How part of Wall Street works--- a piecee of very interesting st
Galleon chief's web of friends proved crucial to Rajaratnam's scheme
Peter Lattman and Azam Ahmed, The New York Times, Updated: May 12, 2011 09:27 IST
New York: As Raj Rajaratnam and Anil Kumar, a McKinsey consultant, walked out of a fund-raiser in Manhattan, Mr. Rajaratnam pulled his old friend aside and made him an offer: would Mr. Kumar provide him with insights for $500,000 a year?
"You have such good knowledge that is worth a lot of money to me," he said, according to Mr. Kumar.
Mr. Kumar faced an agonizing choice. His employer barred its executives from outside consulting, but an extra half-million dollars a year -- and the chance to do business with a powerful hedge fund manager -- was tantalizing.
Weeks later, Mr. Kumar accepted.
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That deal, struck on an autumn evening in 2003, was one of the many connections made by Mr. Rajaratnam over the years that gave him access to the inner secrets of dozens of publicly traded companies. His vast Rolodex of tipsters included former business school classmates, fellow hedge fund traders and technology industry executives whose origins, like his, were from the Indian subcontinent.
In many respects, Mr. Rajaratnam was no different from the thousands of Wall Street stock pickers who diligently network with corporate executives and industry experts to gain an investment edge. But Mr. Rajaratnam, a 53-year-old Sri Lankan native, sought out information that was confidential, beyond the reach of research, and illegally traded on it, a jury in Federal District Court in Manhattan found on Wednesday, convicting him on all 14 counts of securities fraud and conspiracy.
The verdict punctuates a stunning downfall for Mr. Rajaratnam, who before his arrest in October 2009 was among the biggest hedge fund managers. First making his name as an adept picker of technology stocks at Needham & Company, a small New York investment bank, he rode the tech market boom to strike out on his own, forming the Galleon Group hedge fund. At his peak, he was managing more than $7 billion in assets.
What made Mr. Rajaratnam stand out was not his proprietary computer models nor his skills in security analysis. Instead, colleagues marveled at the deep set of contacts he had cultivated inside Silicon Valley executive suites and on Wall Street trading floors.
Many of Mr. Rajaratnam's tipsters came from the South Asian immigrant community, a relatively small group of Indians, Pakistanis and Sri Lankans who over the past several decades have made their mark in finance and technology. He met several important sources of illegal information through the South Asian club at the Wharton business school at the University of Pennsylvania. He connected with another primary informant through his philanthropic support of the Indian School of Business, a prestigious graduate school in Hyderabad, India.
All these contacts formed the core of Mr. Rajaratnam's vast information network. From his office on Madison Avenue, Mr. Rajaratnam collected data about technology companies and then swapped it with sources across the globe. He spoke of getting an edge to beat the stock market, and for Mr. Rajaratnam, that edge was information.
But the conversations between him and his network were being secretly recorded by federal agents beginning in 2008. Prosecutors received approval from a judge to place a wiretap on Mr. Rajaratnam's phone after a government informant taped calls with Mr. Rajaratnam exchanging secret business information. The portrait that emerges from those tapes is of a man who bolstered his formidable talents as a money manager by tapping the insecurities and desires of those within his circle for lucrative -- and illicit -- stock tips.
Twenty-six people have been charged in the government's case against Mr. Rajaratnam; 21 have pleaded guilty. Some of those accused as co-conspirators were direct contacts, including Galleon employees and board members at publicly traded companies. He dealt with others through intermediaries: in one case, a fellow trader gave him corporate secrets provided to her by a Moody's credit analyst.
Among those in Mr. Rajaratnam's circle, Mr. Kumar was one of the more prominent. They first met in the early 1980s while at the Wharton School.
Others included another Wharton classmate, Rajiv Goel, a hapless executive at Intel; Adam Smith, a hardworking Harvard graduate at Galleon; and Danielle Chiesi, a hedge fund trader with deep connections inside publicly traded technology companies. All three pleaded guilty to swapping illegal stock tips with Mr. Rajaratnam.
With these people, Mr. Rajaratnam altered his approach, depending on the person or the situation. He could be direct at times, demanding information from his sources. He could also be solicitous, such as calling to check in with an informant after she underwent an operation. He fed the needs of those in his orbit who could be helpful to him, whether with money, tips or friendship.
In his soft-spoken manner, shaped by his years at secondary school and college in England, Mr. Rajaratnam alternately prodded, chided, ridiculed and flattered his sources. Above all, he was a good listener, saying little as those on the other end of the phone, eager to impress the hedge fund titan, kept talking.
"Getting information that others didn't have was very valuable," said a prosecutor during the trial. "It meant the defendant knew tomorrow's news today, and it meant big money."
