Authors: Anita Raghavan
Tags: #Finance, #Business & Economics
Rajaratnam believed that through Ruiz, Chiesi came to learn of AMD’s bid to spin off its facility to make computer chips and create a joint venture that would be 50 percent owned by a Middle Eastern sovereign wealth fund.
“Your value to me is a little bit diminished,” he told Kumar.
Then he pressed Kumar to see Ruiz and tell him to stop the purported pillow talk. Lest Kumar be confused into thinking that Raj was trying to save Ruiz’s marriage, he made it clear to Kumar that his issue was that Chiesi was freely sprinkling Ruiz’s secrets to everyone who would listen on Wall Street. What irritated him was that the loose-lipped Chiesi robbed him of the “edge” he had at AMD. She was muddying the waters in a stream of insider information that was his alone to fish.
“Raj, you’ve got to be kidding me,” said Kumar, flabbergasted by the request. “Dr. Ruiz—he is my client. He is older than me.” Rajaratnam wanted Kumar’s morally challenged job description expanded to include verbal subterfuge. Kumar was comfortable transgressing the law, but he was far less at ease with the idea of crossing social norms.
His pushback came at a trying time in his relationship with Rajaratnam. Ever since his big tip in 2006 on the AMD–ATI Technologies talks, Kumar’s hot streak had gone stone cold. In 2007, he told Rajaratnam that the industry of business intelligence, in which companies use software to mine mountains of information stored in widely available databases, was ripe for consolidation. The tip piqued Rajaratnam’s curiosity. “How do you know?” he asked.
Kumar explained that he was providing consulting services to a company called Business Objects, a French-American firm that made intelligence software. Naively, or perhaps simply because it was easier this way for him to rationalize his behavior, Kumar believed that Rajaratnam would buy stocks in three or four companies in the sector and hopefully in a year they would rise and Rajaratnam would make a profit.
In July 2007, at a time when Business Objects was getting hammered by Microsoft and Oracle, Kumar attended an offsite meeting the company was holding in Napa Valley, California. Kumar passed on the bleak prospects that Business Objects was facing to Rajaratnam.
Sometime after, he got a call from Rajaratnam.
“Anil, are you absolutely sure they are doing badly?” Rajaratnam quizzed him. What was puzzling Rajaratnam was the performance of Business Objects stock in the market. If the company was indeed struggling, then why was its stock inching up? It was as if all the players in the market were in on a big secret and somewhat surprisingly had left the master of divining secrets out of the loop.
It wouldn’t have mattered to Rajaratnam except that he’d traded on Kumar’s tip, accumulating a sizable short position in Business Objects stock, by essentially borrowing shares on the belief that he would be able to buy them back at a cheaper price as the market appreciated the company’s challenges. Every dollar rise in the stock cost Rajaratnam money on his bearish bet on Business Objects. Uneasy with the rally, Rajaratnam told Kumar that he was halving his short position.
A few months later, in October 2007, Business Objects announced that German technology giant SAP was acquiring it for $6.78 billion, a move that sent its shares soaring and saddled Galleon with more losses—around $5 million on a realized and unrealized basis. Rajaratnam told Kumar he was very upset about the money-losing trade and in 2007 he did not pay him. A few months had passed since the Business Objects fiasco but Kumar still smarted from the rebuke. At the same time, managing the elaborate consulting arrangement with Galleon was getting harder.
In 2008, Morgan Stanley, which handled administration details for Galleon, pushed for verification that Manju Das (Kumar’s housekeeper, who received the consulting payments made by Rajaratnam to Kumar) was an offshore investor living in India and not required to pay US taxes. Among other items, it sought a notarized passport, certified copies of two forms of address such as utility bills, and a bank assurance letter for Manju Das.
“Let me look into this and see what can be done,” Kumar emailed an investor relations employee at Galleon. “May be tricky.”
The reason it was “tricky” was simple. Even though Das, his housekeeper, lived with him and his wife and son in California, Kumar had given his in-laws’ address in New Delhi as Das’s home. In doing so, he established falsely that she was an offshore investor in Galleon and thus not liable for US taxes.
He set up the account because Kumar’s principal concern was to avoid having his consulting arrangement with Rajaratnam traced back to him or McKinsey. If he indicated that Das lived in the United States at his address, it wouldn’t take much time to connect him with her.
Under the original arrangement he put in place, account statements for Das were sent to his in-laws’ house in the Delhi suburb of Vasant Vihar but naturally addressed to Das, the account holder. The setup raised logistical problems from the start. “My concern is with Manju’s mail—there is always the possibility of it being handed over to one of her relatives by mistake/returned/handed over to others. They do ask and come here occasionally to get news of her,” wrote Kumar’s mother-in-law, Reva Dayal, in 2005. Perhaps her son-in-law could find another solution.
