Rajat Gupta's Lust for Zeros

Painting by Alan Coulson

Rajat Gupta, who was indicted in the largest insider trading case in United States history.

Late one Friday morning, Rajat Gupta was rushing through security at Philadelphia International Airport, carry-on in tow, when his cellphone rang. When Gupta heard from Goldman Sachs, on whose board he sat, it was often from its chief executive, Lloyd Blankfein. But on this morning, it was Gregory K. Palm, his old Harvard Business School classmate and the bank's general counsel, on the line. Palm sounded unusually serious. So Gupta asked if he could call him back from the other side of security.

Graphic

Raj Rajaratnam

When he did, Palm quickly made two odd disclosures. First, he told Gupta that he had arranged for a colleague to listen in on their conversation. Then he said, “We are representing the corporation, and not you.” Palm wanted to make sure that there was no doubt that this was not a privileged conversation. If the matter evolved into something bigger, their discussion could be handed over to law-enforcement officers.

As Gupta listened, Palm stuck to the script that he worked out beforehand. “What can you tell me about Raj Rajaratnam, and have you ever provided him with information about what we do?” he asked.

Of course Gupta knew Raj Rajaratnam, the billionaire head of the Galleon Group hedge fund and No. 236 on the Forbes 400 list. He had worked with him on a number of projects since stepping down from the top job at McKinsey, the consulting giant, in 2003. But Rajaratnam's name had turned radioactive since his arrest, on Oct. 16, 2009, for trading on closely guarded corporate information.

“What are you talking about?” Gupta asked, seemingly taken aback.

Palm explained that Goldman officials had come to believe Gupta may have provided Rajaratnam with crucial information about the firm. Ever cool, Gupta calmly denied that he had given Rajaratnam confidential information about Goldman. Then Gupta said that he and Rajaratnam had indeed been business partners on an investment fund called New Silk Route. Teaming up with Rajaratnam seemed to be his plan for a spectacular career finale - a bid not only to stay vital after stepping down from McKinsey but also to establish himself in the elite circle of billionaires, like the private-equity giant Henry Kravis, that made up his new coterie.

Gupta didn't say all that to Palm, of course. Instead, he explained why it would have been ludicrous for him to give Rajaratnam information: the two had had a falling out over a soured $10 million investment. Gupta told Palm that he had hired accountants and lawyers and was planning to sue his former partner; he would have done so already, he said, were it not for Rajaratnam's arrest. “Why would I help out someone with whom I had a dispute?” he asked rhetorically. He said he was happy to discuss the issue more, but he had to catch a flight to Boston.

Over the course of the day, Palm and Gupta had a number of follow-up conversations. In one, Palm recommended that Gupta get his own lawyer. Gupta eventually retained the renowned defense attorney Gary Naftalis - not out of any real concern, he would later say, but as a precautionary measure. Indeed, Gupta seemed so unconcerned with the call he received that Friday, Dec. 11, 2009, that he never even mentioned it to business associates.

It would take more than a year for them to learn of the depth of Gupta's legal tangles. In March 2011, the S.E.C. charged him in the largest insider trading case in United States history. Months later, he was indicted on a charge of giving Rajaratnam, the subject of the investigation, inside information from two of the boards he sat on, Goldman Sachs and Procter & Gamble. Many remained incredulous, but in June 2012, Gupta was found guilty of conspiracy and securities fraud in connection to tips about Goldman - including Warren Buffett's $5 billion investment in the bank during the financial crisis. Phone logs revealed that less than one minute after hanging up from the board call unveiling the Buffett deal, Gupta phoned Rajaratnam, who then bought nearly $35 million worth of Goldman stock. A federal judge called it “the functional equivalent of stabbing Goldman in the back.” Gupta was sentenced to two years in prison.

The 64-year-old Gupta, who remains free on appeal, has vigorously maintained his innocence. But even as his appeal is heard this week, the fundamental question behind his case remains a mystery. Why would one of the most revered C.E.O.'s of his generation, who retired with a fortune worth some $100 million, show such bad judgment? How could he get into business with a trader who was known for giving Super Bowl parties filled with scantily clad women. The confusion, a management consultant might suggest, may arise from looking at the problem from the wrong angle. What if Gupta, the adviser to presidents and executives, simply got played?

