The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (9 page)

“He was exceptionally able and a very nice person,” says Salmon today. Salmon told Gupta that D. Ronald Daniel, the head of McKinsey’s New York office, was an old classmate of his. The two had been in the same section at HBS. Salmon would call him and suggest McKinsey reconsider its decision. It wasn’t a step Salmon ordinarily took. In fact, Salmon says some forty years later that he doesn’t recall ever making an overture like that before or since. “It rarely happened, if at all,” he says.

When Salmon got a hold of Daniel, he didn’t have to say very much. Salmon was a rising star at Harvard Business School; he was chairman of the marketing department, and in a year he would be elevated to the powerful position of associate dean of faculty affairs. Daniel knew that Salmon wouldn’t be calling on just anyone’s behalf. For Salmon to get in touch with him, he must have believed that the student McKinsey had just rejected for a job was extraordinary. “This is a bright student,” Salmon told Daniel. “I think you should take a second look.” Salmon spoke with characteristic understatement, but his message was clear. Shortly after the call, Gupta received a coveted “ask back.” He was invited to McKinsey’s New York office for a full day of interviews and then he was offered a job.

In the fall of 1983, a heavyset young man flashing a big white smile strode into Chase Manhattan Plaza to report for his first day of work. With his MBA ticket recently punched from the University of Pennsylvania’s Wharton School of business, Raj Rajaratnam arrived on Wall Street with impeccable timing. He was selected from more than two thousand applicants to be one of fifty analysts in Chase Manhattan Bank’s coveted credit program. After finishing it, many analysts left to take up enviable jobs at investment banks like Goldman Sachs and Morgan Stanley. The only Sri Lankan in his class, Rajaratnam would play the expected role of reserved math whiz. He started at a salary of $34,000.

After limping through the seventies, Wall Street got its swagger back thanks to President Ronald Reagan’s personal and corporate tax cuts and his push to deregulate the American economy. In 1981 the markets began a long rally that except for one interruption, a terrifying one-day crash in October 1987, would rage almost unabated for nearly two decades. The boom and its unprecedented demand for people—brokers to sell stocks, bankers to help raise capital, traders to make money on all the dizzying market moves—transformed Wall Street, changing its complexion from a bastion of all-white men to a colorful mosaic of women, South Asians, and, to a lesser extent, African-Americans. The new arrivals added color and helped break down the barriers that had persisted for most of Wall Street’s history, segregating Jewish banks like Goldman Sachs and Lehman Brothers from Wasp banks like Morgan Stanley and First Boston. The South Asians also formed tribes of their own.

For decades, long-standing client relationships had driven business to Wall Street securities firms. Investment bankers were men who had the talent and the social connections required to nurture and keep Wall Street’s best clients. But the opening of the capital markets in the early eighties and the advent of technology that powered the way to the growth of complex mathematically driven trading strategies changed Wall Street. What securities firms needed most were financial wizards who actually had the brains to dream up newfangled products—derivatives and junk bonds—and sell them to an ever-increasing number of clients, savings and loans, pension funds, and high-net-worth individuals. It needed analysts who could understand the sophisticated products and technologies of the corporations they analyzed—and not simply swallow the spoon-fed and curdled explanations that companies served them. With their highly quantitative backgrounds, the new emigrants from South Asia were perfect for the job.

Men like Indian native Vikram Pandit, the former CEO of Citigroup, and Sri Lankan Raj Rajaratnam heeded the call. Others followed. Anshu Jain, today the co-chief of Deutsche Bank AG, joined Kidder, Peabody & Co. in 1985 as a research analyst after earning an MBA at the University of Massachusetts at Amherst. Arshad Zakaria, brother of journalist Fareed, started at Merrill Lynch & Co. in 1987, straight out of Harvard Business School, and rose to become the firm’s powerful head of global markets and investment banking. Though the new recruits from South Asia were appreciated for their mastery of math and finance, there was little sign at the time that they would ever be respected for anything more.

“Wall Street was tough to get into for us,” Rajaratnam would say decades later. “Not to be crude but there’s a Jewish mafia, and a Wasp mafia, and an Irish mafia up in Boston…They hire their own; they socialize among their own.” Rajaratnam understood how the system worked. If he couldn’t get into anyone else’s club, he’d build his own.

At Chase, Rajaratnam discovered that there were two hot industry groups that analysts were vying to join: electronics and petroleum. After completing the credit program, Rajaratnam was tapped for the electronics group, where he earned the nickname “HP Raj.” Unlike his peers, he didn’t need a Hewlett-Packard calculator to figure out mathematical computations; he could do complex calculations in his head.

