The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (25 page)

It was shortly before 8 a.m. on Tuesday, March 25, 2008, and an irritable Anil Kumar was stuck in a taxi in the middle of Tokyo on his way to work. It had been four years since Kumar had begun leading his double life, McKinsey consultant by day and Rajaratnam informant by night. Neither was easy. He treaded water at McKinsey but was planning a move to New York in the summer for a new job—a sideways step—to boost his career prospects when Ian Davis, McKinsey’s managing director, stepped down in 2009.

After stopping in Tokyo, Kumar was headed to Singapore and then planned to go to India. As exhausting as his schedule was, there was a more pressing reason for his irritation.

“This taxi driver doesn’t know where he is going,” he bristled.

Rajaratnam, hanging on the other end of the phone, some seven thousand miles away and in a different time zone, laughed.

It was hard to fathom the confusion. McKinsey’s Tokyo office was well known in Japan. It stood tall in a commercial block of the Roppongi section. For the longest time, the office was run by Kenichi Ohmae, a legendary Japanese businessman and aspiring politician. It was a sign of Ohmae’s importance that for a time when he reigned, there was a security guard planted outside his office with a gun sitting on his desk in full view. (McKinsey says that to its knowledge, this is not accurate.) Word was that Ohmae had so many friends—and enemies—in Japan that he required protection even at the office.

With its buzzing discos and throbbing clubs, Roppongi was a continent away from Kumar’s world. As a senior partner, he spent his life on planes, logging as many as forty thousand miles a month to visit clients. He shuttled so often between New York and Silicon Valley that McKinsey assigned him an office in each place. In addition, he had two home offices, one in Saratoga, California, and the other in his apartment in the Time Warner Center in New York so he could field calls from clients on weekends or catch up on emails after hours.

Some of his colleagues griped about the grueling travel regimen that accompanied a career in consulting, but Kumar seemed to relish his peripatetic life. He liked to inject the names of cities he was passing through into emails or phone conversations, much like practiced name-droppers slip in mentions of their rich and famous friends. Kumar had a fetish for both. “Cambodia and Angkor Wat were amazing!!” or “I’m here with…Sunil Mittal and Sunil Munjal,” two Indian business tycoons. All it took was a standard query about his well-being, a simple “how are you?” to elicit a reflex-like reply about the city he happened to be in or the company he was keeping. It was as if he thought all the jet-setting conferred upon him a certain gravitas and imbued him with an importance that otherwise was not apparent.

He had three cell phones, one for each of the continents he worked in, Asia, Europe, and America. Ostensibly the trove of phones was to keep McKinsey’s costs down, but it also served another purpose: it affirmed Kumar’s position in the caste system of the business world. He was no nine-to-fiver, consigned to short-haul trips within the borders of one country. No, Anil Kumar liked to think of himself as a
macher
, a Yiddish term meaning a “maker,” the kind of person who made things happen. He was a pivotal player in the new global economy, so in demand that his old colleagues in New Delhi would joke that he spent most of his life on a plane or on the phone.

In recent years, regardless of where he was—Mumbai, Dublin, Tokyo—Kumar had fallen into a predictable pattern. He made it a point to call his new best friend, Rajaratnam. Fortunately for him, Kumar occupied a privileged place in Rajaratnam’s ever-expanding universe of contacts. He was on a list of about ten people whose calls were so important that Rajaratnam told his secretary, Caryn Eisenberg, to disturb him if he was in a meeting or find him if he was not in his office. It was an “honor” bestowed on very few—and it was coming from someone who was an acknowledged master of the universe, not a wannabe.

By 2008, Raj Rajaratnam was so successful that he made it to the Forbes 400 “Richest People in America” list for the first time. He hung out with hedge fund rock stars like himself, playing in a fantasy football league whose members included Stanley Druckenmiller and Paul Tudor Jones. The price of admission said it all: members had to pony up $100,000 each to play. And the celebrations for winning were over-the-top.

In February, to mark the victory by Michael Daffy, a Goldman Sachs executive in the league, Rajaratnam, Druckenmiller, and a handful of others took off from the West 30th Street Heliport in helicopters and headed down to Atlantic City for an overnight trip to the Borgata hotel and casino. When they arrived, they were met by limousines that took them to the hotel. There they were joined by Paul Tudor Jones, one of the oldest members of the league. They started the evening with drinks and dinner and ended it with a night of gambling. The next morning, at 6:30, the hard-charging traders left the Borgata for the Atlantic City airport.

