Authors: Anita Raghavan
Tags: #Finance, #Business & Economics
It was critical that Rosenbach move fast. The New York Stock Exchange, where Goldman’s stock is listed, closes at 4 p.m. At 3:56:44 p.m., less than four minutes before trading finished for the day, Rosenbach managed to buy a total of nearly $25 million of Goldman stock, most of it for Rajaratnam’s portfolio. Originally, he had sought to buy 250,000 shares, or about $31 million of stock, but even a pro like him could get only part of his order filled so late in the day. (Rosenbach has not been charged with any wrongdoing.)
Around the same time, Ananth Muniyappa, a junior trader, sat at the trading desk about ten feet away from Rajaratnam’s office. At Galleon, portfolio managers like Rajaratnam decide what stocks to buy and sell, and traders like Muniyappa are in charge of moving stocks in and out of portfolios. Muniyappa and about a dozen Galleon traders were clustered in a T formation outside Rajaratnam’s office; three or four feet separated one from the next, and there were no partitions dividing them. Ian Horowitz, the trader who executed Rajaratnam’s trades, sat closest to the boss’s office. Muniyappa, who would pinch-hit and place trades for Rajaratnam when Horowitz was sick or out of the office, was next to him.
With just three and a half minutes left in the trading day and Horowitz absent, Rajaratnam turned to Muniyappa and ordered him to buy 100,000 shares of Goldman Sachs stock. Purchasing a large quantity of stock—roughly $12.5 million—is hard ordinarily, but it was doubly difficult now because it was so late in the trading day. Since about 3:30 that Tuesday afternoon, Goldman’s stock had risen appreciably, suggesting that someone in the market had a strong suspicion or even knew that positive news about Goldman was imminent. Unlike Horowitz, who had accrued many tight relationships with Wall Street brokers from his years as a trader, Muniyappa was a novice. He could not strong-arm or sweet-talk brokers into filling a huge order on such a tight deadline.
Muniyappa speed-dialed Ted Backer, a broker at Morgan Stanley, and told him that he wanted to buy 100,000 shares of Goldman stock. At first, Backer told Muniyappa that all he could get was 40,000 shares of Goldman. But at 4:01 p.m., a minute after trading ended for the day, Backer instant-messaged Muniyappa:
“bgt 67,200 GS @ 124.0343, fyi,” using the abbreviation “bgt” for “bought” and “GS” for “Goldman.” “I had to beat the sh.t out of the trader to get that 40K at that price.” Muniyappa allocated 217,200 shares of Goldman stock to Rajaratnam’s portfolio—150,000 of the shares Rosenbach bought and the 67,200 shares he purchased. Rosenbach kept 50,000 shares for his portfolio.
But shortly after 5:45 p.m., when headlines started streaming across Bloomberg News about Buffett’s company, Berkshire Hathaway, purchasing $5 billion worth of Goldman preferred stock, all hell broke loose at Galleon. Leon Shaulov, a portfolio manager whom Muniyappa sat next to, was livid. His face was red, his hair was flying all over the place, and his eyes were popping out. Shaulov, who together with Rosenbach ran the trading-oriented Buccaneers fund and was not in Rajaratnam’s inner circle, had a big bearish bet on financial stocks and appeared to be seething because no one at Galleon had tipped him off to the Buffett news.
At 6:16 p.m., he fired off an angry email to Rosenbach.
“Thx for the heads up btw. I’m short 170mm fins,” he said, noting that he had a bearish bet of $170 million on financial stocks. “Not one word from anyone. Thnku very much…What I give vs what I get back is disgusting. But at least all my deferred (compensation) is in bucc.” He was referring to the practice at Galleon where some portfolio managers had the opportunity to defer substantial portions of their income by investing in the funds they or others managed. He then added in what sounds like sarcasm, “That’ll help me. Fucking bull shit.”
Rosenbach replied: “Number.” He was not going to discuss the Buffett tip on the company email.
The next morning, when Rajaratnam telephoned the office to check on the amount of Goldman stock Galleon would get in the offering that was planned on the back of the Berkshire investment, Ian Horowitz, his longtime trader, picked up the telephone. Rajaratnam was angling for Galleon to get 2.5 million shares. Rumor had it that Gary Cohn, Goldman’s copresident, was deciding how much stock would be allocated to the long roster of Goldman clients hungering for it. Rajaratnam wanted to make sure he and others knew that Galleon “didn’t pull a single dollar out” or yank its assets amid the market mayhem. It was a time in the markets when loyalty mattered, and Galleon had been deeply loyal to Goldman.
Rajaratnam didn’t waste time in updating Horowitz on the panicked few minutes of trading late in the day before.
