The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (36 page)

On October 7, the hearing ended.

As the SEC lawyers and federal prosecutors who’d been working the case for years nervously awaited Judge Holwell’s ruling, the Manhattan US attorney took to trumpeting the virtues of wiretaps. Standing before some two hundred lawyers at the New York City Bar Association on October 20, Preet Bharara spoke for the government: “It does not take a rocket scientist to understand that it would be helpful to have the actual recording of the communication. Recordings are the absolute best evidence and so we will not shrink from using them.”

In a veiled reference to the Rajaratnam case, Bharara said, “On October 4th, a well-known criminal defense lawyer was arguing to a judge in connection with one of our more well-known cases that a wiretap should be suppressed because the Government could not meet the burden of showing the necessity of the tap in an insider trading case.” Some in the audience were struck by Bharara’s oblique reference to the Rajaratnam case. It was unclear yet if the wiretaps would be allowed. Only a month later, on November 24, did Judge Holwell, after excoriating the government for its omissions, rule that the wiretaps were admissible at trial.

With the recordings in, Jon Streeter and his colleague Reed Brodsky began focusing on the evidence they would present in the US attorney’s criminal case against Rajaratnam and his cohorts. A trial date had been set for March 8, 2011. Over the holidays and into the New Year, he and Brodsky sat in their drab offices, both with headphones on, listening to roughly four hundred calls that had been culled from more than a thousand. Their colleague Michaelson was intimately familiar with them because he had built the investigative case, but Streeter and Brodsky, who were to lead the government at trial, were tuning into the recordings for the first time. They were blown away by the Goldman calls. The most incriminating one was on October 24, 2008, just a day after Blankfein told Goldman’s board that the bank was going to lose money in the fourth quarter.

“I heard yesterday from somebody who’s on the board of Goldman Sachs, that they are gonna lose $2 per share,” Rajaratnam told David Lau, a lieutenant in Singapore. The call was compelling to the prosecutors: it’s rare for someone to lie and implicate himself in a crime.

When the Manhattan US attorney’s office first indicted Rajaratnam on December 15, 2009, it formally charged the Galleon chief with trading on inside information in Polycom, Hilton Hotels, and Akamai Technologies, among other stocks. Galleon’s profitable trading in the shares of Goldman was not part of the original indictment. Though it was on prosecutors’ radar screens, evidence on other stocks was more compelling at the time. Not anymore.

Besides the powerful tapes, there was also compelling circumstantial evidence, much of it ginned up by the SEC, showing a pattern of Gupta hanging up from board of directors calls and telephoning Rajaratnam immediately. Convinced that Rajaratnam’s trading in Goldman was central to the criminal case it would put on in the spring, Streeter decided it was essential for prosecutors to join the Blankfein interview orchestrated through Steve Peikin at the SEC in a few days.

When Streeter called Peikin at home, he got straight to the point with his old chief, who was now Goldman’s lawyer at Sullivan & Cromwell.

“Don’t freak out, there are going to be three AUSAs [assistant US attorneys] and one FBI agent” at the Blankfein interview. Streeter assured Peikin that they were not attending because “they were star-fuckers.” Blankfein was simply the best witness to testify about what he told Gupta about developments at the investment bank.

After he hung up with Peikin, Streeter telephoned Wadhwa and told him that prosecutors were planning to join the Blankfein interview the next morning.

“You had better tell Peikin,” Wadhwa said. When Streeter said he already had, Wadhwa was livid. The Indian-born lawyer was not given to open flashes of temper, but Streeter could tell over the phone that he was steaming. The SEC had painstakingly built up the circumstantial case against Gupta, and now Streeter and the prosecutors from the Southern District had the nerve to gate-crash the biggest interview in the case without even asking him before doing so?

Neither Streeter nor Wadhwa mentioned it, but both knew that Bharara’s press offensive had strained relations between attorneys at the SEC and the US attorney’s office, making the SEC a little more sensitive than usual to something that would not have been out-of-the-ordinary behavior in normal circumstances. Prosecutors from the US attorney’s office are always sitting in on interviews conducted by the SEC and vice versa.

“You need to do a little bit more than pay lip service to our role here,” Wadhwa told Streeter.

The slight was unintentional, Streeter said. “I just go back a long way with Peikin,” he told Wadhwa. He could tell Wadhwa was angry, though, so he didn’t make any excuses. He just apologized again and again.

