The Billionaire's Apprentice: The Rise of The Indian-American Elite and The Fall of The Galleon Hedge Fund
Details the Galleon Group insider trading scandal of 2009 and the central role that the Indian American immigrants played on both sides of the case. The "twice-blessed" wave of Indian immigrants hustled their way to positions of wealth and power, sometimes cutting corners along the way.
In college, I remember watching the collapse of the Galleon Group, one of the world's largest hedge funds, but I didn't appreciate the unique place that Galleon held within the Indian American community. "The Billionaire's Apprentice" details the Galleon Group insider trading scandal of 2009 and the central role that the Indian American immigrants played on both sides of the case. Raghavan explains how the "twice-blessed" wave of Indian immigrants to America in the 1970's hustled their way to positions of wealth and power, sometimes cutting corners along the way. Raghavan's book traces the rise and fall of Rajat Gupta, the first Indian head of the McKinsey & Co. consulting firm. Climbing to the highest levels of establishment influence and power (including a seat on the board of Goldman Sachs), Gupta ended his career in disgrace after becoming embroiled in the Galleon Group insider trading scandal. He served time in federal prison with his co-conspirator and fellow South Asian Raj Rajaratnam (see Raghavan's article in the NYT about their awkward prison meetings).
Raghavan portrays Gupta as hard-working, philanthropic, corporate climber who lost his way as he aspired to ever-higher levels of financial success. Galleon founder Rajaratnam comes off as much sleazier character, the operator of a vast network of South Asians at tech companies and hedge funds who supplied him with a trove of insider information. Raghavan connects the dots between these two men and the many other players in the interconnected web of this case, but some things still don't add up. As Raghavan notes:
In the Galleon case, for instance, the government alleged that Rajaratnam pocketed as much as $75 million from his illegal trades. Compared to Rajaratnam’s net worth of $1.3 billion at one time, the sum pales.
If Rajaratnam was already making so much money, what could have possibly justified the risk of his insider trading activity? There seem to be only two explanations. Either Rajaratnam was a pathological gambler, or the majority of Galleon was built on insider information and the government only uncovered a tiny portion of it. Unfortunately, Raghavan never addresses this question.
Overall, "The Billionaire's Apprentice" was a nice introduction to the world of insider trading and white-collar crime. This book was part of my 2018 reading theme on "Crime and Punishment."
My highlights below.
Prologue - The Twice Blessed
In one generation Indian-Americans had vaulted from geeky outsiders to polished players in all facets of American society.
Gupta and the other Indian-American luminaries were either part of or the children of a generation that academic Vijay Prashad has dubbed the “twice blessed.” The first blessing was to be born after India had achieved its independence from Great Britain at the stroke of midnight on August 15, 1947. The blessing of this freedom was not just political; it was cultural too. The end of the Raj made educational and social advancement possible to a young nation throbbing with 340 million people. The second blessing was the culmination of the civil rights struggle in the United States and the passing in 1965 of the now largely overlooked Hart-Cellar Act into law. The act — an outward-looking follow-up to the 1964 Civil Rights Act — did away with long-standing isolationist policies that severely restricted Indian immigration to one hundred people each year.
The average Indian in the United States is “ten thousand times more likely to have a doctorate” than the average Indian in India.
Of the 3.2 million Indians in the United States, 70 percent have bachelor’s degrees compared to just 28 percent nationally. Their median annual household income of $88,000 is almost twice what most Americans earn each year and 33 percent higher than the average income of Asians in the United States.
Singh, then a little-known finance minister in a previous Indian government, was the architect of a fusillade of economic reforms that dismantled the Red Tape Raj and ushered in an era of entrepreneurial freedom. But when India prospered in the wake of Singh’s moves, McKinsey thrived, advising a raft of Indian companies on restructuring moves and playing a pivotal role in building “Offshore-istan.”
Part One - Discovery
Chapter One - “Who Will Show Me the Way in the World?”
With Macaulay’s urging, Governor-General William Bentinck introduced English as the official language for Indian higher education, a move that would have momentous consequences a hundred years later.