When Rajat Gupta first joined McKinsey, in 1973, it wasn't unusual for consultants to make as much as investment bankers. But that began changing in the 1980s, when bankers started to sell an array of new products, like junk bonds, to corporate clients. By the '90s, Wall Street analysts were pulling in millions each year.

Those heady times didn't go unnoticed at McKinsey. In the late '90s, young associates started leaving the firm, particularly for careers in start-up technology. Office gossip included one who had quit to join Akamai Technologies, the content-delivery network, and supposedly made about $80 million when the company went public. Offers were flowing into Gupta's office too, but his wife, Anita, told a colleague he enjoyed the stature that came with his job. He could trade places with these young Wall Street guys and 20-something tech millionaires any day, but they could never trade places with him.

Gupta embodied the generation of Indians that the academic Vijay Prashad has called the “twice blessed” - those who benefited from both India's independence in 1947 and the 1965 overturning of a United States law that had restricted Indian immigration to 100 people each year. Gupta was a boy in the 1950s, when the Indian Institutes of Technology were established to produce a new generation of engineers. After earning degrees from I.I.T. Delhi and Harvard Business School, he received a job offer at McKinsey during the rise of the corporate consulting industry. In 1994, when Gupta was only 45, he became the first Indian C.E.O. of a major American company. He “pioneered a new way of leveraging the firm's intellectual capital,” recalls Jeffrey Skilling, his colleague from 197 9 to 1990, who later went on to become the chief executive of Enron. “I think Rajat was a shoo-in for election to managing director, and frankly I don't think anyone had a chance against him. He was that good,” wrote Skilling in an e-mail from federal prison in Littleton, Colo., where he is serving a 24-year sentence for his role in Enron's collapse.

Gupta's first two terms at the helm of McKinsey were extraordinary; he doubled the consulting staff, and revenue nearly tripled to $3.4 billion. But early into his third term, which started in the summer of 2000, the firm's revenues plunged as the tech bubble burst. The senior partners' annual financial awards took a huge hit. In mid-2003, humbled and restless, Gupta stepped down from the top job and began to plan his next moves. He wanted to burnish his legacy as a philanthropist and focused on charitable works tied to India, like the Indian School of Business, his pet cause. At the urging of Bill Clinton, he had already helped start the American India Foundation.

While Gupta departed McKinsey with a fortune, he was now mingling with a crowd that included Bill Gates, Henry Kravis and Henry M. Paulson Jr., then Goldman's chief executive, with whom he traveled to Indonesia to see the Komodo dragons. For many of these men, $100 million was not rich; it was simply the price to play. If Gupta wanted to compete on the same level as Stephen A. Schwarzman, who would go on to give $100 million to the New York Public Library, or Sandy Weill, whom he knew from the Weill Cornell Medical College board, he had to be a billionaire.

In pre-Lehman New York, that goal didn't seem unattainable for someone with Gupta's connections. Bankers and private-equity founders, like Pete Peterson, were getting extraordinary paydays by taking their firms public. Speaking at Columbia University around this time, Gupta reflected on his new ambition. “When I look at myself, yeah, I am driven by money,” he said. “And when I live in this society, you know, you do get fairly materialistic, so I look at that. I am disappointed. I am probably more materialistic today than I was before, and I think money is very seductive.” He continued: “You have to watch out for it, because the more you have it, you get used to comforts, and you get used to, you know, big houses and vacation homes and going and doing whatever you want, and so it is very seductive. However much you say that you will not fall into the trap of it, you do fall into the trap of it.”

It was around this time, coincidentally, that Gupta started getting closer to Raj Rajaratnam. The son of a Singer Sewing Company executive, Rajaratnam, who is 55, did not have much in common with the “twice blessed” generation. He attended the same English boarding school as P. G. Wodehouse. At Wharton, he struck some students as rich and loudmouthed. But he inspired a group of loyal followers who, in 1997, after he had spent nearly 15 years on Wall Street, helped him cobble together about $350 million and set up shop in a cramped office on Lexington Avenue and 57th Street. Rajaratnam, whose most attractive feature was a wide, gaptoothed smile, seemed to relish his reputation as a player. In 1999, he invited about 300 clients and brokers to a blowout Christmas party headlined by Donna Summer. But he backed up the publicity stunts with phenomenal returns. That year, one of Galleon's funds soared 93.2 percent. By 2001, investing in technology stocks like Intel and Advanced Micro Devices, he had built Galleon into a $5 billion behemoth.