In 2006, soon after Galleon registered with the SEC, Rajaratnam started pressing Kumar to move his money out of the Manju Das account and into an offshore vehicle. He told Kumar that it was a wise move since the SEC was starting to scrutinize matters like this more closely. He didn’t mention that his brother Rengan’s hedge fund, Sedna Capital, was being examined. If the probe moved to focus on Galleon and Rajaratnam, investigators might be able to connect Das with Kumar.
It was important now more than ever for Raj Rajaratnam to give the impression that Galleon was complying with SEC regulations. Kumar said he knew someone in Switzerland who worked with Asian investors on affairs like this but generally did not like having US investors as clients because of the stiffer regulatory environment in the States. After some arm-twisting, the Swiss gentleman agreed to buy the holdings in Galleon from Manju Das and transfer them into a financial institution called Ambit. Kumar thought it was the perfect way to deal with all the inquiries he was getting on the account. Ambit was an institutional investor and unlikely to raise the same kind of red flags as an individual.
“From a Morgan Stanley Fund Services perspective, they should not care if an LP has sold their stake to another party, for whatever consideration. All they may ask for is a transfer form,” Kumar emailed Galleon’s investor relations’ staffer Shireen Gianchandani on May 26, 2008. “It is the most elegant solution to the predicament. And hopefully one which will not require too many documents.” Kumar asked Gianchandani not to proceed yet or to copy anyone on their correspondence.
“Bottom line is to avoid redemption of the funds from Manju’s Galleon account into a bank account in her name for immediate reinvestment back into Galleon,” he wrote. “That would be a painful exercise.”
The transfer wasn’t as simple as Kumar thought. To move assets from the Das account into Ambit, Morgan Stanley required two proofs of address for Das. When Gianchandani raised the issue with Kumar, she met with obvious irritation.
“Manju Das comes from a village in the remote areas of Bengal,” he wrote in a July 17 email to Gianchandani. “It is not customary to have utility or water bills in these areas. The permanent address, as noted in her passport, is in that district and this is used by all authorities as proof of address.” Apparently annoyed that his arguments so far had not succeeded in swatting away the issue, Kumar concluded by saying, “In India, a notarized copy of the passport with current and permanent address is considered as adequate proof of residence since passports are only issued upon physical verification of residence by a local administrator.”
But Kumar kept bumping up against Morgan Stanley, which was still not satisfied. Frustrated that he was not getting anywhere close to resolving the situation, he devised a way to get the necessary documents. He turned to someone he had known for years: Dr. Alok Mathur, a physician who had been his in-laws’ doctor for twenty-five years.
At Kumar’s behest, Mathur wrote a letter certifying that Das was in his care for ten years and confirming Das’s address in Delhi. For the second proof of identity, Kumar reached out to an assistant at McKinsey in Delhi to obtain a notarized copy of his housekeeper’s passport.
“Dear Mr. Mahindroo, do you know of a notary who will easily and conveniently sign letters/copies/affidavit et cetera?” Kumar emailed on August 1.
“There is no need to know anybody,” replied Mahindroo. “They are businessmen and just shop keepers. They have to charge and sign.”
It seemed as if Kumar had solved the problem until the documents were delivered to Morgan Stanley. The investment bank rejected them as proofs of address again. “We will require 2 original or certified (notarized) utility bills,” Morgan Stanley’s Sinead Hayes replied to Kumar on Monday, September 8, 2008. The words “2 original or certified (notarized) utility bills” were highlighted in bold. Hayes told Kumar that if he could not supply the required information, “please provide an explanation and I will escalate to our compliance department.”
It was the last thing Kumar needed. He tried to deflect the issue again with an argument he’d tried unsuccessfully earlier. “In India, there are not utility or fuel bills in all individual’s names, since the infrastructure is so weak,” he emailed Hayes a couple of days later. “The same holds true for the financial/banking infrastructure, and many people have historically held money in other forms, or in joint accounts with other people in other cities from where they live. It has been a country where money matters are dealt with on faith (for example, you can buy jewelry in one city and pay in another, months later, based on good faith). Each country has its own custom, and you can do the same in Japan.”