On January 7, 2011, Lloyd Blankfein, accompanied by a phalanx of lawyers, arrived at the SEC. After passing through security, he headed to a testimony room on the fourth floor, where he was met by more lawyers: Wadhwa and Friedman among others from the SEC; and Streeter, Brodsky, and Michaelson from the US attorney’s office. B. J. Kang, the FBI agent on the case, was the designated note-taker. After walking Blankfein through the preliminaries, the SEC’s Friedman got to the crux of the matter. What did Blankfein tell Goldman’s board on the October 23 call?

“I would have told the board as of now Goldman is down 2 bucks a share,” Blankfein said. Friedman asked the question again, in a different way, and Blankfein’s answer was the same. Every way Friedman asked the question, Blankfein provided the same answer.

Friedman and Wadhwa felt they were on to something: Blankfein’s words—“Goldman is down two bucks a share”—mimicked Rajaratnam’s language on the wiretap.

On January 21, two weeks after Blankfein’s interview, the US attorney’s office unveiled a new indictment against Rajaratnam and cited seven additional stocks that were part of Rajaratnam’s alleged conspiracy to commit securities fraud. One of the stocks was Goldman Sachs.

As prosecutors geared up for the Rajaratnam trial, Wadhwa—out of the office for a few days for the birth of his first son, Kiran—spent much of the time on his cell phone. Standing outside the hospital room where his wife, Judy, had just given birth, he discussed whether to pursue a civil case against Gupta with Canellos, the SEC’s New York regional chief, and staff attorney Friedman. On January 28, the SEC sent Gupta’s attorney Naftalis a so-called Wells notice, informing him of the SEC’s imminent plans to charge Gupta. In most cases, where there is a parallel criminal investigation, the SEC does not “Wells” a potential defendant for fear of flight risk and tipping the person to theories civil and criminal authorities might use in a future case. But when George Canellos learned that his counterpart at the US attorney’s office, Bharara, planned to give Gupta’s lawyers an audience if prosecutors later pursued a criminal case, he decided that the SEC would give Gupta a chance to respond to the charges against him.

Upon receiving the Wells notice, Naftalis sought a meeting with Canellos. Naftalis knew Canellos when they were both on the same side, working as defense lawyers. Repeating the same arguments that he had made with Canellos’s underlings, Naftalis questioned the motivation for his client Gupta to pass inside information to Rajaratnam.

“He has lived a life of probity,” said Naftalis. “Why would he do this in the seventh decade of his life?” The phone calls the SEC lawyers were focused on had nothing to do with Gupta passing inside information to Rajaratnam. Rather, they had everything to do with Gupta tracking down his $10 million investment in a vehicle Rajaratnam managed.

At the full-day meeting attended by Wadhwa and the staff attorneys on the Gupta case, Canellos listened and then told Naftalis that based on the evidence, “the question of whether we are charging Rajat Gupta is not a close call…

“Gary, if we don’t take a shot at this case, when would we ever take a shot?”

Naftalis, as it happened, was not the only one opposed to the SEC’s move to file a civil action against Gupta. Prosecutors preparing to try the Rajaratnam case at the US attorney’s office in Manhattan were livid too. Charging Gupta on the eve of the Rajaratnam trial, they feared, would make prosecutors vulnerable to accusations that they were tainting the jury pool. A civil action against Gupta would mean Rajaratnam was back in the news in a negative way again. It could anger Judge Holwell. The SEC maneuver would be seen as a government dirty trick, an attempt to smear Rajaratnam. But the SEC, smarting from missing out on the public relations bonanza from the Rajaratnam case and intent on fulfilling its role as corporate watchdog, would not back down.

“We’re ready to go,” asserted Wadhwa. In a concession to criminal authorities and to avoid compromising the Rajaratnam trial, the SEC agreed to file an administrative action against Gupta, which carries less onerous discovery requirements than a civil proceeding.

In late February, Gupta was in Bangalore with his New Silk Route partner Parag Saxena watching England and India face off in the World Cup cricket tournament when he learned that the SEC was planning to file charges against him. He couldn’t believe it was actually coming to pass. His lawyers had just filed their response to the SEC’s Wells notice—at around 10:45 p.m. on Friday, February 25. The agency would barely have had time to read their arguments. As thrilling as the cricket match was—the game ended in a dramatic tie—Gupta’s mind was elsewhere.

On Tuesday, March 1, 2011, three months after Gupta had taken the Fifth Amendment at SEC headquarters and a week before the start of the Rajaratnam trial, the SEC filed its civil action against Rajat Gupta, alleging that he passed insider tips about Goldman (and Procter & Gamble) to the Galleon chief.

In New York, when Sanjay Wadhwa’s father heard of the SEC move, he telephoned his son.