All hedge-fund managers strive for an edge - an extra something that will help their funds beat the market average. For years, Rajaratnam had been dogged by the rumors that he owed his edge to insights from a circle of corporate insiders who were paid to divulge proprietary information. Indeed, Rajaratnam had assembled a stable of carefully curated industry moles. His favorite targets were South Asians like himself. Despite the stereotype of South Asians as hardworking grinds who eschew the sharp-elbowed politicking of their American peers, Rajaratnam knew they could be every bit as competitive as anyone else on Wall Street. Many Indians in finance had worked since grade school to gain entrance into the cutthroat I.I.T. system - which was far harder to penetrate than Harvard - before even landing in America.

Even though he was from Sri Lanka, Rajaratnam made big gifts to Indian causes, and was a regular at exclusive Indian galas. He made his Indian informants feel so comfortable that they often sprinkled Hindi words like accha, or “O.K.,” into conversation. In India, where he would have been treated as an outsider, Rajaratnam's approach would probably have fallen flat. But in the United States, such differences matter less. Rajaratnam made himself seem like one of them. “Raj sort of had a South Asian mafia,” recalled Gerald Fleming, a colleague from his pre-Galleon days. There were people he could call and “get, for a few companies, earnings to a penny.” Fleming recalled once sitting in Rajaratnam's office when he logged a call to Advanced Micro Devices. After some time, Rajaratnam's secretary came in and said that someone with an Indian-sounding name had returned the call. Rajaratnam picked up the phone, walked onto the trading floor and announced the profit figure. “And he was right,” Fleming said.

Rajaratnam was also an expert at preying on his sources' weaknesses. His first major target was an Intel marketing executive named Roomy Khan. He caught her attention by mentioning that his wife, Asha, was a Punjabi Indian, like her. Then he reeled her in by promising a well-paying job at Galleon in return for early readings of revenue indicators at Intel and, later, tips about acquisitions, like the Blackstone Group's bid to buy Hilton Hotels. (She found out about the latter from a South Asian Moody's analyst, a roommate of her cousin's.) Rajaratnam also persuaded his old Wharton School classmate Rajiv Goel, a perennially frustrated executive at Intel's treasury department, to feed him information in exchange for introductions to his high-powered friends. Rajaratnam's most prized recruit, however, was Anil Kumar, a former classmate from Wharton and a graduate of the I.I.T. system who worked as a technology consultant at McKinsey.

Kumar's prickly manner had led to several career setbacks, including being passed over for the job of managing McKinsey's India office. Rajaratnam shrewdly capitalized on his frustrations. When Kumar returned from India to McKinsey's Silicon Valley office, Rajaratnam flattered him, asking lofty questions that the consultant readily answered. “I have all the brains, and you have all the billions,” Kumar was overheard saying to Rajaratnam. Feigning humility, Rajaratnam laughed right back. Then, one evening in the fall of 2003, as the two men were leaving a charity dinner in Manhattan, Rajaratnam pulled Kumar aside and offered him $500,000 a year to consult for Galleon. “You have such good knowledge that it is worth a lot of money,” he told him. Kumar, feeling underappreciated by his bosses at McKinsey, soon accepted. Then they found a way to pay him without ever tipping off McKinsey. Rajaratnam was now one step closer to the ultimate source of information - Kumar's ment or, Rajat Gupta.

As he had with his other informants, Rajaratnam began the seduction of Gupta by playing on ethnic ties and indulging his new friend during a rare career lull. The two men had actually first become acquainted around 2000, when Rajaratnam gave generously to two of Gupta's favorite Indian causes. But it was only after Gupta stepped down from the helm of McKinsey, with newfound time on his hands, that he began accepting Rajaratnam's lunch invitations. The Galleon chief treated Gupta with a deference that bordered on obsequiousness; he often called him a South Asian “rock star” and praised his reach. “I think he can raise a billion dollars if he started Gupta & Company,” Rajaratnam once said.

