In the Galleon case, both the prosecutor, Preet Bharara, and the defendant, Raj Rajaratnam, were immigrants from the subcontinent.
In the fall of 2003, Anil Kumar, a senior executive with the consulting firm McKinsey, and Raj Rajaratnam, the head of a multibillion-dollar hedge fund called Galleon, attended a charity event in Manhattan. They had known each other since the early eighties, when, as recent immigrants, they were classmates at the Wharton School of Business, in Philadelphia. Their friendship, intermittent over the years, was based on self-interest rather than on intimacy. Kumar, born in Chennai, formerly Madras, India, was fastidious and morose, travelling at least thirty thousand miles a month for work, and seldom socializing. Rajaratnam, a Tamil from Colombo, Sri Lanka, was fleshy and dark-skinned, with a charming gap-toothed smile and a sports fan’s appetite for competition and conquest. Kumar was not among the group whom Rajaratnam took on his private plane to the Super Bowl every year for a weekend of partying. “I’m a consultant at heart,” Kumar liked to say. “I’m a rogue,” Rajaratnam once said. Kumar had the more precise diction and was better educated, but Rajaratnam was one of the world’s new billionaires and therefore a luminary among businessmen from the subcontinent. In an earlier generation of immigrant financiers, Kumar would have been the German Jew, Rajaratnam the Russian. Kumar might have felt some disdain for Rajaratnam, but Rajaratnam’s fortune made him irresistible.
McKinsey executives, in an attempt to cash in on the explosive growth of hedge funds, had recently sent Rajaratnam several e-mails proposing that Galleon hire the company to provide expert advice. Rajaratnam had ignored them. Leaving the charity event, Kumar expressed annoyance about the unanswered e-mails, he later recalled. Rajaratnam pulled him aside. “I’d much rather have you as a consultant than McKinsey,” he explained. “And I am willing to pay you half a million dollars a year.” Kumar replied that McKinsey forbade outside consulting, but Rajaratnam persisted, appealing to Kumar’s pride: “You work very, very hard, you travel a lot, you are underpaid. People have made fortunes while you were away in India, and you deserve more.” He noted that Kumar, who provided strategic advice to Silicon Valley technology companies—one of Rajaratnam’s investing specialties—possessed knowledge that was worth a lot of money. Kumar had only to keep a list of “ideas,” and to call him once a month or so. “I know you will do that if you get money from me,” Rajaratnam said. “And I know you will not remember to keep a list if you don’t get money from me.”
Kumar agreed to be paid a quarterly sum of a hundred and twenty thousand dollars. To evade the scrutiny of McKinsey and of the government, he followed Rajaratnam’s instructions and set up a Swiss bank account for a shell company in Geneva called Pecos Trading, which transferred the quarterly payments, through offshore banks, to a Galleon account under the name Manju Das. This was Kumar’s housekeeper in Saratoga, California, who also cared for his ill son. “Lots of people set up offshore companies,” Rajaratnam said, trying to alleviate Kumar’s squeamishness.
Pulling off the subterfuge required a false mailing address, signatures obtained under false pretenses, backdated investment documents, and phony doctor’s bills. Yet Kumar initially believed that he was going to pass information to Rajaratnam legally. He soon realized that Rajaratnam wanted tips that he could convert into profitable stock trades. Once the flow of money created an obligation, Rajaratnam began asking for financial details about companies that Kumar advised. Soon, Kumar was breaking both McKinsey’s confidentiality rules and the securities laws that forbid such exchanges.
His offerings were never good enough for Rajaratnam, who kept pressing for more. As an incentive, Rajaratnam offered to pay Kumar a percentage of the profits from trades made on his tips. Kumar recoiled: the paper trail documenting such trades would put him at risk of exposure, and receiving Galleon trading profits would bring him too close to Rajaratnam’s illegal business. He didn’t want to know what Rajaratnam did with his secrets. As long as he was paid as a consultant, Kumar felt sufficiently sheltered from the truth. So he secured a different arrangement: at the end of each year, Rajaratnam would give him whatever he thought his information had been worth, a common practice at McKinsey. In 2006, it was worth a lot.