Born as a British subject, Ashwini Gupta, through hard work and sacrifice, became an insider in modern India.
Chapter Two - “I Respectfully Decline to Answer the Question”
India’s independence from Britain in 1947 required Partition, as the division of India was known. To quell Muslim unrest and accelerate the departure of British forces in India, the Indian Independence Act of 1947 split two of the country’s most distinctive provinces, Punjab and Bengal. Parts of both formed the Islamic Republic of Pakistan. West Bengal was part of India, but East Bengal became Pakistan. Similarly, part of Punjab went to Pakistan and half stayed with India.
Partition triggered a mass migration of people, with about 7.2 million Hindus and Sikhs moving to India from the newly created Pakistan and an equal number of Muslims making the reverse migration. One million lives were lost along the way, many victims of brutal sectarian violence.
Before the terrorist attacks, the SEC was housed in the World Trade Center. Hundreds of thousands of files were destroyed in the attacks, along with accompanying cases.
Chapter Three - A Family Affair
Moon’s firm, UBS, is a significant player in a highly profitable business on Wall Street known as prime brokerage. Banks provide back-office support, IT, office space, and custody services to independent hedge funds and earn money by lending cash and stock to the funds.
Chapter Four - Drama at IIT
Unlike his classmates, Rajat could not afford the luxury of adolescence. Not long after he arrived at IIT, his mother died of a heart attack.
The country was struggling to feed its population, so how could it possibly build a network of MIT-like universities from scratch? But that is exactly what it did, in large part because of the vision of Jawaharlal Nehru.
It is the IITs’ focus on meritocracy that has made it a beacon of excellence in an India bedeviled by cronyism and back-scratching. Admission requires academic excellence, period.
Chapter Five - Birdie Trades
In 2006, when Christopher Cox, a California congressman, led the SEC, enforcement lawyers often got pushback when they sought formal powers to probe. Cox believed that financial players like investment banks and hedge funds could be trusted to regulate themselves. During his time, the agency missed some stunningly huge fraudsters, such as Bernie Madoff, who ran a Ponzi scheme for nearly two decades.
Chapter Six - Promises to Keep
Among the pride of alpha males at HBS, Gupta was distinctive in a very non-alpha-male way.
Chapter Seven - The Good Ship Galleon
Besides showing that material nonpublic information has been divulged, to bring an insider trading case the SEC needs to demonstrate there has been a breach of duty when the information is given.
The writer went on to say that the limited partners in Galleon “are industry executives... and Board Members of large public companies... They share quarterly results with the management of this fund prior to release to the public. In return the fund provides greater returns on their money.”
“Prostitution is rampant for executives visiting Galleon. You will find that the superbowl [sic] parties for the executives, paid for by the Galleon Group, including [sic] prostitutes and other forms of illegal entertainment. In return, the executives provide Galleon the unfair edge that the fund leverages so well.”
Sedna Capital, Rajaratnam’s brother’s hedge fund, whose suspicious trading activity sparked the investigation into Galleon in the first place, suddenly closed, largely on account of poor performance. Tellingly, its employees were absorbed by Galleon.
Some executives take the gamble that lying under oath is better than invoking the Fifth Amendment in the event that the SEC brings a civil complaint and their pleading of the Fifth is used against them.
Part Two - Rising
Chapter Eight - No Ask Backs
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.
Chapter Nine - “The Tamil Tiger”of Wall Street
The new arrivals added color and helped break down the barriers that had persisted for most of Wall Street’s history, segregating Jewish banks like Goldman Sachs and Lehman Brothers from Wasp banks like Morgan Stanley and First Boston.
“Wall Street was tough to get into for us,” Rajaratnam would say decades later. “Not to be crude but there’s a Jewish mafia, and a Wasp mafia, and an Irish mafia up in Boston... They hire their own; they socialize among their own.” Rajaratnam understood how the system worked. If he couldn’t get into anyone else’s club, he’d build his own.
