How to set up an insider-trading network

By Felix Salmon
May 12, 2011
Peter Lattman and Azam Ahmed are here to tell you exactly how to do it, using the secrets of the master of the artform, Raj Rajaratnam.

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Do you want to set up a network of insider-trading tipsters? Well, Peter Lattman and Azam Ahmed are here to tell you exactly how to do it, using the secrets of the master of the art form, Raj Rajaratnam.

Different techniques work for different people, of course, but often the direct way — a lot of money, mixed with equally large amounts of flattery — is the easiest:

As Raj Rajaratnam and Anil Kumar, a McKinsey consultant, walked out of a fund-raiser in Manhattan, Mr. Rajaratnam pulled his old friend aside and made him an offer: would Mr. Kumar provide him with insights for $500,000 a year?

“You have such good knowledge that is worth a lot of money to me,” he said, according to Mr. Kumar.

Mr. Kumar faced an agonizing choice. His employer barred its executives from outside consulting, but an extra half-million dollars a year — and the chance to do business with a powerful hedge fund manager — was tantalizing.

Weeks later, Mr. Kumar accepted.

It’s worth noting that at this point neither man has done anything illegal. If found out, Kumar could lose his job — but being fired, even for cause, is not a criminal offense.

Yet the die, at this point, has been cast. Raj has both a carrot and a stick with which to control Kumar: money, and the fact that he knows that Kumar has been accepting it. The two are bound into a secret conspiracy, and once you’re in such a thing it’s impossible to get out without inflicting serious pain onto yourself.

So when Raj started asking for inside information — when he started asking Kumar to do things which were actually criminal — it was easy for Kumar to say yes, and very hard for him to say no.

With other people, Raj used different techniques. Adam Smith (yes, Raj really was getting inside information from a man named Adam Smith) was probably the easiest: Raj simply brought him into Galleon as an employee, making their interests pretty much fully aligned.

With Rajiv Goel, there was a real friendship — or at least Goel thought there was. And while money changed hands as well, it wasn’t money for tips, not directly: it was more that the rich friend, Raj, helped out with things like buying a house or caring for a sick parent, while the poorer friend, Goel, desperately tried to curry Raj’s approval in the only way that he could get it.

Incidentally, only in the world of Wall Street is it unsurprising to find mid-level Intel executives being described as “hapless” and “in need of money” — Goel had a job that most people can only dream of, but was permanently dissatisfied. Maybe if his friends had less money than he did, instead of more — if they were in the bottom 99% of the population, rather than the top 0.01% — then he would have been happier, and would have felt much richer. Lesson of the story: don’t vacation with people who are a lot richer than you are.

And then there’s Kumar, who’s the weirdest of the lot, seeing as how he was already earning several million dollars a year at McKinsey. He was set for life, yet he accepted Raj’s $500,000 a year, and also the occasional bonus:

In 2006, Mr. Kumar agreed to another compensation scheme: Mr. Rajaratnam would pay him a year-end bonus based on his annual performance. Mr. Kumar proved his worth that year, providing him with details about secret merger negotiations between Advanced Micro Devices and ATI Technologies…

In December, Mr. Rajaratnam told Mr. Kumar that Galleon was paying out big year-end bonuses. “I want to give you $1 million,” Mr. Rajaratnam said.

“I almost fell off my chair,” Mr. Kumar testified.

$1 million is a lot of money for almost anyone, but in Kumar’s case it was not enough to change his standard of living at all, and it didn’t make him significantly richer than he was before. So how come Raj’s money had so much effect on him?

Kumar sticks out here in other ways, too — he’s the only informant who could be considered even more successful than Raj was, at least professionally if not in terms of raw cash. Raj had money, more money than he really knew what to do with, but Kumar had much more societal acceptance and prestige — things you definitely need if you’re going to make it all the way to the board of Goldman Sachs.

And, of course, Kumar still hasn’t been criminally charged. But I suspect that particular shoe is going to drop at some point. Now that Raj has been convicted of all 14 counts, Kumar is surely next.

Update: As EnricoPalazzo points out in the comments, it’s Rajat Gupta, not Anil Kumar, who made it onto the board of Goldman Sachs.