Early that year, the microprocessor-maker Advanced Micro Devices decided to acquire a graphics-chip company called A.T.I. Hardly anybody on Wall Street anticipated the deal except Rajaratnam, who knew exactly what was going to happen because Kumar was A.M.D.’s consultant at McKinsey, guiding its strategic decisions. His tips allowed Rajaratnam to time a trade perfectly, and Galleon—betting long on A.T.I.—cleared twenty-three million dollars. After the deal was announced, in July, 2006, Rajaratnam called Kumar at home from Galleon’s offices and said, “Thank you. We’re all cheering you. You’re a hero.” At the end of the year, he called Kumar again: “I’ve had a fabulous year. I’m handing out huge bonuses.” Kumar’s was a million dollars. “Tell me where to send it,” Rajaratnam said.
In the language of hedge funds, Galleon’s strategy was to “arbitrage reality” with the consensus on the Street—to find information about a given company that diverged from Wall Street’s view, allowing Galleon to cash in when the company’s stock price rose or fell. At Galleon, this was known as “getting an edge.” The analyst or portfolio manager with the best read on a company was called the “axe” on that stock. The surest way to become the axe was to have a source who passed on information about a company’s earnings, upcoming deals, and other confidential matters. The ultimate edge was insider trading—the acquisition of nonpublic information about a company—and Rajaratnam was the king axe. At Galleon’s daily 8:30 A.M. meeting, he always had more information than his employees and didn’t hesitate to let them know it. By the mid-aughts, hedge funds accounted for nearly half of all stock trades, and there was ferocious competition for wealthy investors and the business of investment banks. Lightly regulated and nearly opaque, hedge funds played a central role in the creation of credit-default swaps and other financial exotica that led to the economic collapse of 2008.
Rajaratnam’s goal was to be running a ten-billion-dollar fund by the end of 2009. In seducing Kumar, he made a valuable addition to the network that he had built up over the years. Some of Rajaratnam’s informants were his subordinates at Galleon, such as Adam Smith, a graduate of Harvard and of Harvard Business School, whom Rajaratnam hired in 2002. Clean-cut and calculating, Smith was the sort of ambitious financier who worked hard, did his homework, and cheated, too. In 2004, in the class notes for his ten-year college reunion, he wrote about working at Galleon: “It’s the first job I’ve truly loved, and I find the challenge of the stock market exhilarating.” By then, Smith had become a reliable conduit of illegal tips to Rajaratnam. Some of the biggest ones came from Kamal Ahmed, at Morgan Stanley in Menlo Park, California, where Smith had worked. To throw off potential investigators, Smith used code names and adopted one of his boss’s favorite techniques, creating false e-mail trails. (The merger of two companies whose names began with “I” became “the two eyes.”) Rajaratnam soon promoted Smith from analyst to portfolio manager.
At the heart of Rajaratnam’s informant network was a group consisting largely of Indian-born businessmen. They included Krish Panu, a board member of the outsourcing company PeopleSupport; Kris Chellam, an executive at Xilinx, a Silicon Valley semiconductor company; and Rajiv Goel, a manager at Intel, who was, in a comically assertive and bumbling fashion, one of Rajaratnam’s close friends. The most illustrious was Rajat Gupta, the former worldwide head of McKinsey; the onetime chair of the Global Fund to Fight AIDS, Tuberculosis, and Malaria; and a board member of several prominent business schools and companies, including Goldman Sachs. All these men had investments that were tied to Galleon, and therefore benefitted from the trades that they helped Rajaratnam make. Rajaratnam tried to keep each source unaware of the others so that their trails of information led only to him.
Rajaratnam’s sources revered him, except Kumar, who viewed him with condescension, and Gupta, who was on friendly terms with heads of state and didn’t need Rajaratnam’s approval—only his money. In August, 2008, when Gupta was considering a position with the private-equity firm Kohlberg Kravis Roberts, Rajaratnam and Kumar exchanged gibes on the phone about Gupta’s greed. Rajaratnam said, “Here he sees an opportunity to make a hundred million dollars over the next five years, or ten years, without doing a lot of work.” Two weeks earlier, Rajaratnam had disparaged Kumar to Gupta, saying that he was trying to be “a mini-Rajat” without “bringing anything new to the party.” He added, “I’m giving him a million dollars a year for doing literally nothing.” Worse, Kumar had never thanked him. “I’ve never seen him laugh and be really happy, you know? He is constantly . . . not scheming—it’s not the right word—but constantly trying to figure out what other people’s angles are.”