Founded by George Needham, a former investment banker at CS First Boston, the upstart firm challenged Wall Street by filling its ranks with outsiders. “I hire one-legged men, and I beat the crap out of them,” Needham liked to say.
Chapter Ten - Up or Out at McKinsey
Skilling recalled in a series of emails from federal prison in Englewood, Colorado. (He is serving a twenty-four-year sentence for his role in the collapse of energy giant Enron, a McKinsey client.)
Chapter Eleven - The Camera Never Lies
Many investors had come to believe that someone at Intel was divulging confidential information about the company before its earnings were announced. The recipient of the information was widely thought to be a fast-rising analyst at a boutique investment bank named Needham & Co.
He would hold job interviews at the topless club Scores.
Deep analysis and a lean expense ledger were not the only core competencies at Galleon. Rajaratnam’s secret sauce was that he was an expert manipulator. He knew just the right way to push corporate insiders to pass along confidential financial information long before it was publicly released. And with his own money riding on Galleon, he squeezed them harder than ever before.
For Rajaratnam, it was part of doing business. His cultivation of Khan as a future source of inside information was perfect. Even before he ever asked her for anything, he made her feel that she owed him.
Chapter Twelve - The Corner Office
By the time Gluck was set to retire, McKinsey had grown significantly — its revenues doubled in his six years in the job to $1.2 billion. But in a harbinger of the future, 60 percent of that revenue came from overseas.
Gupta’s election in March 1994 to the position of global managing director was a watershed in the history of sixty-eight-year-old McKinsey. By electing an Indian to its helm, McKinsey left no doubt that the firm was confidently embracing a diverse and global future and turning its back on a homogeneous past. Gupta always made it clear that he thought the criticism McKinsey received for being too patrician was overblown. “Did I ever find a glass ceiling?” he rhetorically asked years later. “I never found a glass ceiling partly because McKinsey is a truly meritocratic institution and partly because most glass ceilings are people in their minds, rather than true.”
Chapter Fourteen - Building Offshore-istan
Many were less interested in McKinsey’s services; indeed, some did not even know exactly what management consulting was. Rather, what they sought was the firm’s cachet. They wanted to be able to broadcast to others—their customers and their friends—that they had the wherewithal to hire the US consulting giant. The McKinsey name had become a status symbol in one of the world’s largest and fastest-growing markets.
Manmohan Singh, India’s new finance minister and a free marketeer, started hacking away at India’s socialist undergrowth, getting rid of the License Raj, which had developed into a clunky cover for government intervention in industrial policy. Singh’s reforms marked an important milestone for India, which had been muddling along since independence. They put the country on a trajectory of growth from which it would never look back.
Chapter Seventeen - The Wharton Mafia
They looked upon the Indians who were raised in America with contempt and mocked them as ABCDs—or American-Born Confused Desis
Though their ethnic origin should have been a unifying bond, US-raised Indians and immigrant Indians were almost as far apart as black Americans and white Americans.
Chapter Eighteen - Reeling in Roomy
For instance, if Galleon was expecting a positive event to buoy a stock, Rajaratnam told Smith to make purchases and sales of the stock. That way, if the government started investigating, Galleon could point to the sales and argue that they were inconsistent with a hedge fund being dead certain a positive event was imminent.
Phone intercepts historically have been used in organized crime, drug, and terrorism cases but had not been applied in the investigation of an insider trading ring, even though in 1984 Congress expanded the list of crimes in the Federal Wiretap Act, often known as Title III, to include wire fraud. Among other things, insider trading violates the wire fraud statute.
Before any US attorney’s office in the country seeks a wiretap from the court, it requires approval from the Justice Department, which traditionally requires two things: probable cause and necessity.
In 2008, US judges approved 1,891 phone intercepts; nearly 1,600 were for drug cases. Just 12 were for conspiracy, one of the most common charges filed against white-collar defendants.
Part Three - Falling
Chapter Nineteen - Moonlighting at McKinsey
By 2001, the assets at Rajaratnam’s Galleon fund made it one of the ten biggest hedge funds in the world.