The Good Soldier
Raj Rajaratnam loved to hire people like Adam Smith. With two Harvard degrees and a three-year stint as a Morgan Stanley banker, Mr. Smith impressed his colleagues with a tireless work ethic and detailed knowledge of the semiconductor industry.
Mr. Smith impressed his boss in other ways. From almost the moment he joined Galleon, Mr. Smith routinely trafficked in illegal stock tips from corporate insiders, and shared that information with Mr. Rajaratnam, he later said. Mr. Smith pleaded guilty in January and testified against Mr. Rajaratnam.
"Why did you do it?" asked a prosecutor during the trial.
"I was getting an edge on a company," said Mr. Smith, 38, central casting's idea of a banker, with close-cropped hair, wire-rimmed glasses and Hermès tie. "My motivation was to improve the profitability of my firm and to help Raj."
His clinical answer betrayed a culture inside Galleon that conducted rigorous stock research but also, at least at the top of the fund, relentlessly dug for inside information. Combining the two -- legitimate research with illicit tips -- was known within Galleon as "having two torpedoes in the water," Mr. Smith said. "If one of them misses, the other is likely to hit."
Mr. Smith preferred the fast-paced, aggressive environment of a hedge fund trading floor to investment banking. In an anniversary report for his Harvard Business School class, he wrote that Galleon was "the first job I've truly loved, and I find the challenge of the stock market exhilarating."
He approached his job like a dogged investigative journalist, albeit a very highly paid one, traveling the world to develop sources and pump them for corporate secrets. He forged a relationship with an Intel employee in Arizona who provided Mr. Smith with the company's confidential financial data. He flew regularly to Taiwan, where he made contacts with technology executives who leaked their companies' secret revenue numbers.
Mr. Smith also stayed close to his former Morgan Stanley colleagues.
In 2005 he traveled to Laguna Beach, Calif., for the bank's annual technology industry conference. There an old colleague told him about Integrated Device Technology's planned acquisition of Integrated Circuit Systems.
He e-mailed Mr. Rajaratnam about the tip with the subject line "the two eyes" -- code for the two companies. When the companies announced the deal in June 2005 -- bringing Mr. Rajaratnam nearly $3 million in profit, according to prosecutors -- Mr. Smith said he felt a tinge of regret.
"I remember after the announcement having a sinking feeling in my stomach that this might be a problem," Mr. Smith testified.
But, he added, "no one spoke to me about it so I moved on."
The day after Mr. Rajaratnam's arrest in October 2009, Mr. Smith left his apartment on Gramercy Park, where he lived with his wife and two young boys, and drove to his country house in upstate New York. There, he dumped his Galleon-issued laptop computer in the trash.
The Sad Sack
"Hey, get me a job with one of your powerful friends, man," Rajiv Goel, the Intel executive, urged Mr. Rajaratnam. "I'm tired of this company."
The request, steeped in equal parts insecurity and flattery, was textbook Goel.
Some 30 years after they met at Wharton, Mr. Goel and Mr. Rajaratnam found themselves in vastly different places. Mr. Goel was a dissatisfied midlevel manager in need of money and affirmation. Mr. Rajaratnam was a hedge fund titan.
Mr. Goel, perennially suffering bad luck, whether dealing with a damaged car or combating a rat infestation in his new home, seemed to walk through life with a cloud over his head. But his chummy relationship with his billionaire friend was a bright spot.
Secretly recorded conversations reveal a warm friendship: the men vacationed together with their families and joked easily with each other.
Conversations with Mr. Rajaratnam swerved from transactional to personal and back -- one moment discussing a trip to Philadelphia for a business school reunion and the next Intel's corporate secrets.
Mr. Goel gave his friend advance word of Intel's earnings results and previewed a $1 billion investment the chip maker planned to make in a large wireless joint venture.
"He was a good man to me," said Mr. Goel, who pleaded guilty and took the stand on behalf of the government. "I was a good pal, a good person to him, so I gave him the information."
Still, he worried about passing tips to Mr. Rajaratnam, though not for fear of being caught.
"I was afraid that if it turned out to be wrong, it would have a bearing on the friendship," he said.
It was a friendship with financial benefits. Mr. Rajaratnam supported Mr. Goel financially in a number of ways. He lent or gave Mr. Goel a total of $600,000 to help him buy a home and care for his sick father.
Mr. Goel also asked Mr. Rajaratnam to help him make money in the stock market. All told, Mr. Rajaratnam earned about $750,000 for him by trading on inside information in Mr. Goel's account at Schwab.
Mr. Goel constantly sought the approval of his more successful friend.