“So, big drama yesterday,” Rajaratnam told Horowitz. “I got a call at 3:58, right?…Saying something good might happen to Goldman. Right?”
Rajaratnam said he instructed Muniyappa to buy him some Goldman stock but he “was fucking around” so he asked Rosenbach to place the order.
“Mm hmm,” said Horowitz, and nothing more.
An hour later, Rajaratnam telephoned Horowitz again to check on the amount of Goldman stock Galleon would receive in the upcoming offering. He was irritated, stuck in bumper-to-bumper traffic because of the United Nations General Assembly meeting.
“I stressed enough the importance,” Horowitz told Rajaratnam. “We’ve been, we’ve been doing a majority of our business and Adam’s business with them. Even last week with all the bullshit going on we continue to go to them for trading. I don’t think that went unnoticed.”
After agreeing that the matter was out of both their hands, Rajaratnam turned to the late flurry of trading the previous day. Even though Rosenbach had defused Shaulov’s tantrum, it was still preying on Rajaratnam’s mind. Mentioning again that he had gotten a call that “something good” was going to happen to Goldman, Rajaratnam said, “Yeah, at 3:58 I can’t…yell out in the fucking hall,” Rajaratnam said.
“No, you did nothing wrong,” Horowitz assured Rajaratnam.
Then he wisely advised: “We’ll talk about it when you come in.”
Ever since taking the reins of Goldman Sachs in May 2006, Lloyd Blankfein had a simple rule when it came to dealing with the investment bank’s board of directors. He preferred to call them before they called him. From time to time, he would telephone board members one by one, checking each off a list after updating every member on Goldman’s financial performance. Sometimes his interaction with Goldman board members was more informal. He often ran into directors like Rajat Gupta in Davos, Switzerland, or on New York’s Upper West Side. (Gupta was a neighbor of his. He had a pied-à-terre in the Century Building, next door to Blankfein’s more palatial pad at 15 Central Park West.)
Whenever Blankfein encountered board members he would give them an update on the state of the world at Goldman Sachs. He saw it as his job as chief executive to keep his board abreast of developments at the firm. In his mind, it was good corporate governance 101. And it was all the more important in the fall of 2008, when the financial markets were so tempestuous that Goldman could be making money one day and losing it the next. In September alone, an unusually trying period, Blankfein spoke with his board as a group half a dozen times.
On October 23, 2008, about eight or nine weeks into Goldman’s fourth quarter, Blankfein decided he needed to update Goldman’s board of directors on the investment bank’s financial performance. Securities analysts were calling for Goldman to earn $2.76 a share, but Blankfein knew from the daily and weekly profit-and-loss reports he was privy to that Wall Street was way off the mark in its forecast for Goldman’s earnings. The investment bank was actually going to lose money in the fourth quarter, something that had never happened since the firm went public in 1999. Blankfein had known about the losses for weeks, but they had finally risen to a level at which he felt he had no choice but to inform the board.
Just that day, in the morning’s newspapers, there was a hint that things were going badly; the
Wall Street Journal
reported that Goldman was planning to lay off 10 percent of its workforce, or about 3,250 people. But in the wake of the Lehman collapse, the Goldman news was unremarkable; everyone knew 2008 was going to be an awful year for the securities industry, and even Goldman, the biggest money machine on Wall Street, was likely to be scathed.
Shortly before 9 a.m., Lissette Jorgensen called the various assistants of Goldman’s twelve directors to schedule a board meeting at 4:15 p.m. that afternoon. Of Goldman’s nine external board members, only one, Stephen Friedman, said he would definitely not be able to make the call. Ironically, Friedman was the firm’s senior partner in 1994, the most perilous time in Goldman’s history before the present. Of all the directors, he had the best sense of what Blankfein was facing.
As usual, Rajat Gupta had a packed day ahead that wasn’t made any easier by the fact that he was crossing time zones. When Jorgensen called Gomes, his assistant, she said she expected her boss would be able to join the board call. He was flying in from Barcelona, Spain, on American Airlines Flight 151, which was set to land at JFK Airport at 1:45 p.m. His usual driver, Tahir, would pick him up and take him to his home in Westport, Connecticut. Before the Goldman meeting, Gupta had a couple of other calls to make—one to discuss an upcoming leaders conference in Dubai and another to prepare for a November board meeting. Though he had started his day in Europe, he planned to work a full US day. After the Goldman board meeting, there were a couple of other calls on his calendar.
On Friday, he and his wife were headed to Providence for the Brown University parents’ day weekend, where they would visit their youngest daughter, Deepali, who was in her freshman year. The Guptas were friends of Brown’s president, Dr. Ruth Simmons, who, as it happened, also sat on the Goldman board. Simmons invited the Guptas to be her personal guests at the keynote address that broadcaster Jane Pauley was set to deliver. After the speech, the Guptas were to join Simmons at her home for dinner.