If his housekeeper was going to be the recipient of the consulting payments Rajaratnam planned to make, then how could he be assured that he would get his money back? That’s easy, Rajaratnam told him. There was a standard way of dealing with this situation, Rajaratnam explained. Kumar would simply write a nominating letter that would be signed by his housekeeper, giving Kumar authorization to act on her behalf.
Chapter Twenty - A Vanaprastha on the Hudson
A Gupta principle that he drew from the Bhagavad Gita holds that man has a right to work but not to the fruits that arise from his labor.
"The most important contribution I made during my tenure as managing director is to make sure we didn’t go public, we didn’t start a venture fund, we didn’t go into starting businesses."
As managing director, Gupta had always devoted a significant chunk of time — as much as 25 percent — to ventures that had nothing to do with the firm.
He liked to name-drop. “He was very proud of saying ‘I hired Chelsea Clinton—I hired Hillary Clinton’s daughter,’” says Balachandran.
Gupta’s retirement as managing director at McKinsey was a pivotal turning point in his life. “Up to his McKinsey days, he was guided by the McKinsey guidelines and values. He was governed by McKinsey and not Rajat. He was on the right side,” says Balachandran. “After McKinsey, he put his eggs in the basket of money rather than reputation. He stepped up his quest for money because his professional superiority had climaxed.”
Chapter Twenty-One - The Dishonorable Dosco
Since Rajaratnam planned to pay for Kumar’s services with soft dollars — rebates from trading firms — the money could not be funneled directly to Kumar’s housekeeper, Manju Das. There had to be a conduit, an entity that appeared to provide consulting services to Galleon, through which the money passed. After some effort, Kumar found someone in Europe willing to enter into a consulting agreement with Galleon. The firm, Pecos Trading, would bill Galleon for its services and transfer the money it received to an account in Kumar’s housekeeper’s name, at Galleon. As part of the setup, Kumar would be the custodian of his housekeeper Manju Das’s account at Galleon. The beauty of it all was that there would be no paper trail leading back to him at McKinsey.
Chapter Twenty-Three - The Million-Dollar Man
In efficient markets, the easiest way to “arbitrage consensus” is to have inside information — a tip, for instance, that a large semiconductor company is poised to make an unexpected acquisition or that a firm is expected to report an earnings shortfall.
Over the years, Rajaratnam learned that one of the easiest ways to build a network of loyal informants was to invest in fledgling hedge funds set up by young and hungry investment managers — and then make them dependent on you to beat the market. Whenever they could, they paid you back in the best currency around, information.
Rajaratnam had seeded more than forty hedge funds, typically giving their founders $1 million to get rolling.
the SEC put in place Regulation FD — short for “fair disclosure”
The advent of “Reg FD” changed all that. It transformed the discourse between corporate America and Wall Street by requiring companies to disclose corporate news to everyone or to no one at all.
It was a big payday for Rajaratnam, who had accumulated $89.4 million worth of ATI shares, snapping up the stock whenever it slipped. He booked a profit of nearly $23 million on the deal.
Chapter Twenty-Nine - A Tragic Call
And after the collapse of Lehman Brothers, Gupta had come to learn that the $10 million he had invested in the Voyager fund, a vehicle that was managed by Rajaratnam, had evaporated to nothing. He felt that it was Rajaratnam’s responsibility to make him whole; after all, Gupta was only a passive investor in the fund. The unflappable Gupta was so angry that he later contemplated suing Rajaratnam. Ultimately, he never took legal action. It would turn out to be a costly mistake.
Chapter Thirty - “Buy Goldman Sachs, Buy Goldman Sachs”
Washington Mutual, the nation’s biggest savings and loan, was teetering on the brink, and lots of banks were staring into the abyss. By the end of the week, the Federal Deposit Insurance Corp. would step in and seize WaMu, making it the largest bank failure in US history.
Chapter Thirty-One - Trading at the Setai
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.
