Authors: Anita Raghavan
Tags: #Finance, #Business & Economics
During the course of the seven-hour deposition, Rajaratnam tripped all over himself.
Michaelson, who had prepared meticulously to take Rajaratnam’s testimony, spent most of the morning easing his witness into the process and getting him comfortable. He walked him through simple questions such as where and when he was born, what computers he used, and how he kept track of his appointments. Rajaratnam breezed through it all, rarely hesitating before replying. When he was asked if he had ever come into possession of material nonpublic information, he responded: “Me personally, no.” Sometimes his answers were revealing. When Michaelson asked Rajaratnam about the hedge funds he invested in, he offered a variety of names. Some were start-ups like his brother’s fund, Sedna Capital, and Slattery’s Symmetry Peak. But others were old, established hedge funds like the Tudor funds, run by business chum Paul Tudor Jones, a renowned commodities trader; and Duquesne Capital, run by his good friend the legendary Stanley Druckenmiller. A protégé of George Soros, Druckenmiller masterminded one of Soros’s most brilliant trades: making $1 billion in 1992 speculating on the devaluation of the British pound.
When Michaelson asked which investors in his funds were also directors and officers of public companies, he threw out a couple of names—Ken Levy of KLA Instruments, Charlie Giancarlo of Cisco, and Kris Chellam of Xilinx. But he failed to mention Rajat Gupta, who at the time sat on the board of Goldman Sachs and was an investor in Galleon’s Voyager fund.
At 12:30, Isenberg requested a break. Rajaratnam was a diabetic, and his blood sugar was low.
When they reconvened after lunch, Michaelson started grilling Rajaratnam on AMD, asking him about the kind of information he relied on to buy the stock.
He said he acquired about $40 million of AMD stock between July 24 and August 11, 2006, because the stock was a bargain. AMD was unveiling a new product, Opteron, and it had a technological edge over Intel. He thought his source on the new chip may have been
PC Magazine
or industry buzz.
Galleon’s investment decisions were built upon a hundred different variables—analysts’ reports, money flows, Rajaratnam’s view of the market, and his tolerance for risk, among others. The hedge fund had thirty-four analysts to whom Rajaratnam paid somewhere between $30 million and $60 million in total a year to keep happy. They drew on public announcements and articles, stock analysts’ reports, trading patterns, and money flows to patch together winning investment ideas. When lawyers pressed him about whether he had any specific information that Dell or IBM was going to use AMD products in its computers, he said he had none.
Then Michaelson said, somewhat offhandedly, that he had a couple of quick questions before they recessed again.
“Are you familiar with a ‘roomy81’ instant-message address?” he asked.
“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,” said Rajaratnam, spelling out her surname.
Michaelson asked Rajaratnam if he ever talked with Khan about Advanced Micro Devices.
“She may have given me information, but I can’t recall.”
Then Michaelson called the midafternoon break.
Rajaratnam’s prevarication appeared to peak during the last hour, when Michaelson grilled him about an instant-message exchange on August 2, 2006, between him and an analyst with the IM handle APJITW. Apjit Walia, whose aim in life was to be a fighter pilot before becoming a securities analyst, worked at the investment banking unit of Royal Bank of Canada. Walia first met Rajaratnam when he and a colleague called on Galleon, a client of the bank. As often happens on Wall Street, a business relationship turned into a friendship. From time to time, Walia and Rajaratnam would have a drink, and on one occasion Walia accompanied Rajaratnam, an avid cricket fan, to Trinidad for an exciting match: India versus West Indies.
“AMD on August 1st, now 13th,” Rajaratnam appeared to be messaging, writing “13eh” instead of “13th.”
“Hey, for the tickets have to choose package B?” the analyst, Apjit Walia, shot back.
Michaelson wanted to know “what’s going on in this IM exchange,” clearly trying to figure out the link between package B and AMD, the ticker symbol for Advanced Micro Devices. (“A ticker” is Wall Street lingo for the symbol under which a public company’s stock trades. Google’s ticker symbol, for example, is GOOG.)
