I’m still pretty gobsmacked in reading the bits of testimony presented in the financial media’s accounts of the first day of testimony in the SEC’s insider trading case against hedge fund manager Raj Rajaratnam.
I’m struck by how simple it seemed in retrospect for Rajaratnam to suborn McKinsey partner Anil Kumar. Kumar had been pitching Rajaratnam’s fund as a prospective client, since the hedgie claimed to have a budget of $100 million a year to spend on research. But Rajaratnam was cool to Kumar’s proposals. After a charity event, Rajaratnam turned the tables and started wooing Kumar, telling him he was smart, underpaid, and he really just wanted his insights, not the firm’s.
Now partners can in fact bill clients on an unlevered basis (at least in my day), meaning a price that led to a similar level of profit as when working with a normal team with everyone’s cost suitably marked up. They didn’t for practical reasons, namely, it would quickly lead to a burn rate that clients would deem unacceptable. I was brought in by McKinsey to work on a client project a few years after I had left the firm, in the early 1990s when the topic came up. The number then was $20,000 a day. Given how much the firm’s rates increased in the 1990s, I’d guesstimate it would be easily double that by 2004.
So it was pretty apparent what this was really about when Rajaratnam suggested paying Kumar $500,000 a year in via an offshore account .
But here are the parts that indicate a complete lack of a sufficiently criminal mind on behalf of the McKinsey partner. He exchanged information with Rajaratnam on a regular phone line of some sort, I presume his cell phone or perhaps one of his land lines.
I’m far from technology savvy, but I know there are ways to conduct phone calls so that they do not go through any telco central office switch (you set up a computer to be the switch). You and your compatriots need dedicated cell phones to access the private switch. You still run the risk of having your signal intercepted (something which plagues the English royal family). Or as insider trader Dennis Levine did in the 1980s, you use a pay phone (a pain, and you’d presumably need to keep using different ones, which might not be that hard for a jet setting McKinsey type).
But this is the part that strikes me as really barmy:
Mr. Rajaratnam later told Mr. Kumar that he should get someone outside the U.S. to sign the consulting agreement on his behalf with Galleon and had him set up an account with Galleon under Mr. Kumar’s housekeeper’s name in order to reinvest the money with Galleon, Mr. Kumar said. The structure was so McKinsey didn’t know about the payments, Mr. Kumar said.
So Kumar has an agreement, not in his name, and “his” money is in Galleon hands.
That money was in no real sense ever his money. The SEC can seize it, but what ability did Kumar have to get at it? Even if he had been smart about he did negotiate the offshore agreement (UK is very tough; failure to honor contracts that have clear payment and withdrawal arrangements can be argued to be an admission that the company is “trading insolvent”, which makes the directors personally liable) did he have any practical ability to enforce it? His “payment” was just round tripped back to Galleon, he remained dependent on Rajaratnam’s continued good will if he were ever to access a dime. Hence by having control of Kumars account, the hedgie had leverage to keep extracting more from him, independent of continued “payments”.
It may prove a tad ironic if Rajaratnam’s having picked such a mark was what led to his downfall.
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Sounds like you’ve thought about this a bit too much Yves!!
Anyone who has spent enough time in finance has to think around corners, which is not that far from having a criminal mind, I suppose.
But in this case, I had a buddy who I could tell was probably up to no good (tax evasion rather than insider trading). When I was in Oz, I’d come back to NY twice a year, he’d let me use his crash pad of an apartment when he was overseas, sometimes he’d blow into town unexpectedly. I wound up having the opportunity to see the lengths he went to leave very few footprints, so this comes mainly via observation at close range. He obsessively only paid in cash (including his utilities), never bought anything on the Internet, put airfare on a credit card (his clients would buy tickets, he’d pick them up at Amex). Had a lot of clients in emerging markets and had to use that UK law thingie sometimes to get paid (he was proud of and would discuss his various devices for making sure he got paid by people who weren’t always terribly trustworthy). Was almost certainly taking fees offshore.
You might want to proff rade this peice one more teim.
Insider Trading Case Testimony Suggests McKinsey Types are Stupid Crooks
unfortunately, it’s worse than that. Big Finance and high income types are so above the law they don’t care. The only reason this is happening is because they torpedoed the economy so bad that the Govt decided they had to prosecute a few unlucky sacrificial lambs.
Thus, down goes Madoff and this dude. Rest are scot free, howling about govt intrusion into their lives.
Them’s fightin words. McKinsey guys don’t mind being crooks, but they really hate looking stupid.