That, of course, was exactly what Gupta wanted. In 2005, he and Ravi Trehan, an investor and friend, pitched Rajaratnam on buying a so-called fund of funds, which raises money from institutional and high-net-worth investors and then allocates it to different hedge funds. They were hoping that Rajaratnam could offer them $100 million as equity capital.

Rajaratnam heard them out but fixated on another idea. He persuaded them to help create a highly leveraged vehicle, with money from investment banks, that would invest in a smattering of funds and strategies, some run by Galleon and some run by Trehan's firm, BroadStreet Group. The three partners would call their new entity Voyager Capital. But as Rajaratnam and Trehan focused on the nuts and bolts of Voyager, Gupta seemed taken with more grandiose concepts, like turning the fund into a platform on which to build an Asian merchant-banking business. It soon became clear that the former management-company C.E.O. wasn't comfortable with the minute financial details that are essential to investors risking hundreds of millions of dollars on the markets.

From the start, Voyager was a project of Rajaratnam's power. He put in $40 million, giving him an 80 percent stake in Voyager. Trehan, whose firm was behind Voyager's clever structuring and generous credit terms, put up $5 million for a 10 percent stake. Gupta also put in $5 million. Gupta was originally supposed to receive a share of profits depending on the value that he brought through his connections. But Rajaratnam signaled that those connections were less valuable than his deep pockets. “What do I need him for?” he told Trehan.

Voyager was an instant success. By early 2006, three months after it was set up, shareholder equity rose to $58 million, a return of nearly 17 percent. But Rajaratnam began managing the fund as if it were his own, steering it to invest in Galleon's funds rather than BroadStreet's, reaping more of the management profits for himself. Trehan was livid. That March, Gupta and Trehan made their way to Rajaratnam's headquarters on the 16th floor, where they were escorted to his office, which was strategically placed within earshot of the trading floor. Almost as soon as Trehan spoke, it became clear that Rajaratnam was in one of his “gorilla moods.” The behavior may have been calculated to force his hand; if Trehan pulled out, Galleon alone could receive those lucrative management fees. The argument escalated, and Trehan eventually declared that he no longer wanted to be part of the partnership. He marched out of the office and sold his stake in the fund soon after.

< p itemprop="articleBody"> Gupta stayed. Few knew it at the time, but he and Rajaratnam were already hatching a plan that would initiate his second act in the investment business. Months earlier, Gupta confided in Kumar that he intended to partner with Rajaratnam on building a new fund, Taj Capital, that seemed to marry his twin goals of polishing his legacy and getting rich in the process. Taj Capital, which was planned to be as large as $2 billion, was going to focus on investing in South Asia. As talks progressed, Gupta became a fixture at Galleon's sleek new offices on the 34th floor of 590 Madison, one of the most prestigious corporate addresses in Manhattan. Rajaratnam eventually suggested that Taj temporarily decamp to offices adjacent to Galleon's trading floor. Later, when Gupta was considering exercising an option to buy another 5 percent stake in the Voyager fund, Rajaratnam lent him $5 million. He told an old McKinsey colleague, Marshall Lux, that his new partner was “one of the most outs tanding hedge-fund managers and a very close friend.”

During their unlikely partnership, Gupta and Rajaratnam never quite behaved as close personal friends. Their families never socialized on weekends; Gupta was not a guest on the Kenyan safari that Rajaratnam treated 70 of his closest friends and family to for his 50th birthday. Their friendship, in some sense, was as transparent as it was confounding. Rajaratnam offered Gupta the chance to get rich, while Gupta, by virtue of his relationships with world leaders and C.E.O.'s like A.G. Lafley of Procter & Gamble, offered him unparalleled access to high-quality private information. What was notable, however, was how significantly Gupta came to rely on Rajaratnam and how the balance of power in their relationship subsequently changed. Gupta, once freed from corporate life, began to loosen his guard. And in an apparent effort to ingratiate himself to his new friend, their relationship took a dark turn.