“We were going to see cricket in Trinidad,” Rajaratnam responded. “We were talking about the cricket packages, the tickets we had to buy for the World Cup. There were different packages as to whether you could play in Barbados or Trinidad.” (Walia, who has not been charged in connection with the Galleon case, also told the SEC in his voluntary testimony that his remark referred to the World Cup cricket.)
At first, it seemed like for every question Michaelson posed, Rajaratnam had a ready answer. Package B, he said, referred to accommodation and tickets packages that some tour operators were offering. When Michaelson followed up by asking which tour operator he was using, he retorted: “We decided to get our own house.”
But then Rajaratnam was flummoxed.
“Did you buy package B?” Michaelson asked.
“Sorry?” Rajaratnam answered.
Michaelson asked the question again. For a moment, it seemed like the stories had caught up with Rajaratnam.
“What is package B?” Rajaratnam asked. Then, without missing a beat, he said package B, which he ended up buying, was unavailable to people who followed India in cricket.
The SEC lawyers were divided about the meaning of package B. Some, like Markowitz, were convinced that “package B” was a code word to buy a security. Rajaratnam denied it was. After the deposition, Michaelson spent hours Googling cricket packages to look at the various permutations. His gut feeling was that the exchange about package B probably was innocent, as Rajaratnam suggested. It just seemed too elaborate a way to telegraph the buying of a security.
What clearly was not innocent from Michaelson’s perspective was the apparent shift in timing—“AMD on August 1st, now 13th.” When Michaelson asked Rajaratnam about it, he claimed that he did not know the significance of the word “13eh.”
“I know this is about cricket,” he told the SEC lawyers. “I don’t know. It’s about cricket. I remember package B and the ticket, absolutely about the tickets. I don’t know of anything else.”
He said he was pushing Walia to choose tickets and now Walia was reminding him and so he called him a “rocket scientist.” “We nailed the deadline,” Rajaratnam said. “I don’t know what the deadline was, the thirteenth or the fifteenth.”
Seconds after the protracted discussion, during which Wadhwa and Markowitz jumped in, Michaelson showed Rajaratnam an IM exchange between him and his brother Rengan that took place the day before the chat with Walia.
“are you going to hold the amd?” Rengan asked.
“y through the 13th,” Rajaratnam messaged back, using “y” as an abbreviation for “yes.”
Again, Michaelson asked if Rajaratnam could tell the SEC lawyers the importance of the date, the thirteenth.
“I don’t recall what the significance of the thirteenth was,” Rajaratnam said.
In an effort to jog Rajaratnam’s memory, Michaelson pointed to the two instant messages within twenty-four hours that seemed to refer to the thirteenth, one correctly and the other as “13eh.” But before Michaelson could finish posing his question, Rajaratnam’s lawyer Jerry Isenberg jumped in.
“Are you representing that ‘13eh’ means the thirteenth?” Isenberg asked. “Do you have some secret knowledge that the rest of us don’t have?”
The SEC lawyers persisted in their line of questioning, and Rajaratnam stubbornly stuck to his line of defense.
“It doesn’t change my memory,” said Rajaratnam. “I don’t know.”
Before the SEC wrapped up the deposition, Michaelson asked Rajaratnam how he paid for package B for the cricket match. Rajaratnam said he paid with his credit card.
The next day, June 8, 2007, the SEC issued a five-page subpoena to Galleon for his email and cell phone contacts, requests to identify his personal security and brokerage accounts, bank accounts, and investments in privately held companies, and handwritten notes concerning any securities transactions. Buried in the five-page subpoena was a request for Rajaratnam’s credit card bills.
Then the SEC went dark—it issued no more subpoenas and asked for no more testimony from anyone at Galleon. As far as Rajaratnam was concerned, the investigation, which had cost him a lot of time, money, and headache, had ended. Now he could get back to one of his core businesses, trading on inside information.