But Morgan Stanley was not buying Kumar’s explanation. It kept up its demand for the proof of Manju Das’s address. As stock markets imploded all around him and the financial system teetered on the verge of a great meltdown, Kumar accelerated his efforts to get the documents Morgan Stanley wanted. On October 25, 2008, he emailed an employee at HSBC in Bangalore, India, asking for a letter simply stating that Manju Das, a resident of New Delhi, had an account with the bank. “If you can email a pdf copy immediately, that would help a lot,” Kumar wrote to HSBC.
However, when the bank sent Kumar a draft of the letter, the true state of affairs intruded into the virtual reality that Kumar was desperately seeking to craft for Manju Das. In a letter dated October 25, 2008, HSBC said that Das had been an account holder at the bank since October 20, 2008—for only five days. Kumar knew the letter would sound alarms at Morgan Stanley. What had started out as a simple transfer of assets from one account to another had turned into a clerical nightmare that took up far more time than Kumar had first imagined it would. He did not want any more hassles, so he emailed HSBC in Bangalore and said, “Please resend a new letter with the words ‘from 20 October 2008’ deleted.
“Need this asap please.”
Anil Kumar sounded preoccupied.
“Are you in the middle of something else?” Rajaratnam asked.
It was a little before 2 p.m. on Friday, May 2, 2008, and Rajaratnam was in Washington for an investor conference, catching up on calls before boarding a plane to Toronto.
“May be leaving in two minutes, but uh…tell me quickly,” said Kumar. It was hard to tell if Kumar was in a real rush or he simply wanted to give the impression he was frightfully busy. In the circles he trafficked in, there were two traits that made someone important, being connected and being so in demand that one never had enough time. Rajaratnam had heard from an associate that Kumar was close to Mukesh Ambani, the head of formidable Reliance Industries. Kumar and Rajaratnam were in the same Wharton class as Mukesh’s kid brother, Anil.
Like many Indian families, the Ambani brothers for the longest time lived under the same roof—Sea Wind, a tower at Cuffe Parade, an enclave of the wealthy in south Mumbai. The two had one of the fiercest sibling rivalries around, and while they were living together—Mukesh moved out in 2010 to a soaring skyscraper—they were locked in a battle over the price Anil Ambani should pay for natural gas from Mukesh’s field, the largest in the country.
Rajaratnam told Kumar that there was some interesting chatter in the market about Reliance and its interest in semiconductors. He had heard from an investment banker that Reliance was searching for a way to enter the semiconductor space.
Kumar had caught up recently with Mukesh Ambani, who had been in New York for the American India Foundation fifth annual spring gala at the Waldorf. He had formed his own impressions of Ambani’s ambitions in the semiconductor space. They were not nearly as grandiose as what Rajaratnam envisioned.
“Are you going to do AMD?” Kumar asked Ambani. “It’s gonna be a big deal.”
“Anil, for that size deal I’m not ready yet, I need to understand the industry,” said Ambani flatly.
Kumar told Rajaratnam that Ambani was more likely to pursue a far smaller acquisition—the purchase of the Far Eastern assets of a company called Spansion. In fact, Reliance was set to submit an offer for the Spansion assets the next day.
“Do you think we should buy some Spansion for other funds?” Rajaratnam asked.
“Uhm…let me see what offer comes in as of tomorrow,” Kumar replied.
Minutes after hanging up with Kumar, Rajaratnam telephoned Kris Chellam and another colleague. Rajaratnam had known Chellam almost from the time he got started in the business, following him around Silicon Valley as he bounced from Atmel to Xilinx before coming to work for Rajaratnam at Galleon. Chellam was a regular at Rajaratnam’s infamous wild and sexually charged Super Bowl parties in Miami.
“Somebody is gonna put a term sheet for Spansion,” Rajaratnam told the two. “May third is the deadline, which is I think tomorrow, right?”
Rajaratnam said he asked Kumar whether he should buy some Spansion for Galleon but Kumar had told him to wait.
“This is the one that we also have to make sure that we keep our conversations just privileged to the three of us,” said Rajaratnam. “You know, you just have to be careful, right?”
One of the best ways to protect themselves, Rajaratnam suggested, was to create an email trail. He would start the chain by sending an email to the two of them saying: “You know, have you guys thought of Spansion? The stock looks cheap, right?”
Then they could offer to get the Galleon analyst who covered Spansion to do some work on the stock. Alternatively, Rajaratnam could send a more general email. “Something like, you know, ‘there’s a basket of semiconductor companies like Lattice, Spansion and Atmel…see what you think,’” Rajaratnam said. “And you should say, ‘Atmel and Spansion look good.’ You know, so that we just protect ourselves.”
“Have a corporate record,” replied Chellam.