At 4:16 p.m., Gomes dialed into the Goldman call and patched her boss in. Sitting in the boardroom on the thirtieth floor, Blankfein told directors that Goldman was going to post a loss in the fourth quarter—contrary to what analysts were expecting. Any trading revenue Goldman booked in the quarter was being offset by losses in its portfolio of assets. Blankfein’s disclosure sparked a debate: after posting profits all these years, why was Goldman suddenly going to lose money? No director could point to anything more than the environment. At 4:49 p.m. the board call ended.
Twenty-three seconds later, Gupta’s secretary telephoned Rajaratnam’s direct work line and patched in the home office number of Gupta. The two were going through a rocky patch in their relations. Only a year and a half earlier, when Marshall Lux, a McKinsey partner, passed along a hello from Rajaratnam, Gupta gushed, “Raj is one of the most outstanding hedge fund managers and a very close friend.” During his capital-raising trips to the Middle East earlier that year, Gupta spoke highly of Rajaratnam’s investing prowess.
But by mid-October Gupta’s concerns about Rajaratnam’s handling of Voyager were growing. He confided in his protégé Kumar that the $10 million he invested in Voyager had evaporated after Lehman’s collapse on September 15. Raj “dropped the ball,” Gupta told Kumar. He felt Rajaratnam had a “moral and ethical responsibility” to make him whole because he was only a passive investor in Voyager and Rajaratnam was the one running the fund. He wanted Kumar to speak to Rajaratnam. Kumar was reluctant. Getting between the two titans in his life was not appealing. He didn’t know the background of the Voyager investment and figured Gupta and Rajaratnam would find a way to talk through it.
Despite his unhappiness with Rajaratnam’s handling of Voyager, Gupta kept his lines open to him. On October 5, just as he was about to fly out to Europe, Gupta lobbed a call to Rajaratnam on his cell phone. Again, upon his return, on October 10, he telephoned to see how Rajaratnam was doing.
“I know it must be an awful and busy week,” said Gupta on a voice mail he left. “I hope you are holding up well. Uh, and I’ll, uh, try to give you a call over the weekend to just catch up. Uh all the best to you, talk to you soon. Buh-bye.”
After the Goldman board meeting on October 23, Gomes patched Gupta through to Rajaratnam’s office line. While Rajaratnam’s cell phone was being wiretapped during this period, neither his office nor home phones were. For twelve minutes and thirty seconds, from 4:50 p.m. to 5:03 p.m., the two were connected.
The next morning, as soon as the markets opened, Rajaratnam, who had purchased 150,000 shares of Goldman stock for his technology portfolio three days earlier, started dumping the stock. He sold 50,000 shares at 9:31 a.m. and another 100,000 shares in a little more than an hour. The sales saved Galleon $3.8 million in potential losses; over the next few weeks, as word filtered out that Goldman was going to lose money in the fourth quarter, the investment bank’s stock slid to $52 from $108.58.
Later that same morning, Rajaratnam was catching up with David Lau, the new head of his Singapore office and an old friend from Wharton. Risky assets and currencies were plunging overseas on fears of a global economic slowdown. Lau called Rajaratnam to see what he was seeing in the US markets. In the middle of their conversation, Rajaratnam told Lau, “I heard yesterday from somebody who’s on the Board of Goldman Sachs, that they are gonna lose $2 per share. The Street has them making $2.50…They have zero revenues because their trading revenues are offset by asset losses…”
Not one to miss an opportunity to make a quick buck, Rajaratnam said, “I don’t think that’s built into the Goldman Sachs stock price…I’m gonna whack it you know.”
* * *
Soon after Lev Dassin became acting US attorney for the Southern District of New York, he put up a yellow Post-it note on his computer. On it were scribbled the words “Takedowns in Spring”—a pointed reminder that the criminal investigation into Galleon had been percolating for more than one and a half years. Arrests were imminent. As the US attorney, one of Dassin’s jobs is to help decide when to bring cases. If a case is brought too early, prosecutors run the risk that they could miss chasing leads that would allow them to bring a far bigger action or uncover separate but related illegal activity. At the same time, when an investigation drags on for years, evidence grows stale and memories fade.
The financial meltdown in September 2008 and the shocking revelations two months later that respected securities industry executive Bernard Madoff was running a Ponzi scheme that went undetected for decades shone a harsh spotlight on the SEC. Then presidential candidate John McCain, reflecting the mood of the time, called for the firing of SEC chairman Christopher Cox. Morale at the agency plummeted. One former SEC lawyer was asked at his mother’s birthday party, “How does it make you feel that your agency is absolutely incompetent?”