Rajaratnam’s success made him a business celebrity in the South Asian community. He was one of six Asians on the Forbes list. Whenever he dined out, young South Asians gravitated to his table to pay homage and sound him out on a business proposition or hit him up for a job. Rajaratnam was always open and welcoming. He enjoyed the adulation, the verbal stroking that inevitably ensued. Many times, he would hand fawning visitors his business card. Little did they know that Rajaratnam’s world was neatly divided between the people he wanted to know and the people who wanted to know him. He cleverly devised a system to keep the two groups separate. His business card did not list his direct line; only a select group of people had that number. All others were given his secretary Eisenberg’s line. Invariably, the next day when an admirer telephoned, mistaking Rajaratnam’s warmth for something more, Rajaratnam avoided the call. It was his secretary’s job to keep callers like this at bay.

Kumar sounded excited when he called Rajaratnam that Tuesday morning from Tokyo. In the normal course of business, senior partners at McKinsey are called upon to oversee the work of other consultants. It is part of the rigorous evaluation process that is integral to the fabric of McKinsey. In the midst of supervising a colleague who was doing some confidential work for Fujitsu, Kumar got some information that he was sure Rajaratnam would find as scintillating as he did. China’s biggest computer maker, Lenovo Group, which four years earlier had sent shock waves through the computer industry when it bought IBM’s PC business, was in serious talks with Fujitsu to buy its personal computer business.

“It’s not a dead certainty yet,” Kumar said. Then, stating what must have seemed like the obvious to a veteran investor like Rajaratnam, he explained why. Getting a Japanese company to sell a business is “like an act of God.”

“Right,” snapped Rajaratnam. Whenever he was excited about a piece of information, he peppered Kumar with penetrating follow-up questions, but when he was bored with an idea he responded with monosyllabic answers. Even though the two had been conversing for years, Kumar did not always pick up on Rajaratnam’s subtle signals. Sometimes, as was the case that day, Rajaratnam would have to change the subject to get Kumar off the topic and onto a new one. Even then, Kumar was like a dog with a bone. He would stubbornly cling to his tantalizing tip. Minutes later, seemingly out of the blue, he would return to it. Despite the home run on the AMD and ATI deal, Kumar was deeply insecure about his place in Rajaratnam’s world.

“I don’t know how to play” the Fujitsu-Lenovo deal, said Rajaratnam. Not sensing Rajaratnam’s disinterest, Kumar had brought up the transaction a second time.

“So I’ll tell you how to play, it’s very straightforward,” said Kumar, taking an irritatingly didactic tone. He was clearly oblivious to the mounting investing pressures his friend was facing in the spring of 2008. Rajaratnam had just come off one of the most stressful weeks of trading in his life. A week before, Bear Stearns & Co., the fifth-largest investment bank in the United States, had all but collapsed under the weight of a bad bet that two of its hedge funds made on shoddy subprime loans. Bear had stumped up $3 billion the previous summer to rescue the funds, but by March, investors pummeled its stock, betting the company was effectively insolvent. They were right.

At times like these, it was best to stick to safe, surefire ideas like the tip Kumar had given him about an Indian energy company called Hindustan Oil Exploration Corp. Kumar had learned from a corporate lawyer and friend in India that its shares were set to be bought up in an open tender offer.

“So that’s a certainty, right?” Rajaratnam asked.

“Yeah,” replied Kumar.

“So every day I’ll accumulate a little bit whatever I can, in the market,” Rajaratnam ventured.

Trading Hindustan Oil was very different from playing Fujitsu, a conglomerate jettisoning a part of its business. With Fujitsu, it was not clear who would come out on top: the Chinese or the Japanese.

But to the know-it-all Kumar, playing the Fujitsu-Lenovo deal was an obvious trade. Personal computer buyers were tightening their belts on information technology spending amid the slowing economy and were looking for the best deals.

“Lenovo will be the winner” because Dell and HP will have a tough time matching the lower costs that Lenovo, which makes more of its computers in China, enjoys, Kumar explained. McKinsey was a great example of the trend. In a recent overhaul, it decided to buy all its laptops from low-cost Lenovo. Then, suddenly awakening to a complexity that Rajaratnam spotted straightaway, Kumar conceded: “Now, you know, you’re right, somehow markets may also say ‘God, they’ve got this big bear of a cost structure now, because they’ve got this big fat high cost Japanese company.’”