Except for his acumen in math, Rajaratnam kept a low profile at Chase. He struck superiors as humble and deferential. One time, Rajaratnam was on a trip with a couple of colleagues visiting a client. The group was divided into two cars. Rajaratnam drove one, while a seasoned and more senior colleague drove another. The men from Chase were late for the meeting, but the gray-haired gentleman would not accelerate. Rajaratnam’s colleagues gesticulated to him with hand signals to overtake them. Despite their frantic motioning, Rajaratnam lagged behind, refusing to pass. Quizzed about it later, Rajaratnam said he was not comfortable overtaking the older gentleman. In his mind, he said, it showed a lack of respect. His colleagues found his gesture charming; they didn’t focus on the fact that among Asians the elderly were revered. All Rajaratnam was doing was behaving as he had been brought up to do.

Even though Rajaratnam thrived at Chase, colleagues sensed that his passions lay elsewhere. “Give me a Quotron,” he often quipped, referring to the stock quotation machines once ubiquitous on Wall Street trading floors. He liked that the markets were unforgiving and that they humbled you. But most of all he loved the game and the thrill of winning. It was an energy that he infused into every part of his life. Whenever he played tennis, he would blast every ball. Years later, when he started his own company, he described his drive to compete: “After a while, money is not the motivation. I want to win every time. Taking calculated risks gets my adrenaline pumping.” Soon he would be an adrenaline junkie.

In 1985, Rajaratnam quit Chase to join Needham & Co., a second-tier, scrappy investment bank specializing in technology and health-care stock trading. Founded by George Needham, a former investment banker at CS First Boston, the upstart firm challenged Wall Street by filling its ranks with outsiders. “I hire one-legged men, and I beat the crap out of them,” Needham liked to say. Employees were required to take red-eye flights on business trips and stay over Saturday nights if it saved the firm money. Needham himself was known to sift through the stack of FedEx slips every day to see which employees sent FedEx packages rather than using the cheaper and preferred Airborne Express. And he thought nothing about putting down his employees, calling his banking group an “island of misfit toys” and his analysts “hundred-thousand-dollar doorstops.”

Amid Needham’s hardscrabble culture, Rajaratnam flourished. He had vision and fortitude. When US semiconductor companies were struggling, battered by a flood of cheap Japanese computer chips, most research analysts gave up on the sector, thinking it a dead end. Rajaratnam decided to build a career out of it.

Boyish and dashing, he traveled to Silicon Valley and charmed an up-and-coming generation of technology executives with his folksy ways. He told them his first name meant “king” in Hindi and together with his last name, it made him the “king of kings.” He mesmerized them, regaling them with larger-than-life tales. “He would tell about his experience with the Tamil Tigers,” says Gerald Fleming, who covered chip equipment makers at Needham. Fleming remembers a trade group conference in Monterey, California, during which Rajaratnam captivated dinner companions by telling a tale of how “he went into training with the [Tigers] and one day a bullet whizzed past his ear, and that’s when he decided to go and study in England.” No one knew what to make of the story. (A spokesman for Rajaratnam told
Forbes
in October 2010 that the insurgent group Fleming refers to was not in existence when Rajaratnam left Sri Lanka.)

As Rajaratnam unleashed his natural charisma at social gatherings, in the trenches he was even more impressive. A cut above the typical analyst in the technology sector, then a Wall Street backwater, Rajaratnam displayed a prodigious knowledge of the industry and an all-consuming desire to learn about the companies operating at the cutting edge. “When you are presenting a highly technical story, it is not too often you get an analyst who really understands it,” says Bob Anderson, one of the cofounders of KLA Instruments. “He clearly had the ability to understand what was going on.”

Fortuitously for him, Rajaratnam arrived on Wall Street just as Silicon Valley was starting to see an influx of South Asians too. Rajaratnam forged multiple ties with Silicon Valley’s small but growing community of Indian expatriates. One of his earliest contacts was Kris Chellam, a technology industry veteran who worked at Intel. A professional relationship between the two flowered into a friendship, particularly after Chellam joined Atmel Corp. in September 1991. Whenever Chellam came to New York City, Rajaratnam would rent a limousine and the two would head off to Atlantic City.

“Raj sort of had a South Asian mafia,” says Fleming, the Needham analyst. There were people he could call and “get, for a number of companies, [their] earnings to a penny.” Fleming recalls once sitting in Rajaratnam’s office when he logged a call to Advanced Micro Devices. After some time, his secretary came in and said that someone with an Indian-sounding name had returned the call. Rajaratnam took the call, walked onto the trading floor, and announced the profit figure. “And he was right,” says Fleming, astonished at the time.