Pressure for a blockbuster case was mounting, and there was no case more obvious than Galleon. The SEC had already gotten authorization for a civil action to be filed, and yet some six months later, no complaint had been brought. During a meeting in April 2009 with lawyers from the SEC’s Division of Enforcement, Mary L. Schapiro, who by then had replaced Cox at the agency’s helm, was blunt about the stakes: “If we don’t get serious about this process, we may cease to exist,” she said.
Dassin, the new acting US attorney in Manhattan, was not the kind of man to be swayed by political pressure. But as the months wore on and the Bush administration prepared to hand over the reins of government to President Barack Obama and his team, Dassin needled his lieutenant Raymond Lohier about Galleon.
“Did I miss the takedowns?” Dassin would ask Lohier. It was his low-key but effective way of holding his lieutenant’s feet to the fire.
As it happened, in December 2008, just around the time Dassin became acting US attorney in Manhattan, the court-authorized wiretaps on Rajaratnam’s phone ended. They were in place for nine months and yielded mountains of direct evidence of Rajaratnam trading on inside information on a broad swath of stocks—Goldman, AMD, Akamai, and PeopleSoft, among others. There was ample material from which prosecutors could draw to build an airtight case against the Galleon hedge fund manager. But, more important, by wiretapping his cell phone, criminal authorities were now in a perfect position to bring cases against key members of his ring—Chiesi, Kumar, and Goel—and even widen the probe to ensnare others.
One of the most intriguing new suspects was Rajat Gupta, the former McKinsey managing director. The October 24 call between Rajaratnam and Lau confirmed Michaelson’s early suspicions that Gupta was tipping Rajaratnam to inside information he gleaned from his positions on corporate boards. But Michaelson had learned from experience that a promising call didn’t necessarily translate into a bulletproof case. What if Rajaratnam never traded on the information Gupta gave him or if the tip never came to pass? By keeping the wiretap active on Rajaratnam’s cell phone for an extra month, Michaelson hoped to gather more material and perhaps find calls between Gupta and Rajaratnam that would give prosecutors the direct evidence to make a case against someone as prominent in business as Gupta. After all, the recordings had already helped prosecutors widen their net.
In the course of wiretapping the cell phone of Rajaratnam’s former associate Ali Far, investigators stumbled upon calls between him and Rajaratnam. When he worked at Galleon, Far was nicknamed Rajaratnam’s “butler” because he always did his boss’s bidding. In early January 2009 in one wiretapped conversation with his former boss, Far divulged that Atheros Communications Inc. would surpass Wall Street’s expectations and “do 98, 99 million” in quarterly revenue, a tidbit he gleaned from Ali Hariri, an Atheros executive.
Armed with intercepts of calls between Rajaratnam and Far, FBI agent B. J. Kang approached Far at his California home on April 1, 2009. The move very nearly blew the cover on the entire investigation—and not because of any fault of Kang’s. Far didn’t know it, but he was on investigators’ radar early in the probe. In the summer of 2007, Apjit Walia, the RBC Capital Markets analyst and friend of Rajaratnam’s who speculated about the AMD-ATI acquisition, told the SEC that he had met Far a year earlier at a dinner at a restaurant called Le Souk, which Rajaratnam and his brother Rengan also attended.
Soon after Agent Kang approached Far at his home, Far told his business partner Richard Choo-Beng Lee of the unexpected visit from the FBI. Since quitting Galleon, Far had started a hedge fund with Lee, a native of Malaysia, called Spherix Capital LLC, and the two were enjoying a decent year. Their fund was up 10 percent already. Upon discovering that Far told Lee of their overture to him, the criminal authorities had only one choice: they had to approach Lee in the event that he informed someone else and the entire investigation, which was covert, was exposed.
Not long after the visit to Far, Kang knocked on Lee’s door in San Jose, California. When Lee answered, he refused to respond to Kang’s questions, but soon after, Lee got himself a lawyer and the two traveled to New York to meet with Michaelson and Joshua Klein, a prosecutor in the Manhattan US attorney’s office. Since joining the criminal authorities a year earlier, Michaelson had been busy, sifting through hundreds and hundreds of hours of wiretaps, deciding which offered the most promising material on which to build a criminal case against Rajaratnam. The probe was ripe enough that at any point a decision could be made to pull the trigger.
The showdown between Lee and the prosecutors was important. If prosecutors did not succeed in convincing Lee to cooperate, they risked the possibility of their investigation going public and jeopardizing all the hard work they had poured into it over the years. There was another complexity—a logistical one. As it happened, Lee was visiting the US attorney’s office in Manhattan on the same day as his business partner, Far. Prosecutors had to make sure the two didn’t run into each other; they didn’t want to give them the opportunity to match up their stories.