“Rajat Gupta. Really, Rajat Gupta?” he asked. “I hope you guys know what you are doing.” Arjun Wadhwa was Sanjay’s biggest cheerleader and was deeply protective of his son. Gupta was so prominent, a far bigger name in his mind than the other South Asians that the SEC had charged by now, that he wanted to make sure there was no risk that his son and the team he led was wrong in bringing charges.

Hours before the SEC’s action, Gupta sent an email to business associates, friends, and partners.

“I am stunned and shocked by the proposed action,” he wrote. “Let me assure you. I have done nothing wrong. The SEC’s allegations are totally baseless. I am informed by my lawyers that the case is based on speculation and unreliable third hand hearsay.”

Then he added: “Just to be clear: there are no tapes or any other direct evidence of my tipping Mr. Rajaratnam.”

Within two weeks, that last line would come to haunt him.

“Greed and corruption—that’s what this case is all about.”

On the afternoon of Wednesday, March 9, 2011, as the sun peeked into a mahogany-paneled courtroom in Lower Manhattan, a boyish-looking brown-haired prosecutor stood before a jury of nine women and three men and with a few plainly spoken words kicked off the biggest insider trading case in more than a generation. Jonathan Streeter was still in college when Rudolph Giuliani, then the US attorney for the Southern District of New York, launched the first big criminal crackdown on Wall Street with a spree of high-profile arrests that dethroned some of the biggest kingmakers of the era. Their names had receded from the headlines by the time Streeter arrived at the US attorney’s office at One St. Andrew’s Plaza, but in the annals of financial history the glittering epitaphs of men like Ivan Boesky would be indelibly checkered by the financial crimes they committed. They were crimes that Streeter, the youngest son of a Cleveland lawyer, knew intimately well. Over the years as an assistant US attorney in Manhattan he had prosecuted a number of securities fraud cases, and now he was leading the government in the granddaddy of them all, the
United States of America v. Raj Rajaratnam
.

For weeks, there was growing anticipation about a trial, but few expected a live slugfest would actually take place. In legal circles,
US v. Raj Rajaratnam
was considered a non-triable case, a somewhat misleading phrase to a layperson. Far from suggesting a glaring weakness in the government’s brief, it pointed to the opposite. The prevailing view among seasoned lawyers was that the evidence prosecutors assembled was so overwhelming that Rajaratnam would likely settle even if folding so late in the day would buy him little in the way of a reduced sentence. By the time the trial started, of the forty-seven coconspirators the government had charged, twenty-three had pleaded guilty, foremost among them Anil Kumar and Danielle Chiesi.

Kumar, the former McKinsey star and Rajaratnam’s acquaintance from Wharton, was the first to cave. On the afternoon of Thursday, January 7, 2010, he pleaded guilty to conspiracy to commit securities fraud and securities fraud—crimes that carry a maximum prison sentence of twenty-five years. Though Kumar was seeing a psychiatrist and taking prescription drugs for anxiety and depression, he told then Manhattan federal judge Denny Chin that his mind was clear and he was prepared to waive indictment. After Kumar admitted to receiving $1.7 million from Rajaratnam in exchange for divulging confidential information and detailed his crimes—the winning scoop about AMD’s acquisition of ATI—Judge Chin asked him:

“You had an understanding or agreement with Mr. Rajaratnam, is that true?”

“Yes,” replied Kumar.

“To commit securities fraud?” asked the judge.

“Yes,” answered Kumar.

“And you understand that he would be taking this confidential information that you were providing him with, and that he would trade in securities using that information, correct?” the judge continued.

“Yes, sir,” replied Kumar.

“And you knew that he was intending to defraud people with whom he was making those trades,” asked Judge Chin.

“Yes, Your Honor,” he confirmed.

Over the years, Kumar had tried to delude himself into believing there was nothing wrong with the scheme he’d cooked up with Rajaratnam. But now he could not run away from it: the crime was staring him straight in the face.

A year after Kumar’s plea and weeks before the Rajaratnam case was to be heard in open court, Chiesi, strapped for cash to fight the government, pleaded guilty too, stripping the case of its most colorful defendant. Even in the thick of the fight, Chiesi, a former teen beauty queen, could not resist playing court coquette. In November 2010, after a hearing on whether her Miranda rights were violated when she was arrested, Andrew Michaelson was waiting for the elevator when the doors opened. Inside were Chiesi, her lawyer Alan Kaufman, and her mother. Wanting to sidestep any awkwardness, the boyish and earnest-looking Michaelson waited. He planned to take the next elevator down when Chiesi and her mother sweetly beckoned: “Come in, we don’t bite.” Inside the elevator, Chiesi’s mother needled him: “Stop doing such a good job,” she said. “You are putting my daughter in jail.”