Walter Salmon had just wrapped up a class at Harvard Business School in the spring term of 1973 when he noticed a defeated look in the eyes of one of his best students. Salmon didn’t know Rajat Gupta socially. He sometimes had students over to his house in bucolic Lincoln, Massachusetts, for brunch or cocktails, but if it happened, it was generally in groups, not the kind of setting to get to know one student particularly well. As with most professors, Salmon’s knowledge of Gupta came from his interaction with the young Indian’s work. And that work was extraordinary. It was odd to see someone with such a bright future deflated.
Gupta was an amiable young man, even tempered and usually upbeat. Some of Salmon’s colleagues considered Gupta quiet and reserved, but Salmon, a professor of retailing, did not share that impression. During the course of the semester, Salmon was struck by the quality of Gupta’s insights in the elective class on retail marketing that he taught second-year students. He knew enough about him to tell that Gupta was not himself that day.
“What’s going on?” Salmon asked Gupta as they stowed their notes and materials.
By the early 1970s, Salmon, a youthful red-haired professor with a penchant for chewing on rubber bands while in his office, was one of HBS’s most influential faculty members. After getting his MBA from the school, he went into the Army for two years before returning to HBS as a research assistant in 1956. Three years later, in September 1959, he had his baptism at the front of the classroom. Since then, he had gained a reputation within and outside Harvard for his work in better understanding the profitability of particular lines of business and finding effective ways of motivating and compensating the management of retail organizations. Like many HBS professors, he matched academic research with experience in the real world. He didn’t offer freelance consulting services because he preferred a more steady income stream, but he did sit on a number of corporate boards, among them Hannaford Brothers, a Scarborough, Maine, supermarket chain; and Stride Rite, a shoemaker.
Salmon was astonished by Gupta’s news that he’d not received any “ask backs.”
Recruiting at Harvard Business School is an important ritual whose structure is much like that of a senior prom. Every fall, America’s biggest and most prestigious companies—Procter & Gamble, Goldman Sachs, McKinsey, and scores of others—appear on the Allston, Massachusetts, campus of HBS to interview the sharpest new business minds in the country. After one or two on-campus interviews, students jockey for “ask backs”—invitations to visit companies at their headquarters, all expenses paid. “Ask backs” are the equivalent of getting asked to the prom—a sign that firms are serious about hiring a student, so serious they are even willing to pay for a visit to their offices. Some students game the system. They accept “ask backs” from companies they are not particularly interested in joining simply because their headquarters are in a fun city—San Francisco or Los Angeles. Perhaps to reduce the risk of trips to New York by frivolous recruits, it was common in the 1970s for savvy Wall Street investment banks to take a small coterie of prospective hires to a fancy dinner at a then popular Boston eatery like Maison Robert. It was not quite an invitation to go steady, but it was an overture to start dating.
Back then, jobs on Main Street (manufacturing, retailing, energy), not Wall Street (trading and banking), were the traditional path to prosperity for MBAs. The markets wheezed and sputtered in the late 1960s, so much so that by mid-1973, when Gupta’s Harvard class was set to graduate, the risk to stock investors of the three I’s—interest rates, inflation, and the impeachment of President Richard Nixon—had risen exponentially. Harvard MBAs angled to land “residencies,” much like medical residencies, at big, prestigious companies such as US Steel, 3M, Procter & Gamble, and General Mills. The traditional career path for the men—mostly white men and very few women or men of color—who came of MBA age in the 1970s was to start at the bottom of the corporate ladder and work to the top. Getting an MBA from Harvard allowed one to skip a slew of steps and offered the possibility of a country-club lifestyle after graduation.
At the same time, American business culture was in the throes of a quiet but seismic shift—the emergence of a kind of Harvard-after-Harvard career landing zone made up of business experts and advisers. Big, visible, brand-name companies were being usurped at the top of the “ask back” hierarchy by a new class of companies that were not in the business of selling goods. Rather, they sold advice. In the decades to come, the stock market and the companies that serviced it would mint a new class of wealthy individuals and become the most sought-after path to American success. The service industry to corporate America would emerge as the new driver of economic growth, drawing not just America’s but the world’s best and brightest with the allure of unimaginable wealth. Among the arrivistes on the American corporate scene were consulting companies, and there was no firm better known than McKinsey & Co.