On one call he boasted to Mr. Rajaratnam about an award he was receiving inside Intel and asked if Mr. Rajaratnam would read the write-up that won him the honor.
When Mr. Rajaratnam at first appeared uninterested, Mr. Goel seemed deflated.
"Does it always have to benefit you?" he asked.
The Hedge Fund Temptress
Her platinum blond locks and bold manner turned heads in the tech world and on Wall Street.
Danielle Chiesi, a former beauty queen, was well aware of that attention, and used it to her advantage in the ultra-competitive world of hedge funds, where she plied her trade at New Castle Partners. And just as Mr. Rajaratnam worked his extensive network of South Asian contacts, Ms. Chiesi found her sexuality offered an edge in the male-dominated world of finance.
"I just got a call from my guy," she told Mr. Rajaratnam in a July 2008 call. "I played him like a finely tuned piano."
The company under discussion, Akamai, was going to do worse than the market expected, offering a potential windfall for her and Mr. Rajaratnam. When asked by the presiding judge in Mr. Rajaratnam's trial whether there was a physical relationship between Ms. Chiesi and her Akamai source, a prosecutor demurred.
Ms. Chiesi, who pleaded guilty to crimes related to insider trading but did not testify during the trial, had an affair with Robert Moffatt, a former executive at I.B.M. who is serving jail time after admitting to passing confidential information to Ms. Chiesi. She also had an affair with her boss, Mark Kurland, who also pleaded guilty to insider trading.
Squeezing secret information from corporate insiders excited Ms. Chiesi.
"It's a conquest," she told Mr. Rajaratnam on a conversation secretly recorded by the government. "It's mentally fabulous for me."
Ms. Chiesi met Mr. Rajaratnam in 2007 at a Wall Street conference and became fast friends. Secretly taped conversations in 2008 feature conversations littered with expletives, breathless market talk and Ms. Chiesi referring to Mr. Rajaratnam as "baby" and signing off with "I love you."
Mr. Rajaratnam was solicitous of Ms. Chiesi, once calling her just to check in after she had a shoulder operation in the midst of the financial crisis.
"Like how does he even remember I was having surgery? We're not even friends like that," she told someone at the time of the call.
Mr. Rajaratnam made it clear to Ms. Chiesi that their trading of corporate secrets should be kept strictly between them. "Radio silence," he said during one call. During another, Mr. Rajaratnam told her to tell no one about their conversations.
"Not even your little boyfriends, you know?" he said.
Mr. Kumar earned several million dollars a year as a senior executive at McKinsey. He had a grueling work schedule, traveling some 30,000 miles a month, consulting for corporate clients across the globe.
In 2003, Mr. Rajaratnam, who was fast on his way to becoming a billionaire, told his business school classmate that he was underpaid.
"You work hard, travel a lot; people made fortunes while you were away and you deserve more," he said he was told by Mr. Rajaratnam.
Mr. Kumar would later depict himself as a reluctant felon, initially rejecting Mr. Rajaratnam's offer. But after they devised an elaborate scheme to hide the payments -- opening a Swiss bank account and then transferring funds from it into a Galleon account in the name of Mr. Kumar's housekeeper -- he began moonlighting as a private consultant to Mr. Rajaratnam.
At first, Mr. Rajaratnam asked Mr. Kumar general "big picture" questions about the technology industry but soon became "quite specific," pressing him for details about individual companies, Mr. Kumar said.
"Mr. Rajaratnam kept asking for that information, and I felt that I owed him something, given how much money he was paying me," he said.
After Mr. Rajaratnam told Mr. Kumar that his insights were not detailed enough and had little value to him, he suggested an alternative arrangement where they would share trading profits when Mr. Kumar's tips made money. Mr. Kumar rejected this proposal, preferring a straight-up fee similar to how he was paid for his work at McKinsey.
"I was a consultant at heart," Mr. Kumar testified. "That seemed like an even bigger crime to me."
In 2006, Mr. Kumar agreed to another compensation scheme: Mr. Rajaratnam would pay him a year-end bonus based on his annual performance. Mr. Kumar proved his worth that year, providing him with details about secret merger negotiations between Advanced Micro Devices and ATI Technologies.
When the companies announced the deal in July 2006, Mr. Kumar got a call from Mr. Rajaratnam. "That was fantastic," he said. "We're all cheering you at the office right now. You're a star. You're a hero."
Mr. Kumar's tip about the deal helped Mr. Rajaratnam generate about $23 million in profit buying ATI stock, his single largest illegal gain.
In December, Mr. Rajaratnam told Mr. Kumar that Galleon was paying out big year-end bonuses. "I want to give you $1 million," Mr. Rajaratnam said.
"I almost fell off my chair," Mr. Kumar testified.