One month after Gupta's ascension to Goldman Sachs's board, in November 2006, Rajaratnam began to squeeze his new partner. Gupta had recently helped facilitate a loan from Rajaratnam to his friend Ramesh Vangal, whose company was trying to buy an Indian bank. As Vangal dragged his feet on repaying the loan, Rajaratnam's gorilla mood re-emerged. This time it was directed at Gupta. On Dec. 21, Rajaratnam sent him an angry e-mail that seemed to hold Gupta responsible for the missing funds. “Under the circumstances,” he wrote, “I am not able to meet you for lunch today.” The note was perfectly timed to threaten the former McKinsey director. Taj Capital, his foray into the investment game, was in the midst of incorporation. Any hiccup could scuttle the deal. “And I am canceling all further meetings for Taj Capital,” the e-mail continued. It was signed formally, “Raj Rajaratnam.” The money he was owed arrived within a matter of weeks.

Gupta now seemed fully under Rajaratnam's sway. On March 12, 2007, Gupta, sitting comfortably in the Galleon offices, dialed into an audit-committee meeting of the Goldman Sachs board. The meeting previewed Goldman's first-quarter profits, which were set to be unveiled the next day. About 25 minutes after Gupta hung up, Galleon bought $91 million of Goldman stock - an odd trade for a fund that typically invested in companies like Intel and Google. When Goldman posted better-than-expected earnings, Galleon made $2 million on the trade. Over the next year, in June 2008 and then in September and October 2008, Gupta called Rajaratnam following Goldman board meetings. Soon after, the phone records indicate, Galleon funds made market-winning trades worth millions of dollars.

During that time, on July 29, 2008, a month after attending a Goldman board meeting in St. Petersburg, Russia, Gupta returned a call that Rajaratnam placed earlier. Rajaratnam had a meeting scheduled with the Goldman co-president Gary Cohn, and he had heard a rumor that Goldman might buy a commercial bank. “Have you heard anything along that line?” Rajaratnam asked.

“This was a big discussion at the board meeting,” Gupta replied.

For a few minutes, the two men discussed the possibilities before Gupta asked Rajaratnam if he had a second. Gupta, who had spent his entire career giving others professional counsel, needed some job advice himself. He had been approached about a job at Kohlberg Kravis Roberts, the venerable private-equity firm. “I wanted to get your straight opinion on whether . . . I should do this KKR thing,” Gupta said to him. “Do you really feel in the gut that, given everything, it's a good thing to do?” Rajaratnam told him he would take it “in a heartbeat.” Hypothetically Gupta could still be of use: KKR, which buys and sells companies, is privy to all sorts of inside information.

Gupta accepted the offer and was ready to step down from the Goldman board because of the conflict of interest. Blankfein ultimately pressed him to stay on for a while longer to help Goldman weather the market meltdown, and soon after, on Sept. 23, a week after Lehman Brothers collapsed, Gupta found himself on what would be the most important conference call of his life. Warren Buffett was preparing to invest $5 billion in Goldman Sachs in return for a fat dividend. In order to accept the offer, Blankfein needed the approval of his board, and a conference call was hastily put together for 3:15 p.m. Gupta was originally going to be unable to make it, but a half-hour before it was set to begin, his secretary confirmed that he'd be there. At 3:55 p.m., almost immediately after Gupta hung up from the Goldman board call, his secretary connected him to Rajaratnam's direct line. The two men spoke for about 35 seconds. Then, a couple of minutes later, a top lieutenant of Rajaratnam's placed an order to buy about $31 million of Goldman stock. Another young trader scrambled to buy $12 million more. (Because of time constraints, Galleon ended up purchasing only $33 million.) Around 5:45 p.m., after the market closed, headlines of Buffett's investment started streaming across Bloomberg News.

Gupta couldn't have known as he was running through the Philadelphia airport more than a year later that he would indirectly become a person of interest to the S.E.C. The agency had begun investigating Rajaratnam in 2006, after a series of suspicious trades by his brother, Rengan (who is currently under indictment on charges of insider trading). Two years later, the United States attorney's office in Manhattan got approval to tap Rajaratnam's cellphone, unleashing a gusher of incriminating calls. In the fall of 2008, after Rajaratnam mentioned a tip he got from a Goldman director, Gupta appeared in the middle of regulators' radar.