Michaelson was not the only one to have a brush with the Chiesis. In the Upper West Side building where Streeter lived, it seemed like everyone knew before the trial that Streeter was the one putting away the sister of Alex Chiesi, a resident. Everyone but Streeter. One night during the trial, as Streeter was getting into the elevator, a drunken neighbor declared, “You’re the guy who is prosecuting Alex Chiesi’s sister.” Streeter was stumped until the woman explained that Alex Chiesi was Danielle’s brother. Streeter and Alex Chiesi had at one time literally lived next to each other, and Alex had even invited Streeter to his family’s lakeside house in Connecticut, the same one that IBM executive Robert Moffat had been brought to by his sister. Streeter declined the invitation.

On the first day of
United States of America v. Raj Rajaratnam
, Streeter kicked off by describing how the defendant “knew tomorrow’s business news today and traded on it.” Yards from where Streeter stood sat Rajaratnam, flanked by six lawyers, at the center of the defense table. He was literally and figuratively a shadow of his former self. During his heyday as a hedge fund giant, Rajaratnam could be generously described as portly. Overweight, with a self-satisfied toothy grin, the Galleon Group manager seemed to epitomize all the excesses and arrogance of the hedge fund world in his very body. Now, almost a year and a half after his arrest, he looked astonishingly lean and cowed.

Rajaratnam stared impassively as Streeter recited a litany of charges against him.

It was the most controversial case the forty-three-year-old assistant US attorney had tried in his ten-year career as a public prosecutor. All his previous convictions—Anthony Cuti, the former Duane Reade executive; and Marc Dreier—seemed to be warm-up bouts on an impressive record as he approached the showdown with Rajaratnam’s lawyers. A battery of nearly a dozen attorneys and paralegals outmanned the government in number and experience.

Leading the defense brigade was John Dowd, a folksy litigator approaching seventy, from Washington, DC. A former government prosecutor who made his name on mob-related cases, Dowd was known for having something of a Jekyll-and-Hyde personality. At times he seemed like everybody’s favorite uncle, the kind of man who enjoyed regaling those around him with war stories—even the ones that left him scarred, like his unsuccessful bid in 1974 to convict Meyer Lansky, the Jewish organized crime bigwig. He liked to needle up-and-coming prosecutors, often teasing them about the black binders they used to display their court exhibits. The dark covers stood in stark contrast to the defense team’s white binders signifying purity and goodness, Dowd liked to point out, much to Streeter’s amusement.

More often than not, though, the balding and portly Dowd came across as cantankerous and curmudgeonly. Midway through the trial, Dowd would fire off an expletive-filled email to
Wall Street Journal
reporter Chad Bray, who wrote an article suggesting that the defense had been blindsided by the cross-examination of one of its witnesses. “This is the worst piece of whoring journalism I have read in a long time. How long are you going to suck Preet’s teat? Preet is scared shitless he is going to lose this case so he feeds his whores at the WSJ.”

As Streeter took the jury through the government’s case, sitting in the back of the courtroom on a wooden bench usually reserved for the government and listening as intently as the defendant himself was Streeter’s boss, and the man Dowd reserved his choicest language for: Preetinder Singh Bharara. Basking in the afterglow of the Rajaratnam charges and the victory on the wiretaps, Bharara would soon come to be dubbed “the New Sheriff of Wall Street,” even though the case playing out in front of him had been built well before he arrived at the Manhattan US attorney’s office—a fact that his closest friends would rib him about from time to time. Ultimately, the public relations blitz would catapult Bharara onto the pages of mainstream magazines like the
New Yorker
and
Time
, which in 2012 would name him one of its “100 Most Influential People.”

Ever since he started as a lawyer, Preet Bharara’s dream job was to be the US attorney for the Southern District of New York. Over the years, as law school classmates pursued profitable careers in private practice, he made conscious choices to put himself in a position to get the job of running the second biggest US attorney’s office outside Washington, DC. (The US attorney’s office in Washington serves as both the local and federal prosecutor for the nation’s capital.) In 2005, Bharara was picked from relative obscurity to be chief counsel to New York senator Charles Schumer. He stayed under the radar until 2006, when he led the Senate Judiciary Committee’s investigation into whether the firings of eight US attorneys during the Bush administration were politically motivated. No charges were brought after the two-year investigation, and Bharara was credited for his evenhanded approach to the politically charged probe.

The Senate confirmed him for the Manhattan US attorney job in August 2009 after he was handpicked by President Obama. Even Bharara’s daughter, who was too young to know precisely what being a US attorney means, sensed its importance. When she visited his new office, she noticed that it was “humongo.”

