In the fall of 2003, Anil Kumar, a senior executive with the consulting firm McKinsey, and Raj Rajaratnam, the head of a multibillion-dollar hedge fund called Galleon, attended a charity event in Manhattan. They had known each other since the early eighties, when, as recent immigrants, they were classmates at the Wharton School of Business, in Philadelphia. Their friendship, intermittent over the years, was based on self-interest rather than on intimacy. Kumar, born in Chennai, formerly Madras, India, was fastidious and morose, travelling at least thirty thousand miles a month for work, and seldom socializing. Rajaratnam, a Tamil from Colombo, Sri Lanka, was fleshy and dark-skinned, with a charming gap-toothed smile and a sports fan’s appetite for competition and conquest. Kumar was not among the group whom Rajaratnam took on his private plane to the Super Bowl every year for a weekend of partying. “I’m a consultant at heart,” Kumar liked to say. “I’m a rogue,” Rajaratnam once said. Kumar had the more precise diction and was better educated, but Rajaratnam was one of the world’s new billionaires and therefore a luminary among businessmen from the subcontinent. In an earlier generation of immigrant financiers, Kumar would have been the German Jew, Rajaratnam the Russian. Kumar might have felt some disdain for Rajaratnam, but Rajaratnam’s fortune made him irresistible.
McKinsey executives, in an attempt to cash in on the explosive growth of hedge funds, had recently sent Rajaratnam several e-mails proposing that Galleon hire the company to provide expert advice. Rajaratnam had ignored them. Leaving the charity event, Kumar expressed annoyance about the unanswered e-mails, he later recalled. Rajaratnam pulled him aside. “I’d much rather have you as a consultant than McKinsey,” he explained. “And I am willing to pay you half a million dollars a year.” Kumar replied that McKinsey forbade outside consulting, but Rajaratnam persisted, appealing to Kumar’s pride: “You work very, very hard, you travel a lot, you are underpaid. People have made fortunes while you were away in India, and you deserve more.” He noted that Kumar, who provided strategic advice to Silicon Valley technology companies—one of Rajaratnam’s investing specialties—possessed knowledge that was worth a lot of money. Kumar had only to keep a list of “ideas,” and to call him once a month or so. “I know you will do that if you get money from me,” Rajaratnam said. “And I know you will not remember to keep a list if you don’t get money from me.”
Kumar agreed to be paid a quarterly sum of a hundred and twenty thousand dollars. To evade the scrutiny of McKinsey and of the government, he followed Rajaratnam’s instructions and set up a Swiss bank account for a shell company in Geneva called Pecos Trading, which transferred the quarterly payments, through offshore banks, to a Galleon account under the name Manju Das. This was Kumar’s housekeeper in Saratoga, California, who also cared for his ill son. “Lots of people set up offshore companies,” Rajaratnam said, trying to alleviate Kumar’s squeamishness.
Pulling off the subterfuge required a false mailing address, signatures obtained under false pretenses, backdated investment documents, and phony doctor’s bills. Yet Kumar initially believed that he was going to pass information to Rajaratnam legally. He soon realized that Rajaratnam wanted tips that he could convert into profitable stock trades. Once the flow of money created an obligation, Rajaratnam began asking for financial details about companies that Kumar advised. Soon, Kumar was breaking both McKinsey’s confidentiality rules and the securities laws that forbid such exchanges.
His offerings were never good enough for Rajaratnam, who kept pressing for more. As an incentive, Rajaratnam offered to pay Kumar a percentage of the profits from trades made on his tips. Kumar recoiled: the paper trail documenting such trades would put him at risk of exposure, and receiving Galleon trading profits would bring him too close to Rajaratnam’s illegal business. He didn’t want to know what Rajaratnam did with his secrets. As long as he was paid as a consultant, Kumar felt sufficiently sheltered from the truth. So he secured a different arrangement: at the end of each year, Rajaratnam would give him whatever he thought his information had been worth, a common practice at McKinsey. In 2006, it was worth a lot.
Early that year, the microprocessor-maker Advanced Micro Devices decided to acquire a graphics-chip company called A.T.I. Hardly anybody on Wall Street anticipated the deal except Rajaratnam, who knew exactly what was going to happen because Kumar was A.M.D.’s consultant at McKinsey, guiding its strategic decisions. His tips allowed Rajaratnam to time a trade perfectly, and Galleon—betting long on A.T.I.—cleared twenty-three million dollars. After the deal was announced, in July, 2006, Rajaratnam called Kumar at home from Galleon’s offices and said, “Thank you. We’re all cheering you. You’re a hero.” At the end of the year, he called Kumar again: “I’ve had a fabulous year. I’m handing out huge bonuses.” Kumar’s was a million dollars. “Tell me where to send it,” Rajaratnam said.
In the language of hedge funds, Galleon’s strategy was to “arbitrage reality” with the consensus on the Street—to find information about a given company that diverged from Wall Street’s view, allowing Galleon to cash in when the company’s stock price rose or fell. At Galleon, this was known as “getting an edge.” The analyst or portfolio manager with the best read on a company was called the “axe” on that stock. The surest way to become the axe was to have a source who passed on information about a company’s earnings, upcoming deals, and other confidential matters. The ultimate edge was insider trading—the acquisition of nonpublic information about a company—and Rajaratnam was the king axe. At Galleon’s daily 8:30 A.M. meeting, he always had more information than his employees and didn’t hesitate to let them know it. By the mid-aughts, hedge funds accounted for nearly half of all stock trades, and there was ferocious competition for wealthy investors and the business of investment banks. Lightly regulated and nearly opaque, hedge funds played a central role in the creation of credit-default swaps and other financial exotica that led to the economic collapse of 2008.