wadhwa and Friedman. Unlike prosecutors at the Manhattan US attorney’s office, the SEC lawyers were still operating in the dark without access to the wiretaps. Peikin said he had discussed the matter with the criminal authorities and told Wadhwa and Friedman that Goldman planned to conduct an inquiry of its own. But there was only so much Goldman could do. It did not have access to phone records or the subpoena power to get them. And it did not have a complete window into Galleon’s trading in Goldman stock to ascertain if developments at its board meetings were followed up by trading by Galleon.

On January 4, 2010, Gary Naftalis, who by now had been retained by Gupta to represent him, headed to a meeting at Goldman Sachs with his partner Alan Friedman. The two were there to meet with Palm and Norm Feit, Goldman’s head of litigation, as well as Goldman’s outside lawyers from Sullivan & Cromwell, namely, Steve Peikin and Gandolfo V. “Vince” DiBlasi, a well-respected criminal defense attorney. At the meeting Naftalis insisted that Gupta was innocent and never gave Rajaratnam any information of any kind. It was ridiculous to think that Gupta would have tipped off Rajaratnam. Gupta believed the Galleon hedge fund manager had stolen $10 million from him. His story was consistent. Later on government investigators would learn of a conversation Goldman director Claes Dahlbäck had with Gupta not long after Rajaratnam was taken into custody. Dahlbäck was reading an article in a newspaper about Rajaratnam and looked up and asked Gupta, “Do you know him?”

“He’s a bad man,” Gupta replied.

After Naftalis laid out the reasons for his client’s innocence, Palm, as an aside, obliquely raised an issue that was at the forefront of his mind. From the outset, Palm believed it was vital that if Gupta chose to stand for reelection to the board in the spring, the investment bank disclose to its shareholders that Gupta was being investigated in connection with the Galleon case.

“Our proxy is coming out in a few months,” Palm told Naftalis. “Hopefully we can figure this stuff out [before then].” From time to time over the next several weeks, Palm continued to broach the issue about the proxy in conversations with Naftalis.

In February, Gupta himself sat down with Peikin, DiBlasi, and Adam Fee, another Sullivan & Cromwell lawyer, for an informal interview in the presence of his lawyers, Naftalis, Friedman, and Robin Wilcox. Gupta told the lawyers that he and Rajaratnam spoke all the time about investments, but he was steadfast in his assertion that he did not tip Rajaratnam to any news about Goldman. He fell back on the same argument he’d made to Palm on the very first phone call. Why would he tip off Rajaratnam when he believed the Galleon hedge fund manager had “stolen” money from him? Before the meeting adjourned, Peikin asked Gupta for the name of the lawyer he had contacted in connection with suing Rajaratnam. Peikin never received it.

By March 2010, there was still no resolution to the government’s investigation into Gupta, and instead of dying down, it appeared to be heating up. The uncomfortable job of telling Gupta that Goldman was serious that the investigation be disclosed in the firm’s proxy if Gupta stood for reelection fell to John Bryan, Goldman’s lead director and Gupta’s patron. If there was anyone who could persuade Gupta that it was not in his best interests to stand for reelection, it was Bryan.

On March 3, the day before Goldman’s board meetings were to start, Bryan arranged to meet with Gupta at his hotel, the Four Seasons in New York. Normally if the two men were in the same city they tried to have dinner together. But Gupta had a previous engagement that evening, so he and Bryan met at 5 p.m. instead.

Bryan told Gupta of Goldman’s intentions to disclose the investigation—if he stood for reelection. Gupta was upset. He was vehement about his innocence, and Goldman’s proposed action only served to undermine it.

Gupta turned to Bryan and asked, “What would you do? My reputation is the most important thing I have.”

“I wouldn’t for a minute decide to stay on a board that is going to qualify my election,” Bryan told Gupta. Gupta, in Bryan’s view, could not afford to have the investigation come to light. Even if the claims were untrue, a whiff of alleged wrongdoing could smear Gupta’s reputation and damage him irreparably. If Bryan was in Gupta’s position, he would gracefully choose to bow out.

At first, Gupta was bothered by the suggestion. He had done nothing wrong, he told Bryan, and by choosing not to stand for reelection, he felt he would be acknowledging that he had crossed a line. For two hours, the two men talked. Gupta was adamant that he was the victim of Rajaratnam’s chicanery. He was passionate about his innocence, and Bryan found him persuasive. Bryan believed nothing would come of the investigation, but Goldman’s top lawyer, Palm, insisted it be disclosed. The fact remained that Gupta had to choose the lesser of two negatives. Then Bryan and Gupta worked out what they would say when the corporate governance and nominating committee of the Goldman board met in two days.

Shortly before 8 a.m. on Friday, March 5, Bryan, Gupta, and seven other members of the corporate governance committee filed into the investment bank’s light-wood-paneled boardroom on the thirtieth floor of its 85 Broad Street headquarters building. Blankfein, as part of Goldman’s management team, was not a member of the corporate governance committee, which comprises independent directors, but that morning Blankfein was present. Bryan, the panel’s chairman, started by announcing that Gupta was not going to stand for reelection to the board and planned to retire, as he had thought of doing a year earlier when he was seeking to take up the KKR position. Gupta followed with a few words delivering the same message. “As some of you may have known, I thought of resigning my directorship before the financial crisis,” he said. “The company wanted me to stay on as I did, but now is a good time for me to go.” The news took the outside directors by surprise. Blankfein commended him for his four years of service and in an effort not to embarrass him in front of his peers offered no public reason for his unexpected resignation. After the meeting broke up, however, he and Palm privately briefed the remaining Goldman board members about the circumstances behind Gupta’s move.

Several hours later, Blankfein’s consigliere, John F. W. Rogers, was at the Delta shuttle, preparing to return home to Washington, DC (as he did every Friday), when he ran into Gupta. Rogers had worked closely with Gupta when he was joining the board in 2006 and enjoyed a good relationship with him. When Gupta saw Rogers, he assured him that the allegations were entirely untrue.

“I am the victim here,” he told Rogers and then apologized for any inconvenience it caused Goldman. Gupta appeared frustrated. He didn’t know what to do about the growing investigation, which was starting to spill over into his public life as a respected corporate statesman. Rogers was not the only one to notice the toll the brewing scandal was taking on Gupta.