October 14, 2019

Hedge Funds with the Wrong Kind of Indians

Much like Columbus, some hedge funds greeted the wrong kind of Indians.

Hedge Funds with the Wrong Kind of Indians are addressed in Anita Raghavan’s new book, “The Billionaire’s Apprentice,” an account of the insider trading scandal surrounding Galleon Group. The Wall Street Journal‘s Stewart Pinkerton gives a good summary so you don’t have to read the whole thing. I give you a summary of the summary so you don’t have to read the whole summary.

Business mischief is best captured by books that read like novels, with colorful characters committing outrageous acts of excess that defy even minimal standards of ethics, morality and criminal law.

Who knows how many bad guys get away with it? Thus the appeal of “Barbarians at the Gate,” the benchmark epic by Bryan Burrough and John Helyar on the RJR Nabisco leveraged buyout; “Den of Thieves,” James Stewart’s marvelous picture of 1980s greed; “The Smartest Guys in the Room,” Bethany McLean and Peter Elkind’s Enron autopsy; and more recently, “The Wizard of Lies,” Diana Henriques’s fine dissection of Bernard Madoff’s monstrous Ponzi scheme.

To this list now add Anita Raghavan’s “The Billionaire’s Apprentice,” a riveting account of the takedown of Raj Rajaratnam, the rotund Sri Lankan hedge-fund mogul who masterminded one of the biggest insider-trading scams in history—and of one of his key moles, Rajat Gupta, the now disgraced former head of McKinsey & Co. and Goldman Sachs director.

Ms. Raghavan, a reporter who spent 18 years at this newspaper followed by two at Forbes, has written a briskly paced account full of fascinating detail, with chapters that switch deftly back and forth between the two main characters.

Insider trading is a fairly easy crime to commit—all it takes is a phone call—but it can be a hard one to prove beyond a reasonable doubt. Ms. Raghavan’s book documents the government’s first use of wiretaps to nab these white-collar crooks like Rajaratnam, the manager of the Galleon hedge fund, which once managed $7 billion in assets. Previous cases were built only on circumstantial evidence, matching phone logs and trades; here actual conversations clearly show a crime in the works.

Rajaratnam starts circling the drain in June 2007, when Securities and Exchange Commission attorney Andrew Michaelson confronts him in a seven-hour deposition, grilling him with questions about a series of suspicious instant messages obtained by subpoena. Galleon made a killing buying $40 million in Advanced Micro Devices a few weeks before an announcement by Dell Computer that it would introduce desktop computers incorporating AMD’s processors. Rajaratnam insists that the messages, which included the cryptic “AMD on August 1st, now 13th,” refer not to a stock purchase but to buying tickets to a cricket match in Trinidad. Oh, really? Mr. Michaelson also asks Rajaratnam if he had ever come into possession of material nonpublic information. His response: “Me personally, no.”

But the Feds suspected otherwise. Back in 1999, a woman named Roomy Khan had been caught faxing Intel sales data to Rajaratnam from her desk at the chip maker (the feds couldn’t prove that Rajaratnam traded on the information). Using that old incident as leverage, the FBI persuaded Khan in 2008 to record her conversations with him. In one call, he admits having a source inside tech firm Xilinx who told him that the numbers were “not so good” for the next quarter. Bingo: probable cause for investigators to seek judicial approval for the first of several sequential 30-day wiretaps on Rajaratnam’s cellphone, which by law had to be the same one used on the Xilinx call.

Soon “dirty calls” began rolling in, including one from Danielle Chiesi, a foxy blond trader. She had just gotten off the phone with a family friend at Akamai Technologies, who told her that the stock would probably soon take a big hit. Chiesi told Rajaratnam, adding that they should both short the stock, which dropped 20% after the bearish news came out, giving both of them tasty profits.

Meanwhile, Rajat Gupta low-key but ambitious, he rose to the top of the consulting world and joined a raft of prestigious corporate boards.

The most compelling scene comes on Sept. 23, 2008, when Goldman convenes an emergency board meeting to inform directors that Warren Buffett had agreed to invest $5 billion in the bank, just as the financial markets were beginning to unravel. A minute after the board call ends, Gupta places a 30-second call to Rajaratnam. It is only minutes before the market closes, and the Galleon trading desk frantically starts buying up as much Goldman stock as it can, 267,200 shares, or about $33 million worth, mostly for Rajaratnam’s own portfolio. Of course, Goldman shares rise smartly the following day.

To summarize, Hedge Funds with the Wrong Kind of Indians can be its undoing or tarnish a record. Moral character is hard to determine in interviewing potential hedge fund managers but due diligence and warning signs are always in order.


  1. It’s difficult to find educated people in this particular subject, but you seem like you
    know what you’re talking about! Thanks

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