The oldest consulting firm in the world, McKinsey had its roots in a company founded in 1926 by James O. McKinsey, a certified public accountant and University of Chicago professor. McKinsey saw an opportunity to counsel managers when he worked in the Army Ordnance Department and dealt with suppliers during World War I. After the war, he started his eponymous firm, specializing in accounting and in what was then known as “management engineering.”
The name McKinsey would probably have been relegated to a footnote in history had it not been for the arrival in 1933 of a young Harvard Business School graduate named Marvin Bower. Over a career that spanned six decades, Bower single-handedly built a profession out of McKinsey and spawned what we now call management consulting or corporate problem solving. Initially, consultants helped CEOs chart out their companies’ strategic course, but over time they have come to work with firms on more picayune problems, such as devising ways to cut costs and boost sales. One of Bower’s first projects was a prototype of the kind of work consultants would routinely come to practice. In 1935, big Chicago department store Marshall Field & Co. hired McKinsey to perform a study of its entire business.
Bower and McKinsey recommended that Marshall Field focus on its department store business and jettison other assets. After the study, Marshall Field’s board was so impressed that it offered James McKinsey the job of chief executive. Not only did McKinsey’s acceptance secure Bower’s control of the consulting concern; it was the beginning of a one-way revolving door that would become common among McKinsey consultants in later years.
During the course of sixty years at the firm, Bower saw consulting as an above-the-fray profession, not a profit-above-all-else enterprise. A career dedicated to helping companies solve problems for a fee would and did provide a comfortable living, but Bower firmly believed that to exploit a client was contemptible. As a graduate of Brown University, Harvard Law School, and Harvard Business School, Bower sought to find other men like himself to staff his company.
At the time Gupta was looking for a job, McKinsey was a bastion of Waspy, Ivy League–educated young men with lines into America’s dominant families and businesses. A firm handshake and entrée into New York’s Social Register set were more important than academic achievement. “BCG and Bain hired the ‘best and the brightest’ while McKinsey focused more on hale fellows well met,” says Jeffrey Skilling, who joined McKinsey’s Dallas office directly out of HBS in 1979.
As Skilling notes, McKinsey was not the only place an MBA from Harvard could find consulting work. Spurred by Bower’s success, Bruce D. Henderson, a onetime Bible salesman and Harvard Business School graduate, founded the Boston Consulting Group in 1963. It started with just two consultants and in its first month racked up just $500 in billings. Unlike McKinsey, which built a local-office-based model of client relationships, which amounted to spending considerable time at the country club, the Boston Consulting Group competed by offering “thought leadership”—consultant-speak for developing new and innovative ideas to win clients. It was known for its “fly in, fly out” expert-based consulting, which ate into McKinsey’s market share.
By 1973, Boston Consulting had grown to 142 consultants, and like McKinsey, it had offices in London and Paris. Management consulting was so promising a profession that in that same year Bill Bain and a coterie of others quit BCG to found Bain & Co. The last of what came to be known as the big three, Bain relied on consultant star power and competed with the behemoths by cultivating big-name talent. It recruited the top 5 percent of the graduating Harvard Business School class, so-called Baker Scholars such as unsuccessful presidential candidate Mitt Romney. (Despite stellar grades in his first year, Gupta was not a Baker Scholar.)
Besides being intellectually challenging, consulting appealed to young HBS graduates like Rajat Gupta because it forestalled the important decision of what to do in life. As James McKinsey had demonstrated forty years earlier, it was a back door to jobs in corporate America. It allowed young men to mingle with corporate chiefs and forge close ties that they could later parlay into employment. A number of consultants at McKinsey—Harvey Golub, Michael Jordan, and Louis V. Gerstner Jr.—would leave over the course of the 1970s and 1980s and ultimately land top jobs at prestigious companies such as American Express, Westinghouse Electric, and IBM. In the years that followed, countless other McKinsey consultants trod similar paths, among them Jeffrey Skilling, who ran Enron; and James Gorman, a native of Melbourne, Australia, who succeeded the charismatic John Mack as the chief executive of Morgan Stanley. In 2008, a
USA Today
study calculated that the odds of a McKinsey employee becoming CEO at a public company were the best in the world, at 1 in 690. In 1973, for the young and undecided like Gupta, it was a great way of keeping one’s options open.