Agree with @yearning to learn. Raj et al are the convenient scapegoats and conveniently they don’t look anything like the Paulsons, Blankfein, Geithner. Here’s an Onion-esque take ….
http://manurelagoon.wordpress.com/2011/03/10/wall-street-not-worried-so-long-as-sec-only-goes-after-foreign-types/
Loved this:”complete lack of a sufficiently criminal mind on behalf of the McKinsey partner.” They must have smarter ones, though, don’t you think?
methinks you’re being too soft on mckinsey and their ethics. in my view mckinsey and the other consultants add zero value–worse then investment bankers–who at least raise money for clients. their pecking order in usefulness must be close to the bottom of the pole.
the “risk” arb business on wall street in the 80’s was just a big insider trading game–i wonder whether we will discover that the “performance” of some or most of the hedge funds in the past 15 years is because of inside information.
He violated The One Rule of the City, which states that “If you’re incompetent you have to be honest, and if you’re crooked you have to be clever” (Yes Prime Minister). Applies to Wall Street just as well.
Hmm.
2004. I remember that year well. I remember talking with Anil Kumar that year, and thinking he was a colossal jackass.
500K to see out McKinsey. They are not stupid, just cheap.
Maybe we can get some insights from readers from the subcontinent? It seems to me that there are cultural issues here. The US seems to have singled out a group of Indians. This might be politically easier. But more importantly here on the left coast they have a very fine sense of connections, hierarchy and networking in general. I don’t understand the details, but it seems always there. So, maybe Kumar had reasons to trust Rajaratnam. Hempton’s Guanxi description a few weeks ago showed better concealment. Maybe the law enforcement in India is significantly less draconian than in China?
I see the “singling out” of South Asians more as a disease cluster than as a policy. Perhaps I’m naive. But you through a cup of beans onto a tile floor, and there will be tiles with a dozen beans and tiles with none.
Indian law enforcement is a joke. That’s not the issue.
There is no reason why Indians would trust one another on this basis. Rajaratnam is Tamil, from the South, Kumar is from the North (at least, that’s what his surnames says). They have nothing in common: South Indians or Sri Lankans don’t even speak languages from a common family as northerners, as the Dravidian languages in the South are not of the Indo-European family. Somebody speaking to me in Tamil might as well be speaking Russian.
India is a continent, not a country. You wouldn’t expect a Sicilian and a Swede to trust each other on the basis of common ancestry, would you?
Maybe they went to school together. Had the same country club, perhaps. Had some other commonality. But it’s not enough that they both had the same skin colour. Because by Indian standards, they don’t.
If Raj’s lawyer can reverse this slam dunk of a case, that will be a sensation.
I got through a couple of rounds of interviews at McKinsey.
By the time I got weeded I knew it wasn’t for me.
As an Indian, this is completely normal behavior…
To us that 500K does not matter, the relationship matters… and if the relationship came with 500K (whether realized or un-realized) it is an added bonus…
The relations are akin to blood relations…
at a very small scale… i have not yet withdrawn my bonus from my company, payable last march (2010)… nor have I drawn upon a $1,600 computer consultancy help from an aquaintance from the same country… though both are not relatives to me…
If Anil Kumar, has not tapped his 500K, to us… that means, he has 5000K stacked some place… he does not really need the money… unless it is a worst case scenario…
One thing you must understand… all these guys came to US with 0-500$ in their pockets… so even if there is a downside to $0… there is nothing lost…
time… in jail… however, is a different matter…
Having worked at both a strategy consulting firm and an investment bank, the median strategy consultant is far more intelligent, but the banker is far smarter and savvier.
How All The Souls Go Flying and You Don’t Know Where
I remember Raj Rajaratnam. I met him once, in the mid-1980s when he worked as a tech analyst at a boutique investment bank. I was an analyst too, with a big bracket firm and I was checking around, just interviewing to see what happened.
I have a way of feeling things and sort of knowing things beyond logic or reason. Everybody does, but I suppose I just pay more attention to it, right or wrong. And I distinctly remember, now that he’s in the news, briefly meeting him during the round of interviews. He was their rising star, their golden boy. And I was fascinated by his name, the way the syllables flowed like waves overtaking each other. We probably talked for about 10 minutes, that was it. And I never saw him again.
But the main thing that I remember was that I could feel, in a clear and powerful way, that he wasn’t dead souled or flattened in that exhausted way that people get when they work at jobs that have no craft. And anything to do with moving money around has no craft, despite the formulaic cloak of rigor that academics drape upon it or the haughty and shallow cleverness dignified by the phrase “talent”. Even to this day, I can pull the memory and the images onto the screen of my mind, now that he’s in the news, of the feeling that I was speaking to someone essentially good souled and bouyant, hopeful, decent and fully alive. It seems sentimental to put it that way, but it’s just the way it seemed to me, speaking with him.