At his swearing-in reception, on October 13, Bharara spoke of the varying influences on his approach to the law. “My mother is the kindest and most forgiving person I know…If she were a federal prosecutor, she would likely favor the deferred prosecution,” in which a company or individual is granted amnesty in exchange for following certain steps. “I can see from your expressions that many of you are now wondering whether I take after my mother. Well, the answer is: sometimes. My father, on the other hand, is more of an upward departure kind of guy” (by which Bharara meant that if his father were a judge, he would exceed sentencing guidelines and dole out harsh punishments).

Almost a year into his new job, as he was juggling a full docket of high-profile cases, including some like the Rajaratnam case that had thrust him into the crosshairs of controversy, Bharara confessed to loftier aspirations. “There are only two jobs I could see wanting to have.” Out one night with an old friend whom he has known for more than twenty years, Bharara said that he was “constitutionally barred from” one of the jobs. He was alluding to the fact that to be president of the United States a person has to be a natural-born citizen. Bharara was born in India and came to live in America when his parents immigrated to the United States some forty years ago. The other job that piqued his interest, he confided, was being one of the justices in the hallowed chambers of the Supreme Court of the United States. (Bharara, through a spokesperson, said he has no recollection of this.)

Before Bharara could even consider higher office, he needed a career-defining case, and in
US v. Rajaratnam
, he had a very good shot at one. The forty-four-year-old Bharara, who can come across as a Boy Scout, takes insider trading seriously. Some legal scholars contend that it is a victimless crime, often involving minuscule amounts of money. In the Galleon case, for instance, the government alleged that Rajaratnam pocketed as much as $75 million from his illegal trades. Compared to Rajaratnam’s net worth of $1.3 billion at one time, the sum pales. What galled Bharara, whose father is a doctor and whose mother is a homemaker, was that the Rajaratnam case boiled down to people with lots of money trying to game the system. “Disturbingly, many of the people who are going to such lengths to obtain inside information for a trading advantage are already among the most advantaged, privileged and wealthy insiders in modern finance,” he told a packed crowd at the New York City Bar Association in October 2010. “But for them material nonpublic information is akin to a performance-enhancing drug.”

The South Asians who have been prosecuted by Bharara’s office are by and large first-generation immigrants, born and bred outside the United States. Bharara, whose first name, Preetinder, is a Sikh name meaning “the one who loves God,” is of a different generation. He was born in 1968 in Ferozepur, India, an ancient city not far from the Indo-Pakistani border, but came to the United States when he was a toddler. Mirroring a journey taken by hundreds of thousands of Indian immigrants, his father, Jagdish, a Sikh, and his mother, Desh, a Hindu, migrated to Eatontown, New Jersey, in 1970. When the Bhararas arrived in Eatontown, it had only about two dozen South Asian families.

Jagdish Bharara, a pediatrician with a medical degree from Amritsar Medical College in Punjab, quickly poured his energies into retraining as a doctor so he could practice medicine in the United States. He started a practice in Asbury Park, New Jersey, home to the blue-collar poet Bruce Springsteen, a lifelong idol of Preet’s. On the side, the family and others owned an Indian restaurant for a short time, where Preet washed dishes and waited on tables. Weekend evenings were spent socializing with the small group of Indians in Eatontown or with Jagdish Bharara’s classmates from Amritsar and their families. Like the Bhararas, they had come to America to stake out a new future.

Bharara’s father was typical of the early wave of Indian immigrants. He pushed his children to excel. The Bharara boys were not expected to come home with anything less than a perfect score on tests. “My dad was more of a tiger dad—if there is such a thing,” Bharara told NDTV, an Indian television station. Though money was tight, the Bhararas splurged on one luxury: a private school education at the Ranney School in Tinton Falls, New Jersey, for their oldest son, Preet, and his younger brother, Vinit, born not long after their arrival in America. Vinit went on to cofound an online retailer—its businesses include Diapers.com—which he and his partner would sell for $540 million to Amazon.

Preet shone at Ranney, making his mark in everything from ballroom dancing to art history. One time, for a difficult art history test in eighth grade, Bharara simply handed in an outline. He got an A-plus. “Mrs. Tomlinson held it up in class and said, ‘Look what Preetie did,’” says Christine Gasiorowski, a classmate. “If it was anyone else, I would be really mad.” But Bharara was so unassuming and low-key about his achievements that he was well liked despite having a reputation as something of a teacher’s pet. Whenever he did well, he shrugged it off, telling friends, “Oh, I was just lucky.” His modesty was endearing. More important, it sheathed a great ambition.