“Right,” said Rajaratnam. It was exactly the kind of wishy-washy investment idea from the talking-head types at McKinsey that he could not afford right now.

Wall Street had been closed for the Good Friday holiday. In most years, traders welcomed the break, but now there was so much uncertainty swirling that even a day away from the markets unnerved them. Rajaratnam had originally planned to join Kumar in Singapore later in the week, and then the two were set to fly to India together to look at possible investments. But with the stock markets seesawing in the wake of Bear’s collapse, Rajaratnam felt he had better stay strapped to his desk.

“I am not sure whether I’m going to Asia right now…you know, it’s just crazy and I just need to be here, right?” he said.

“I didn’t check on what happened today. Was it down again?” asked the clueless Kumar. Rajaratnam, by contrast, was so driven by the markets that his moods hinged on their performance. “Sometimes, my wife is the most beautiful woman in the world,” he would say, referring to days when the markets went his way. “And sometimes she is a midget.”

By 2008, the rocky state of the stock market was hurting Kumar’s cherished client, AMD, too. Its acquisition of ATI Technologies in 2006 had saddled it with a mountain of debt. Although the company dreamed up wonderful new computer chip designs, investors fretted that it did not have the stash of cash it needed to build the factories to manufacture them. What most investors didn’t know was that behind closed doors the company was quietly hatching an innovative plan that would enable it to build the chip factories without a big cash outlay. Instead of footing the bill all on its own, AMD looked to find a deep-pocketed investor—perhaps a cash-rich sovereign wealth fund—that could bankroll the plants. The supersecret initiative was code-named Asset-Lite. The moniker reflected the notion that once the deal was done, AMD would own fewer factories, or assets, because the facilities would be spun off.

Kumar began briefing Rajaratnam regularly on the Asset-Lite strategy. In the winter of 2007, they spoke once every three weeks because Kumar was planning to move to New York to lead the McKinsey Asia Center, which advised US companies about business opportunities in Asia, and Asian companies about the United States. Kumar wanted to give McKinsey one last chance to elevate him, but if he wasn’t going up at McKinsey, this time around he’d get out.

During their conversations, Kumar told Rajaratnam that if AMD spun off its manufacturing facilities, it would lift a huge financial burden off the company: “It will be fantastic.”

“Oh, this is going to be just like ATYT,” replied Rajaratnam. It was hard to forget AMD’s 2006 acquisition of ATI Technologies, a deal that made Rajaratnam tens of millions of dollars.

Yes, Kumar agreed, it would be just like ATI.

As the months progressed, it became clear that it would be nothing like ATI. Rajaratnam was under the impression that the investment in the chip-making facility was imminent, but when Kumar called from Tokyo, he got a rude shock.

“It could take two more months,” said Kumar. “It’s not like weeks.”

“Oh my God,” said Rajaratnam, remaining remarkably cool in the face of news that he clearly was not expecting. Always flexible, Rajaratnam suggested he salvage the situation by lightening his position in AMD the next time the markets rallied.

Despite his winning tip on AMD-ATI, by 2008 Kumar was on shaky ground, eclipsed by a rival who enjoyed nowhere near the stature in the corporate world that he did but had much more to offer to Rajaratnam. Rajaratnam had told Kumar that there was a woman on Wall Street named Danielle Chiesi who he said was having an intimate relationship with Ruiz, the AMD chief executive and Kumar’s client. (Ruiz denies that he was ever involved with Danielle Chiesi and the relationship is otherwise unsubstantiated.) Kumar did not know it, but Chiesi was Rajaratnam’s newest acolyte. After she asked a Galleon analyst for an introduction, they met for lunch. The two hit it off, and soon Chiesi was getting invitations to Rajaratnam’s parties. Guests noticed her at Rajaratnam’s birthday bash on the boat in June when she took to the dance floor alone and kept changing from one low-cut slinky outfit into another. In September, she and her mother were invited to the clambake at Rajaratnam’s Greenwich estate, where Kenny Rogers sang his hit “The Gambler” (“You got to know when to hold ’em, know when to fold ’em, know when to walk away and know when to run”). It was a favorite of Rajaratnam’s and he had Rogers sing it over and over again.

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