“Yeah, we just have a email trail, right, that uh…I brought it up,” said Rajaratnam.
* * *
Sixty blocks south of Galleon’s midtown office, an FBI agent was sitting in a secure room with about ten other agents, each with a headset, tuned in real time to a call between Rajaratnam and his associates.
Roomy Khan’s calls to Rajaratnam had suggested that there was indeed criminal activity taking place on his cell phone, so on March 7, 2008, Lauren Goldberg, the prosecutor who had given Khan a lecture when she first sat down with the government, presented a wiretap affidavit to the court seeking permission for the feds to eavesdrop on Rajaratnam’s conversations. Federal judge Gerard E. Lynch approved a wiretap on Rajaratnam’s cell phone for thirty days. His work phone and his home phone were not tapped. Now, for the first time, the FBI was in a position to get an insider’s glimpse into Rajaratnam’s relationship with Kumar, Gupta, and a host of others. Three days after Lynch’s authorization, the FBI intercepted calls over Rajaratnam’s cell phone, monitoring both outgoing and incoming calls. Each time a call came into Rajaratnam’s cell phone, a number would pop up on a computer screen in front of the agent manning the wire. Typically the agent would listen to the call on a headset and write on lined sheets the initials of the callers.
Under Title III, the statute governing wiretaps, “non-pertinent phone calls” such as a target speaking to his mother must be “minimized,” which means not listening to and not recording the call. If the call appears to be “non-pertinent,” the agent manning the wire has to turn down the volume, which also stops the recording, wait a few minutes, and then turn up the volume to see if it has turned to a “pertinent” subject. If the call is with someone who always seems to be “non-pertinent,” they generally have to “minimize” the entire call.
Some agents are more adept than others at manning the wire, a job that within the FBI is known for its drudgery. A few times during the investigation a call that could have yielded important evidence got “minimized,” meaning it isn’t recorded at all. It is hard to fault the FBI agents, though. Before a wiretap goes up, prosecutors are required to read the agents manning the wire a speech that lasts about twenty minutes. Prosecutors impress upon agents that one way a wiretap can be suppressed or thrown out later is if an agent fails to minimize a call properly. Judges are all over the map on their views of calls that aren’t minimized properly; some exclude the specific call, whereas others disallow the whole wire, potentially jeopardizing an entire investigation and killing a case.
In mid-April, Andrew Michaelson—the SEC line attorney who had built up the investigation from suspected cherry picking of investments at tiny Sedna Capital to insider trading at giant Galleon—was lent to the US attorney’s office in Manhattan to work on the Galleon case. Before he left the SEC, there had been a small breakthrough in the investigation. On April 2, Roomy Khan, after months of obfuscation and ridiculous stories, admitted that she had made trades in Hilton stock based on inside information. As part of an agreement with prosecutors, Khan had been cooperating, but she had been holding out on revealing the Hilton informant because she had met the source through her cousin, whom she was trying to protect. Her source was Deep Shah, a young analyst at Moody’s, the credit-rating agency, whom SEC lawyer Jason Friedman had identified the previous summer when he drilled down into Khan’s world. At the time, Friedman knew only that Shah was one of the hundreds of contacts in Khan’s Rolodex. He had no way of knowing that as a Moody’s analyst Shah had been briefed on the Hilton deal before it was announced.
As Khan told the story, one day in late 2006 her cousin telephoned her and said that his roommate worked at Moody’s and was privy to a lot of buyout information before it was unveiled. Moody’s, which provides widely watched ratings on corporate credit, is often briefed on deals before they are announced, as they were in the Hilton case, so they can develop a new rating when a takeover is unveiled.
“You know you can make a lot of money,” said her cousin. Then he put his roommate, Shah, on the phone. In their very first conversation, Shah served up a takeover tip—the trouble was it was Friday evening and the deal was going to be unveiled on Monday before the market opened. There was no window for Khan to trade in; however, when the deal was announced on Monday exactly as Shah had predicted, Khan knew she had a new surefire source. For the Hilton insider tip, she told prosecutors she paid Shah $10,000. The tip was red-hot; Shah called her on July 2 soon after learning about it from a colleague who had been briefed by Hilton. (Shah has denied being the source of the Hilton tips.)
“Didi,” he said, using the Hindi word for “older sister” when he got in touch with her. “This is happening tomorrow so better get on it right away.”