I remember so much, most of it not worth remembering and it’s weird to feel the changing perpsectives on the memories and what they mean now. Maybe it is worth remembering.
But he was one of so many in the money hunt that I knew and who got sucked in to the mirror logic of it all and lost their way in so many unique and strange ways. There were so many — indicted, arraigned, tried, sued, destroyed — one who shot himself in a car in the Hamptons after a few bad business deals. When I met this one he was a CEO and I was 23, a clueless analyst recommending his stock, and his respect for me transcended all artifice or pose, and it made my confidence soar. And 20 years later I read in the news he had killed himself because his company failed and he thought he had failed. He didn’t fail me, that’s for sure.
How they all fell into the whirlpool where the demons make them into soul food. Not sure what to make of this stuff about Raj Rajaratnam, except to think of the before and the after. And to think how so many fell into the pool where it’s all two dimensional and I can see how I, too, might have fallen in if things had gone a slightly different way. It’s so easy to lose your soul.
There’s a point where you begin to believe it all. That you have a kind of talent, that there’s an art in what you do and that when money comes your way it’s because you earned it through insight and effort, and everything begins to justify itself and explain itself in expanding self-consistent theories that achieve nearly the quality of an eschatology.
There is no way to make this logical. All you can do is channel it through intuition and approximate in words some final reality where truth resides. It doesn’t reside with the District Attorney or with McKinsey, for God’s sake not with McKinsey and all their formulaic and empty artifice, or with Mr. Rajaratnam. It resides outside of all their efforts and all their actions and the falseness of the whole scene, the essential falseness of them all as puppets of some inarticulated compulsion, lights the field of play for demons as if it were a stage. And all we can see are the bodies falling in and drowning in the sea of its lies.
You make a great point Craazy. The loss of our souls, (disclaimer I am not religious)it is almost as if peoples souls are stolen in small almost unnoticeable pieces. I have had spent many a sleepless nite defining my own values and trying to nail down those moving lines. we have an amazing talent of rationalizing our own sins.
Craazy,
I read your piece as a moving and insightful story (or it may just be crazy.., is it really a true story?), even though I can’t quite put my finger on the truth you’re trying to describe to the rest of us shallow, or saner, thinkers.
If I read your and Anand’s take on this jointly, the explanation could reasonably boil down to a simple convergence of naivete and ambition based on a human friendship between Kumar (the overachieving naif and Raj the overachieving ruthless shark) and hubris resulting from the mythology of the Masters of the Universe class.
How do we combat this and protect ourselves? The defense is simple.
Recognize and empower the overachieving dullards (Markopolis, Bill Black (although he’s not dull at all),Yves?)), the accountants and the compliance guys, who are immune to the Raj and Madoff charms. Let them plod along and mutter (loudly) bullshit as they drag these guys through the courts and in thier financials.
yes Michael C, it’s a true story. Funny how certain memories stick with you, despite their complete trivia in the Big Picture of your life. There was absolutely nothing remarkable about my one brief conversation with Mr. Rajaratnam. But for some reason I always remembered it, and him, even before he made the news of late.
I should add, just for karma’s sake, that I assume nothing about his guilt or innocence — other than his right to be presumed innocent. It’s the theater of the situation I’m responding to.
http://www.bloomberg.com/news/2011-03-11/hedge-fund-billionaire-bores-jury-to-plant-doubts-ann-woolner.html
The game is afoot. Savvy players can carefully dissect the machinations of Kumar and Raj and clearly see illegal insider trading. But it is the JURY that will decide Raj’s fate – and this stuff bores them. I would not be at all surprised to see Raj walk. I’ve said this before on this blog, but it deserves rehearing – many if not most Americans equate Wall Street with a carnival and brokers with carni hawkers. If you play the game, you are asking for it. After all, from a Calvinist perspective, making money without work is sin. All sinners must suffer. If other investors were injured by Kumar and Raj’s dealings, they reaped what they sowed. So the state has an enormous task. Not only must the lawyers make a sound technical case, they must overcome the jury’s perception of Wall Street as a den of thieves. This is not made easier by the current economic situation. Nor is it made easier by the fairly broad belief that government itself is crooked. Were I a betting man, I’d bet against conviction.
I pray I am wrong.
As a McK alum (5 years there, at the outset of my career), I’m deeply saddened by the revelations about Kumar and Rajat Gupta.