Though he was one of two students in his class who was awarded perfect grades after his first term, Gupta struck out during his second interview with McKinsey—a setback that carried greater weight for him than for many of his peers. After graduating, Gupta planned to marry his IIT sweetheart, Anita. She thought when Gupta left India, that was the last she would see of him. Well-meaning friends had told her that people change when they go to America. But Gupta didn’t forget her. He wrote long letters to her every day and waited for her missives back. In his wallet, he kept a five-rupee note that she had signed and a small photograph of her.
Anita’s academic concentration was electrical engineering. She was a brilliant student who received the coveted director’s gold medal at IIT, and Gupta liked to say that Anita was the smarter of the two. As modest and self-effacing as Gupta appeared to be, those who knew the couple tended to agree that in terms of raw intelligence, Anita Mattoo outshone Rajat Gupta.
To stay in the United States and to bring Anita over, Gupta needed a job. Straight out of the gate, Gupta hit a roadblock. Many corporations would not even contemplate interviewing job candidates on student visas. They told the HBS placement office that foreigners need not apply—no exceptions, not even standout students with stellar work experience.
The previous summer, Gupta had worked at a food-processing company in upstate New York. He got the summer job because his former suite mate David Manly’s father was a senior executive at the company. During his summer stint, Gupta devised an innovative production planning system for jam and jelly making that is used even today at the company and is known as the “Rajat system.” “It was a very professional piece of work for a young man,” said Doug Manly forty years later.
But as Gupta prepared to graduate in 1973, none of that seemed to matter.
“If you didn’t have a US citizenship or a green card you never got an interview,” Gupta said years later. The one exception was the plum positions to be had at the big three consulting firms. In their gusto to expand overseas and outflank one another, they were keen to attract the right kind of foreign consultant.
Gupta had two back-to-back interviews with McKinsey. After the second interview, Bill Clemens, then head of recruiting at McKinsey, told Gupta that he had terrific credentials. But then with a subtle, yet time-honored, between-the-lines message, Clemens told him, “You’re obviously very smart, but you need to go and work somewhere else for three or four years before we’ll consider you.”
“Nobody else is interviewing me so how would I go and work anywhere else?” Gupta asked pointedly. Clemens was unmoved. Gupta’s rejection was curious, especially as both McKinsey and its archrival, Boston Consulting, vied every year to land the most Harvard B-schoolers. At one point, more than a third of McKinsey’s consultants held a Harvard MBA. The consulting giant historically rolled out the welcome mat to top students like Gupta. When word got around the class that Gupta had been rejected by McKinsey, some students suspected an undercurrent of discrimination at play. Out of necessity, universities and hospitals had started integrating Indian intellectual manpower in the late sixties and early seventies. But opportunities for nonwhite immigrants in the clubby, largely Waspy world of corporate America and Wall Street were rare. When he was recruited to McKinsey in 1979, Anjan Chatterjee recalls meeting with a partner who said to Chatterjee: “You guys do great work and you are terrific consultants. The question is will our senior clients ever relate to you.”
* * *
HBS professor Walter Salmon listened intently to Gupta’s story of getting rejected by McKinsey because of his lack of experience.
“That surprises me given your work in my class,” Salmon said. He was seasoned enough to know that Gupta was one of those very bright students who were few and far between. He also was acquainted with a number of McKinsey partners and had a good sense of the caliber of people the firm hired. In his view, Gupta fit the McKinsey mold perfectly. He was quick at figuring out the core issues of an HBS case and was effective at delivering his analysis.