The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund by Anita Raghavan Read Free Book Online

Affair
    Rajat Gupta’s and Sanjay Wadhwa’s paths might never have crossed if not for the brief that landed on the SEC attorney’s desk on August 22, 2006.
    On that late summer afternoon four years before Gupta would plead the Fifth, John Moon, an in-house lawyer working in New York for Swiss bank UBS, paid a visit to Wadhwa and his boss, David Markowitz, at their office at Three World Financial Center. He had come to inform the SEC about a tiny hedge fund called Sedna Capital.
    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. For most of its history, prime brokerage was an unsexy business and not much of a moneymaker for investment banks. At some white-shoe firms like Morgan Stanley, prime brokerage departments were relegated to Brooklyn, where the back-office services were. But in the late 1990s, as hedge funds exploded onto the investment landscape and multiplied like weeds, Wall Street rediscovered prime brokerage and dressed it up. In a sign of the times, Morgan Stanley moved its department that serviced hedge funds to Manhattan.
    After its acquisition of ABN AMRO’s prime brokerage unit in 2003, UBS inherited a thriving business catering to small hedge funds. These funds were lower-tier grinders, ignored by behemoths like Goldman Sachs. UBS’s John Moon had come to see Wadhwa and Markowitz about one grinder UBS serviced, an off-the-radar hedge fund called Sedna Capital. A heady thirty-five-year-old money manager named Rajarengan Rajaratnam ran it.
    After graduating from the University of Pennsylvania in 1992, Rengan, as he was known to friends, bounced around Wall Street, working at investment bank Morgan Stanley and at hedge fund SAC Capital Advisors. Rengan lasted at SAC, named after its enigmatic founder, Steven A. Cohen, for only eight months. One day, Cohen asked Rengan why SAC was not involved in telecommunications equipment stocks, which were rallying at the time. Rengan, who covered the sector, said he’d traded the stocks a few months before. “How come we are not involved now?” Cohen asked. Before long, the discussion devolved into a screaming match, with Rengan yelling about his pay and Cohen about Rengan’s performance. When it was all over, Cohen told Rengan, “If you don’t like it, leave.”
    The word on Wall Street was that Cohen then preemptively called Rengan’s influential brother, billionaire and hedge fund impressario Raj Rajaratnam, to break the news. “Someone came up to me on the floor and he was complaining about something, so I fired him,” Cohen said. “The bad news is that it was your brother.”
    In May 2004, Rengan Rajaratnam and a trader whom he shared an office with at SAC started Sedna Capital, plowing in “every single dime we’ve ever earned” and raising some money from a couple of investors who like Rengan had gone to Penn. The two created a stable of funds that were supposed to be run on an equal footing, with trades distributed proportionately to all funds, and by mid-2006, Sedna’s assets under management had swelled to $80 million. During a family vacation that summer to Gila, New Mexico, Rengan, while chatting with his big brother Raj, floated the idea of creating a high-risk fund that would deliver big returns. Raj was encouraging, and in July 2006, Rengan opened a new fund, the Sedna Strategic Opportunities fund, an investment pool for friends and family. When he hit up the small circle for money, he didn’t sugarcoat the risks: “Listen, give me as much money as you are willing to lose.”
    The new entity was seeded with $700,000 of Rengan’s savings. Investing in it was a family affair. Rengan’s sister, Vathani, threw in $50,000 and his middle brother, R.K.—the nickname of their brother Ragakanthan—forked over $25,000.