One of Rajaratnam’s most enthusiastic informants was Danielle Chiesi, a former teen beauty queen from upstate New York. She worked at a hedge fund called New Castle, which was owned by Bear Stearns. A bottle blonde in her early forties, Chiesi lived alone in midtown and slept with men who gave her stock tips. She said that when she profited from such tips she felt “mentally fabulous.” By 2008, Chiesi had entered a relationship with Hector Ruiz, the chief executive of A.M.D. (Ruiz has denied that it was intimate.) Rajaratnam, hearing of Chiesi’s highly placed source, told Kumar that he had established a new inroad at the company, noting, “Your value to me is a bit diminished.”
In October, 2008, Kieran Taylor, an executive with Akamai, an Internet-services company, told Chiesi over the phone, “Danielle, I have a major present for you.”
“Drugs?” she asked. “I hope not.”
“Information, information.”
“I love you for that. When am I going to see you?”
After another phone conversation with Taylor, Chiesi told Rajaratnam, “I played him like a finely tuned piano.” She was eager to impress Rajaratnam, flirting with him as if by reflex, and passing him secrets without expecting much in return. Rajaratnam kept his distance, and declined to tell her when her information confirmed tips from other sources. After receiving one tip, he warned, “We got to keep this radio silence.”
“That is my pleasure,” Chiesi said.
“Not even to your little boyfriends, you know?”
“Believe me, I don’t have any friends.”
Rajaratnam’s view of human nature was not so different from that of Willie Stark, in “All the King’s Men”: “Man is conceived in sin and born in corruption and he passeth from the stink of the didie to the stench of the shroud.” If there are examples of people whom Rajaratnam unsuccessfully tried to corrupt, they have not surfaced in the voluminous public record on Galleon. Once, his brash younger brother, Rengan, put out a feeler for inside information to a friend from Stanford’s business school who had become Kumar’s protégé at McKinsey. Rengan gleefully relayed to his brother that the young associate was “a little dirty.” When Rajaratnam shared this assessment with Kumar, Kumar asked him to lay off the associate, not wanting his protégé to be sucked into Galleon’s corruption. Later, Rajaratnam laughed with his brother over the episode. “I just wanted to show how your friend is—”
“Scumbag!” Rengan said. “Everybody is a scumbag!”
In October, 2009, Rajaratnam and Kumar flew to Trinidad with their wives to attend a wedding. On their way home, they stopped in Miami to spend two days at Rajaratnam’s beachfront condominium. On the evening of October 6th, the men went out in Rajaratnam’s boat, then returned to shore and took a swim. They were lounging on deck chairs, reading and chatting, when Rajaratnam’s phone rang. Excusing himself, he walked down the beach to talk. Five minutes later, he came back, excited. “That was a Cisco executive,” he said. “Cisco is buying Starent”—an information-technology company. Kumar had never heard of Starent, and he wondered which Cisco executive was calling Rajaratnam.
Rajaratnam then gave Kumar a warning: a man named Ali Far, who had worked at Galleon, was rumored to be wearing a wire. “I have to be really careful,” Rajaratnam said. “I can’t believe he’s doing that and betraying me.” He instructed Kumar to start using unregistered prepaid cell phones for their calls. When they returned to the condominium, Kumar opened his laptop, went into his Charles Schwab brokerage account, and bought three hundred shares of Starent, worth about eight thousand dollars. The deal was announced a week later. It was Rajaratnam’s last known inside trade.
Early on the morning of October 16th, F.B.I. agents converged on Rajaratnam’s town house, on Sutton Place, on Manhattan’s East Side, where he lived with his wife, Asha, his two younger children, and his parents. The agents arrested him on charges of conspiracy and securities fraud, and released him on a hundred-million-dollar bond. Within hours, Adam Smith and Rengan Rajaratnam had removed evidence from the Galleon offices. At six that same morning, Danielle Chiesi was roused from bed in her apartment on East Fifty-ninth Street by the knocks of four agents wearing bulletproof vests. The agents spent an hour showing Chiesi a file of evidence before concluding that she wouldn’t coöperate. She refused to place a monitored call to someone on the West Coast—probably Hector Ruiz.