Chapter Thirty-Two - Handcuffs for Breakfast
Of the three largest technology funds at the start of the decade, Rajaratnam’s Galleon was the only one still in business. The other two, the Bowman Technology fund, run by former Fidelity manager Lawrence A. Bowman, and Andor Capital Management, spearheaded by former Goldman Sachs technology analyst Daniel Benton, had shuttered.
Part Four - Trials
Chapter Thirty-Three “Why Is It So Quiet Around Here?”
Every man in the room knew that Wall Street rivals would rush to exploit the news of Rajaratnam’s arrest even as they feigned sympathy on the phone. Competitors would make a calculated bet that Galleon would have to dump stocks at fire-sale prices; then, as they did in 1998 when high-flying hedge fund Long-Term Capital Management got in trouble, they would hammer stocks they suspected were in Galleon’s portfolio, making money as the stocks tumbled amid Galleon’s indiscriminate selling and creating a death spiral that fed upon itself.
Chapter Thirty-Five - The Gupta File
The proceeding, known as a Franks hearing — its name is derived from the case Franks v. Delaware — is held to determine if an affidavit to obtain a search warrant, or in this case a wiretap, relied on false statements.
Chapter Thirty-Six - Kumar Sings
Jonathan Streeter was still in college when Rudolph Giuliani, then the US attorney for the Southern District of New York, launched the first big criminal crackdown on Wall Street with a spree of high-profile arrests that dethroned some of the biggest kingmakers of the era.
Ultimately, the public relations blitz would catapult Bharara onto the pages of mainstream magazines like the New Yorker and Time, which in 2012 would name him one of its “100 Most Influential People.”
The forty-four-year-old Bharara, who can come across as a Boy Scout, takes insider trading seriously. Some legal scholars contend that it is a victimless crime, often involving minuscule amounts of money. In the Galleon case, for instance, the government alleged that Rajaratnam pocketed as much as $75 million from his illegal trades. Compared to Rajaratnam’s net worth of $1.3 billion at one time, the sum pales.
Preet, and his younger brother, Vinit, born not long after their arrival in America. Vinit went on to cofound an online retailer — its businesses include Diapers.com — which he and his partner would sell for $540 million to Amazon.
Dinh wanted Bharara to join the Phoenix Club, one of eight exclusive all-male final clubs at Harvard. Bharara demurred. “I do think he just didn’t think it was the right thing,” says Clark.
Andrew Ross Sorkin, the New York Times writer and author of the best-selling book Too Big to Fail, made a cameo.
The firm’s practice, he told jurors, was “to do your homework but to still cheat on the test.”
Chapter Thirty-Seven - An Unhappy Diwali
In the wake of the 2008 market meltdown, no major Wall Street figure had been sent to jail, and Bharara was sensitive to the criticism that he had not taken on the architects of the worst financial crisis since the Great Depression.
As Rajaratnam stood, the judge sentenced him to eleven years in prison, the longest sentence ever for an insider trading case.
Chapter Thirty-Eight - Et Tu, Kumar?
It was the most uncomfortable trial in recent memory. It pitted one corner of the establishment, represented by Gupta, the former three-time managing director of McKinsey, against the other corner of the establishment, Goldman Sachs & Co. There was no love lost between the two. In the months before the trial, Gupta had come to distrust his relationship with Goldman and view Blankfein with great disdain.
Chapter Thirty-Nine - A Family Secret
(Goldman had advanced him money to pay his legal bills, which by the end of the trial amounted to $30 million.
Even with his own future at stake, Rajaratnam refused to cooperate with the government. In an interview he granted after he was arrested, he assailed the South Asians swept up in the case, singling them out for their lack of honor. “The Americans stood their ground. Every bloody Indian cooperated — Goel, Khan, Kumar,” he railed in Newsweek magazine. (Rajaratnam was not entirely correct; one of his carefully groomed protégés, Adam Smith, cooperated and testified at his trial, but he was never one to let the facts get in the way of a good story.)
This is the first book on an insider trading case written with the aid of nearly fifty wiretapped calls, some of which run nearly 30 minutes. The wiretaps offered an extraordinary glimpse into white-collar crimes, typically shrouded from public view, being perpetrated in real time.