Khan shielded Shah for as long as she could, risking her own cooperation with the government to protect her cousin, who had introduced them. Soon after she agreed to help the feds and record calls on phones she was given by the FBI, she got a new cell phone, which she had registered in the name of her gardener. She used the cell phone to make calls to a few in her circle, including Shah, whom investigators believe did not return to the United States from India after she casually mentioned that she had gotten some inquiries on Hilton from the SEC. Prosecutors discovered her scam when they noticed the new caller reaching out to people in Khan’s circle. When prosecutors finally discovered that the phone number was in the name of Khan’s gardener, they summoned Khan to New York and ordered her to quit playing games.
By the spring of 2008, it had been one and a half years since Michaelson and Wadhwa had first started sifting through the trading records, emails, and instant messages at Sedna and noticed the curious exchanges between Sedna’s cofounder Rengan Rajaratnam and his brother Raj at Galleon on stocks like AMD. They had taken testimony from both brothers and reviewed thousands of pages of documents, yet the only stocks on which they had direct evidence of insider trading by Rajaratnam were Polycom, Google, and now Hilton.
Upon arriving at One St. Andrew’s Plaza, where the prosecutors in the US attorney’s office sit, Michaelson received a thick folder of material from B. J. Kang, the FBI agent working the Galleon case. It contained a slug of recordings that soon came to be known as the “Clearwire” calls.
After nearly two years of Sisyphean frustration, particularly with AMD, Michaelson started to feel optimistic. At the SEC, investigating was like a game of connect the dots—linking a phone call, for instance, to a trade soon after. But sitting in the US attorney’s office with his headphones on, listening to the wiretaps, he was riveted. Not only were the dots connected, but he was inside the room. It was the early days and already the wiretaps were yielding heaps of direct evidence that Rajaratnam received confidential nonpublic information from a wide circle of informants. For the first time, there was a sense at the US attorney’s office that the case prosecutors were developing was going to be huge—in terms of not just the number of people but also their prominence.
As Michaelson delved into the file of Clearwire calls that Kang gave him, he found for the first time direct evidence of the passing of confidential corporate secrets between Goel and Rajaratnam, the two friends from Wharton.
Starting in late March 2008, Goel, who worked at Intel Treasury, began briefing Rajaratnam on Intel’s plans to invest $1 billion in a new wireless venture with an all-star cast of technology companies—Clearwire, Sprint Nextel, Time Warner, and Comcast, among others. The move was part of a bid by Intel to spur the rapid adoption of a longer-range wireless technology called WiMAX. In 2006, Intel Capital invested $600 million in Clearwire, a company led by cellular pioneer Craig McCaw, which was a large holder of frequencies suitable for WiMAX.
Now Intel Capital was in the midst of talks to take the assets of Sprint and Clearwire and create a nationwide geographical footprint of cellular broadcasting licenses. While Goel worked on the initial 2006 investment by Intel into Clearwire, he was not involved in the latest deal. However, he came to know of it because of the size of Intel’s investment.
On March 19, Goel was feeling a little tired and came home early. He was supposed to meet with an Intel vice president to get an update on Intel’s investment in the new venture. At about 5 p.m. West Coast time, he called Rajaratnam, ostensibly to engage in some of their usual freewheeling banter.
“I just called to say you’re a good man,” Goel started.
“Why?” Rajaratnam asked.
“I just called to say that you’re a good man, that’s all,” Goel repeated.
“Why am I a good man?” Rajaratnam asked again.
“I just thought that you are one of the better guys that I know,” Goel said.
“That’s highly suspicious,” said Rajaratnam.
The two traded compliments back and forth until Rajaratnam concurred that Goel was a “good guy too. When I see you I’ll give you a kiss on the cheek.”
“No, no, no,” insisted Goel.
Before he hung up, Goel told Rajaratnam: “
Aacha
, listen,” using a Hindi word for “okay.” He had not had a chance to meet with the Intel vice president, but he knew that the Intel board was not going to consider the Clearwire deal that day.
Rajaratnam thanked him for the information, and with that, the two said good-bye. When they hung up, so did the agent at the FBI, which was now monitoring Rajaratnam’s cell phone in real time.
Over the next few days, as the FBI listened in, Goel called regularly, filling Rajaratnam in on the details of the Intel investment so that he could figure out how to assign a value to the new entity. He generally called Rajaratnam from home, but it was hard to talk at times. Goel’s kids made fun of the hushed tones that their father used when he spoke to Rajaratnam.
“What do you have?” Rajaratnam asked. “Bunch of hyenas there?”
“No, no, no. No, they are laughing at the way I talk to you,” Goel explained.
Between March 24 and 25, Galleon bought 385,000 shares of Clearwire stock, the majority of which was allocated to the technology fund Rajaratnam ran. But before he could accumulate a bigger position, he got scooped.