As his clout at Needham grew, he shed his quiet persona and took on the bravado of a Wall Street wheeler-dealer. If a banker missed a piece of business and the treasurer of the company was a woman, Rajaratnam would inquire: “Why didn’t you sleep with her?” At Needham, he was “pretty much the same guy you see now. He was bossy, he was loud, and not a particularly nice guy but he was a rainmaker at the firm,” says Lisa Lettieri, who worked as a sales assistant at Needham in the mid-1980s. “He had to be on a beautiful woman’s arm all the time. He wanted lots of [money]. It was money and women.”

While playing the bon vivant at work, Rajaratnam was seriously dating a woman at the time. Asha Pabla was a quiet Sikh Punjabi woman who worked in the textile industry. She was as fair as he was dark. Even though he publicly denied it, his intimates knew that he had always had a chip on his shoulder about the color of his skin. Years later, when he catapulted to hedge fund stardom, he would often marvel at how he—a man with a black, ugly face—had gone from being an outsider, hovering on the fringes of Wall Street, to being a consummate insider. (Rajaratnam, through a spokesman, denied to
Forbes
that he ever mocked his own appearance.)

Rajaratnam told friends he fell in love with Asha at first sight, but it took her awhile before she was convinced that she wanted to settle down with him. Her parents were dead set against the union because they were from different communities, but Rajaratnam vowed that he would earn $1 million quickly and then ask her to marry him. In 1988, with Raj still far from the million-dollar mark, the two were married. Soon Rajaratnam was earning the big bucks.

Sometimes he did it by cutting corners. In the early 1990s, Novellus Systems learned that Rajaratnam, who covered their company at Needham, was courting its archrival, Applied Materials, for an offering of securities. Novellus was founded by a group of refugees from Applied Materials and the two companies were fierce competitors. When the Novellus executives found out that Rajaratnam won the mandate, they suspected he might have clinched the deal by discussing with Applied Materials some cutting-edge technology that Novellus had developed and previewed before him. Whether he had done so is not known. They were furious with Rajaratnam; after the incident, Novellus cut off Rajaratnam and Needham for a time from future investment banking business.

In 1991, George Needham, impressed with the deals Rajaratnam was winning, promoted him to president. As a boss, Rajaratnam drove employees—and himself—hard. One time, when an analyst returned home to take a nap after a red-eye flight, Rajaratnam chewed him out. “You don’t show people that you are tired or you are beat,” he told the analyst. Rajaratnam understood the importance of appearances. In later years, when he started his own hedge fund, he hired a fleet of analysts, openly calling them “window dressing.” Having them around drove home to investors that he was serious about research even though he made most of his trading decisions without their input.

At Needham, pushing boundaries—both personal and professional—became a point of pride for Rajaratnam. One time, after Rajaratnam bragged to his colleagues that he could handle any kind of spicy sauce, a colleague decided to put his taste buds to a test. As a crowd looked on, Rajaratnam spread a bottle of habañero sauce called Armageddon onto two chicken wings. Within moments of tucking in, tears were streaming from his eyes and he was coughing. He rushed to the bathroom and went home early that day, a rare move on his part. Later, he chuckled about the episode.

By the beginning of 1994, Rajaratnam owned 17 percent of the small boutique bank—the second-largest equity owner after Needham himself, who owned 26 percent of the firm’s equity. He was earning $1 million a year. Job offers from big investment banks were pouring in—a fact he reminded George Needham of all the time. To cement his power, he began building his own empire of loyalists—many of them from South Asia, including his old Wharton friend Krishen Sud. The hires were so blatant that at one point George Needham confronted him. Rajaratnam rattled off the names of the employees on Needham’s trading desk. Most were Jewish.

Needham took the point…
If you have your tribe, I’ll have mine
. On Fridays, Sud, Rajaratnam, and Ari Arjavalingam, another colleague, would head off to Bombay Palace, one of the oldest Indian restaurants in New York, for a long lunch. George Needham would needle the trio when they returned from their meal, remarking that they came back with extra vim and vigor because of the spicy food they ate.

For years, Rajaratnam was hankering to manage money, and in 1992, in a bid to capture more business from Silicon Valley technology companies, he started a small hedge fund at Needham. Many of the companies he served were going public, enriching their executives along the way. Rajaratnam figured the newly minted entrepreneurs needed a place to invest their new wealth. What better venue than a hedge fund managed by their investment banker? He quickly raised $250 million—a sizable sum of money at the time—from some of his best banking clients.