13 comments

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I think you might be confusing Anil Kumar and Rajat Gupta here. They both worked at McK, but it’s Gupta that was worldwide managing director and on Goldman’s board, not Kumar.

Posted by EnricoPallazzo | Report as abusive

There’s almost no chance that Anil Kumar earned several million dollars per year at McKinsey. Rajat Gupta may have made that, but most partners do not.

Posted by right | Report as abusive

Wikipedia excerpt below. I guarantee you both Gupta and Kumar were making millions of dollars a year.

“Rajat Gupta and Anil Kumar were senior partners together at McKinsey & Company for over a decade and among the earliest and best-regarded Indian-Americans in management consulting; they became friends and enjoyed a mentor-protégé relationship early into Kumar’s career as senior partner. The two men co-founded the Indian School of Business in 1997 and “were the face of McKinsey in India.”[53]

According to The Financial Times, “the two operated as a forceful double-act to secure business for McKinsey, win access in Washington and build a brotherhood of donors around the Hyderabad-based ISB and a handful of social initiatives.” [54]”

http://en.wikipedia.org/wiki/Rajat_Gupta

Posted by someone2 | Report as abusive

PS: clearly Kumar was no ordinary McKinsey partner, for good or ill

Posted by someone2 | Report as abusive

I blame cable TV. Obviously they have been watching the Sopranos

Posted by msobel | Report as abusive

Felix, you’ve gotten Rajat Gupta and Anil Kumar confused. Kumar might have been making millions a year eventually, but not in 2003 I suspect, and he was never on the board of Goldman.

Posted by Ulysses | Report as abusive

I’m not sure that Raj and Kumar didn’t commit a crime at the time they agreed to commit securities fraud in the future. Conspiracy to commit a crime is itself a crime.

The question is at what point the conspiracy ripened, and I don’t know enough about the facts to know that.

Posted by AnonymousChef | Report as abusive

@Ulysses: my guess is that he was making at least a couple of million a year since he became senior partner in 1997, and then increasingly more for 12 years

Posted by someone2 | Report as abusive

I’ve given up on caring about insider trading, just like I still watch NBA games even though I am convinced the league instructs the refs to favor certain players and teams at times, to keep the networks happy and the fans interested (I guess if Memphis were to play Atlanta in the finals, I might have to take that back, but it’s not going to happen).

If it’s not traders getting access to inside information, it’s brokerage firms issuing their incompetently written but widely read analyst’s reports, which always seem to jack stock prices around. They go up, they go down, often with no correlation to their performance or ability to sustain their business. The brokers make money when the stocks go up, they make money when they go down, so they are incentivized to create news that drives changes in stock prices.

What’s pathetic about this insider case is that the defendant probably wasn’t doing this for the money – he was a billionaire, and didn’t need an extra $50 million here and there. He was risking getting caught for ego reasons – he needed to be a top player. This should probably be filed along with the steroid cases.

Posted by KenG_CA | Report as abusive

Yes, 1 million dollars really isn’t a lot of money to rich people. And $500,000 is chump change!
Wait a minute … that’s totally not true.

Felix, they did it for the money. Somehow you have convinced yourself that rich people don’t think that a big pile of money is “worth it” , but actually they do. Maybe they pretend they don’t, but they do. And you can do a lot with even a paltry amount like $500K.

Posted by wah718 | Report as abusive

@wah718: I strongly disagree.

RAJARATNAM didn’t make $60 million dollars; his company did. He wasn’t planning to, as you say “do a lot” with any of it.

KUMAR didn’t “do a lot” with his $1.75 million dollars — he invested it right back into Galleon.

Felix, these people didn’t do it for the money.

Posted by someone2 | Report as abusive

They did it for the money. I suspect the effort to reward ratio was favorable. A thousand bucks ain’t much to Joe Sixpack, but if someone gives it to him for a couple of phone calls, and he’s pretty sure he won’t get caught, then he’ll do it.

Posted by JimInMissoula | Report as abusive

Sure, the money may have been a motivation. Or it may just have been a way of keeping score. But it sounds like a lot of what was going on was what used to be called, back in the day, “wanting to be a BSD.”

Posted by SelenesMom | Report as abusive