A centerpiece of Gupta's defense, which he mentioned to Palm in the airport, was that days before the Buffett call, he was supposedly stewing over $10 million that he had recently lost in the Voyager fund he shared with Rajaratnam. Gupta, who said he blamed Rajaratnam for the loss, was so stressed about it, his lawyers have said, that he even raised it with his daughter Geetanjali. Less than a month later, he shared the same concerns with Kumar, telling him that he felt Rajaratnam “had dropped the ball.”

In Gupta's view, the dispute made any case against him a nonstarter. (As he told Palm: Why would he help out someone with whom he had a dispute?) Last May, a year after Rajaratnam was convicted of 14 counts of securities fraud and conspiracy and eventually sentenced to 11 years in prison, Gupta entered the federal courthouse at 500 Pearl Street confident that he would be acquitted. Despite wiring Rajaratnam's phone for nine months, the government had no recordings of him directly tipping Rajaratnam on material nonpublic information. Naftalis, his lawyer, said that the evidence was circumstantial, based on the timing of events; his call to Rajaratnam on the day of the Buffett deal was merely a poorly timed check-in about a soured investment. Nevertheless, it took less than two days for the jury to convict Gupta on four of six counts of conspiracy and securities fraud. (He was convicted regarding calls about the Buffett investment and Goldman's 2008 fourth-quarter earnings.) Te llingly, the jury acquitted Gupta of the charges that were not supported by wiretapped conversations. This week, his lawyers are expected to argue that those wiretapped conversations should have been inadmissible.

In the year since his conviction, Gupta has tried to maintain his life. In December, days after winning the right to stay free pending appeal, he visited friends in San Francisco. This spring, he took a couple of trips to his house on Palm Island, a wealthy enclave of Miami Beach. (Gupta recently set up residence in Florida, which would protect his home.) “The thing that has been missing most in his life is engagement,” said Anjan Chatterjee, an old friend from McKinsey. “Imagine a bullet train being stopped dead in its tracks with Superman on the other side.” Gupta spends most of his time holed up in his Westport, Conn., library overlooking the swimming pool. There, in the estate that once belonged to James Cash Penney, he sits alone working on his appeal.

One friend who recently visited him in Westport said that Gupta was “cautiously optimistic.” Gupta told him that his lawyer had an astonishing record, winning 80 percent of his cases. I asked this friend how Gupta explained the damning phone exchange with Rajaratnam in which the Galleon chief admitted that Kumar was moonlighting for him, receiving “a million dollars a year for literally doing nothing,” and Gupta replied, “He should sometimes say thank you for that.” He said that Gupta was a very busy man. “He's a parallel processor,” he said, someone who habitually carries out a number of tasks at the same time. While he was speaking to Rajaratnam that day, he told me, Gupta was probably looking over his diary or his BlackBerry.

Whether Gupta's charge is overturned or not, he will still be remembered as the dignified McKinsey managing director who fell down the money trap and under the spell of a boorish hedge-fund trader, a reality which, in his world, is almost as damning as the crime he stands accused of committing. At one point Gupta was convinced he would find a way to come back, salvage his tattered reputation and perhaps even rebuild his savings, which have taken a beating as his legal troubles have mounted. He thought he might be able to rehabilitate his brand as Martha Stewart had. Yet unlike Stewart, whose image as a domestic diva was far removed from her insider trading, Gupta had a reputation that was completely wrapped up in his. Even if he succeeds in overturning the conviction, his options at rehabilitation are limited. The S.E.C. is seeking to bar him from running a company and even working for an investment adviser. In a way, it is one of the few realities of his new life that he has embraced. “I don't think Rajat aspires to be in the same room as Jamie Dimon anymore,” Chatterjee told me. “I don't think he really cares.”

This article is adapted from “The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund,” to be published by Business Plus.

Anita Raghavan writes for The Times's DealBook blog and Forbes.

Editor: Jon Kelly

A version of this article appeared in print on May 19, 2013, on page MM30 of the Sunday Magazine with the headline: A Lust for Zeros.