At the same hour, agents appeared at Anil Kumar’s Manhattan apartment, at the Time Warner Center. When they put him in handcuffs, Kumar’s long struggle to separate himself from what he had become ended. He fainted, hitting his head against a wall. He had to be treated at a local hospital before he could be brought in for booking.
Two of Chiesi’s co-conspirators and Rajaratnam’s friend Rajiv Goel were also arrested. Later that day, Asha Rajaratnam sent a text message to Kumar’s wife, Malvika. It said, “I’m sorry.”
Three years earlier, in October, 2006, a thirty-one-year-old lawyer from Weston, Connecticut, named Andrew Michaelson started working at the New York office of the Securities and Exchange Commission, at 3 World Financial Center, just west of Ground Zero. Michaelson, a graduate of Harvard Law School, had wanted to work in government in order to help fight corporate fraud and abuse. When the S.E.C. lifted a hiring freeze, he jumped at the chance.
In the seventies and eighties, the S.E.C. had been a powerful regulator, led by ambitious attorneys; it handled important cases like the insider trading of Ivan Boesky and Michael Milken. But by the mid-aughts the commission was languishing. Its chairman, a former California congressman named Christopher Cox, exuded blithe faith that the financial markets would regulate themselves. The S.E.C. ignored warnings when Wall Street inflated the credit bubble with dubious “synthetic” securities known as collateralized debt obligations. After the Enron scandal, in 2001, the S.E.C. began attracting promising lawyers like Michaelson, but it was still a largely impotent institution. Wall Street regarded it with disdain, and when companies under investigation were called to give testimony their executives may have felt little reluctance to lie, which carried far less risk than admitting to a crime under oath in a civil action.
Michaelson’s first assignment was a month-old case involving a small hedge fund called Sedna Capital, which was run by Rengan Rajaratnam. A tip from a source in the banking world had alerted the S.E.C. to a pattern of “cherry picking” at Sedna—reserving the biggest profits for a fund in which all the investors were family members and friends. In its first month of operation, the favored fund executed ten trades, all winners, and doubled its capital. Some of the trades seemed to involve inside information, including on A.M.D. The S.E.C. soon shifted its focus to Galleon, the much bigger firm of Raj Rajaratnam, where most of the trades were duplicated.
In March, 2007, the S.E.C. briefed the F.B.I. and the United States Attorney’s Office for the Southern District of New York, which opened a criminal case. That same month, an anonymous letter arrived at the S.E.C.’s offices, postmarked Queens, March 13, 2007. “It is hedge funds like Galleon Group that create wealth for their shareholders and themselves at the expense of innocent investors,” the letter began. “Insider trading word in this fund should be changed to insider partnership and prostitution. . . . Prostitution is rampant for executives visiting Galleon. You will find that the Super Bowl parties for the executives, paid for by Galleon Group, include prostitutes and other forms of illegal entertainment. In return, the executives provide Galleon the unfair edge that the fund leverages so well.” The letter was signed “Seeking integrity in business.” The writer sounded knowledgeable about Galleon and the industry, but it was impossible to track him down.
In 2006, Galleon had registered with the government as a “regulated investment adviser.” In order to obtain this title, which conveys to potential clients the impression that a business is soundly run, Galleon had to agree to preserve its electronic correspondence. Rajaratnam, aware of this requirement, instructed his subordinates to move key dealings off the Internet and onto the phone. Nevertheless, a few electronic records gave hints of widespread insider trading at Galleon. In February, 2007, an S.E.C. examination team began going through the company’s electronic correspondence, and after several months of meticulous work they found enough suspicious fragments to issue Rajaratnam a subpoena. On June 7, 2007, Rajaratnam arrived at 3 World Financial Center for an all-day session of giving testimony. That morning, a member of the exam team told Michaelson’s supervisor—a New Delhi-born former corporate tax lawyer named Sanjay Wadhwa—that there was “definitely some interesting chatter” in a batch of cryptic I.M.s from a person using the handle roomy81. Wadhwa and Michaelson hastily formulated a way to ask Rajaratnam about roomy81 without raising his suspicion.
The session took place in Testimony Room 416, which had scuffed yellow walls, a stained beige carpet, and windows overlooking the World Financial Center’s Winter Garden. The session lasted seven hours, and Rajaratnam, relaxed and fluent, spent a good part of it telling lies. After Rajaratnam’s lawyer, Jerry Isenberg, requested a midafternoon break, Michaelson looked up from his papers on the conference table, as if he had just remembered something.
“A couple quick questions before break,” he said. “Are you familiar with a roomy81 instant-message address?”
“Yes.”
“Who is that?”
“She worked at Galleon and then she left Galleon to start her own fund. I think she primarily manages her own money.”
“What is her name?”
“Roomy Khan,” Rajaratnam said, spelling out the surname.
“Do you know where she works now?”
“From home.”
Michaelson asked, “Did you ever talk with Roomy about A.M.D.?”
“She may have given me information, but I can’t recall.”
“We can take a break.”
Five days after Rajaratnam’s deposition, the investigators turned up an I.M. exchange, dated January 9, 2006, between rajatgalleon and roomy81:
PLCM was the ticker symbol for Polycom, a manufacturer of voice and video equipment. JNPR was Juniper, a company that made switching routers. But what jumped off the screen was “till I [get] guidance . . . want to make sure guidance OK.” The term “guidance” refers to the direction of a company’s quarterly earnings, up or down. Roomy Khan seemed to have an inside track on Polycom’s financial information. Without this I.M., the case would probably have died.
In the months after Rajaratnam testified, the S.E.C. investigators stayed away from Galleon, wanting to make him think that they had moved on. In fact, Michaelson went back and scoured all of Rajaratnam’s I.M. correspondence from 2006—thousands of pages. The S.E.C. issued subpoenas to phone companies, and when the records finally came in, a new member of the team, Jason Friedman, combed through the call histories of Rajaratnam and Khan. By comparing I.M.s, phone calls, and trading records, the investigators determined that Rajaratnam and Khan, in the days after their January 9, 2006, I.M. exchange, had called each other frequently and begun trading heavily in Polycom stock. At the end of January, 2006, when Polycom announced record quarterly earnings, Khan made three hundred thousand dollars, and Galleon cleared at least twice that. One of Khan’s phone contacts was a Polycom vice-president named Sunil Bhalla, who lived near Khan in Silicon Valley and, like Khan, was Punjabi. The investigators guessed that he was Khan’s source.
In July, 2007, another S.E.C. lawyer noticed that there had just been several large purchases of stock options in Hilton Hotels immediately preceding an announcement of the chain’s takeover by the Blackstone Group. One of the prescient traders was Rajaratnam; another was Khan. The lawyer went to Michaelson and asked, “Isn’t this the woman you were talking about?”
The S.E.C. gave Khan’s name to B. J. Kang, the F.B.I. special agent assigned to the case. On July 10th, a background check revealed that Khan had a criminal history, and that it involved Rajaratnam.
Khan was married to a wealthy Indian entrepreneur and lived in Atherton, California, in a mansion with a tennis court. In 1998, she had been caught on a security camera faxing to Galleon confidential documents from the offices of Intel, where she worked at the time. Khan pleaded guilty and received three years’ probation, but the case against Rajaratnam was too hard to make—the volume and the complexity of hedge-fund trading makes pinpointing the source of just one trade almost impossible. The Rajaratnam file was sealed in 2002.
The investigators believed that the evidence on the Polycom trade was also too circumstantial to bring a criminal charge against Rajaratnam. To break the case open, they needed a source in Rajaratnam’s inner circle to flip and give direct evidence of providing Rajaratnam inside information. Anil Kumar, the McKinsey consultant, and Rajiv Goel, the Intel executive, came up frequently in Rajaratnam’s phone records. But there was no sign that Kumar was making trades on inside information. Then investigators discovered that Galleon had been given the password to Goel’s Schwab account, which it was using to make profitable trades on his behalf. Goel’s account was like a road map to insider trading—but Goel was considered too close a friend of Rajaratnam’s to be approached without irrefutable evidence. The F.B.I. would have only one chance to flip someone; if it failed, Rajaratnam would know that he was the target of a criminal investigation and take precautionary measures. The best shot was Roomy Khan, who had already pleaded guilty once, and who had said a little too much in an I.M. before Rajaratnam could nudge her onto the phone.
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