March 29, 2023

Rajat Gupta’s Lust for Zeros

When he did, Palm quickly made two odd disclosures. First, he told Gupta that he had arranged for a colleague to listen in on their conversation. Then he said, “We are representing the corporation, and not you.” Palm wanted to make sure that there was no doubt that this was not a privileged conversation. If the matter evolved into something bigger, their discussion could be handed over to law-enforcement officers.

As Gupta listened, Palm stuck to the script that he worked out beforehand. “What can you tell me about Raj Rajaratnam, and have you ever provided him with information about what we do?” he asked.

Of course Gupta knew Raj Rajaratnam, the billionaire head of the Galleon Group hedge fund and No. 236 on the Forbes 400 list. He had worked with him on a number of projects since stepping down from the top job at McKinsey, the consulting giant, in 2003. But Rajaratnam’s name had turned radioactive since his arrest, on Oct. 16, 2009, for trading on closely guarded corporate information.

“What are you talking about?” Gupta asked, seemingly taken aback.

Palm explained that Goldman officials had come to believe Gupta may have provided Rajaratnam with crucial information about the firm. Ever cool, Gupta calmly denied that he had given Rajaratnam confidential information about Goldman. Then Gupta said that he and Rajaratnam had indeed been business partners on an investment fund called New Silk Route. Teaming up with Rajaratnam seemed to be his plan for a spectacular career finale — a bid not only to stay vital after stepping down from McKinsey but also to establish himself in the elite circle of billionaires, like the private-equity giant Henry Kravis, that made up his new coterie.

Gupta didn’t say all that to Palm, of course. Instead, he explained why it would have been ludicrous for him to give Rajaratnam information: the two had had a falling out over a soured $10 million investment. Gupta told Palm that he had hired accountants and lawyers and was planning to sue his former partner; he would have done so already, he said, were it not for Rajaratnam’s arrest. “Why would I help out someone with whom I had a dispute?” he asked rhetorically. He said he was happy to discuss the issue more, but he had to catch a flight to Boston.

Over the course of the day, Palm and Gupta had a number of follow-up conversations. In one, Palm recommended that Gupta get his own lawyer. Gupta eventually retained the renowned defense attorney Gary Naftalis — not out of any real concern, he would later say, but as a precautionary measure. Indeed, Gupta seemed so unconcerned with the call he received that Friday, Dec. 11, 2009, that he never even mentioned it to business associates.

It would take more than a year for them to learn of the depth of Gupta’s legal tangles. In March 2011, the S.E.C. charged him in the largest insider trading case in United States history. Months later, he was indicted on a charge of giving Rajaratnam, the subject of the investigation, inside information from two of the boards he sat on, Goldman Sachs and Procter Gamble. Many remained incredulous, but in June 2012, Gupta was found guilty of conspiracy and securities fraud in connection to tips about Goldman — including Warren Buffett’s $5 billion investment in the bank during the financial crisis. Phone logs revealed that less than one minute after hanging up from the board call unveiling the Buffett deal, Gupta phoned Rajaratnam, who then bought nearly $35 million worth of Goldman stock. A federal judge called it “the functional equivalent of stabbing Goldman in the back.” Gupta was sentenced to two years in prison.

This article is adapted from “The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund,” to be published by Business Plus.

Anita Raghavan writes for The Times’s DealBook blog and Forbes.

Editor: Jon Kelly

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DealBook Column: One Way to Look at Private Equity

The Republican candidate Mitt Romney's career at Bain Capital has been attacked by his rivals and in a mock documentary.Luke Sharrett for The New York TimesThe Republican candidate Mitt Romney’s career at Bain Capital has been attacked by his rivals and in a mock documentary.

Meet Paul S. Levy.

He is a low-key private equity executive and former lawyer who helped co-found a midsize firm, JLL Partners, in 1988. It manages about $4 billion on behalf of pension funds and endowments like the New York State Teachers’ Retirement System and Harvard University.

His firm by his own description is “small potatoes relative to the big guys” like Stephen Schwarzman’s Blackstone Group or Henry Kravis’s Kohlberg Kravis Roberts. Yet Mr. Levy, a well-respected businessman who honed his craft at Drexel Burnham Lambert in the 1980s and was once the chief executive of Yves Saint Laurent, travels in the circles of the industry’s biggest names.

He counts David Rubenstein, a founder of the Carlyle Group, as a good friend (they were once roommates); he has lunch with Leon Black of Apollo Global Management; and his firm has made investments with David Bonderman’s TPG Group.

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Yet Mr. Levy has been dismayed that the industry’s heavyweights have not sought to publicly defend their industry in recent days. Private equity came under attack when Mitt Romney’s political rivals put his career at Bain Capital in the spotlight as part of the Republican primary.

“There’s a tinge of McCarthyism here,” Mr. Levy said in an interview. “I think it’s a pretty honorable industry, and I don’t know why people aren’t stepping up and defending the careers that define their lives. That’s a sad thing. What do they fear it will cost them?”

Mr. Levy, who voted for President Obama in 2008, is right. Virtually none of the big names in private equity have spoken up to defend the industry. Over the past several weeks, anytime my colleagues or I have sought comment about attacks on the industry, private equity’s kingpins have declined. (The industry’s lobbying group, the Private Equity Growth Capital Council, has been working behind the scenes to shore up support and plans a more public campaign in the coming weeks, but with none of the leading private equity executives playing a significant role.)

“Some of the people are saying, ‘Let’s keep our heads down,’ ” Mr. Levy continued.

The question is why.

Of course, it is not a secret that the private equity industry has an image problem, crystallized by the robber baron Gordon Gekko character in in 1987. That view was reinvigorated almost 20 years later in 2006 when BusinessWeek wrote a cover article with the headline “Buy It, Strip It, Then Flip It.” Now it is being underscored again with the release of “When Mitt Romney Came to Town,” an anti-Romney mock documentary riddled with factual errors that was financed by a “super PAC” in support of Newt Gingrich.

You can clearly debate the merits of private equity — the outsize fees, the debt, the special tax treatment for executives. But there seems to be a fundamental myth that has developed that says the vast majority of private equity firms, Bain included, are all out to strip companies to their bare bones.

“We want to build businesses,” Mr. Levy said earnestly. “Nobody wants to fire people. We want to retain all of the value-added, high-quality people that work at these companies. But it’s like any other endeavor. If there are more people there to make the shoes than needed, you can’t keep the people. It’s not about wanting to get rid of people. It’s about wanting to make the company operate on a size and scale that’s commensurate with its opportunities and its revenues such that it can make profits and then build the business. It’s as simple as that.”

Mr. Levy said he felt compelled to speak out because nobody else has. He said his motivation was not about politics, but about standing up for the industry that he works in. “I wouldn’t say that I’m a big Romney fan,” he explained, though he said he would most likely vote for him over President Obama if he were the Republican nominee.

He can’t understand why Bain or Mr. Romney don’t defend themselves. “I don’t have to tell you that the Bain reputation in the industry is excellent. They are viewed as very good people, honest people. It’s sort of like everyone’s picking on the wrong guy.”

Indeed, there are more Gordon Gekko-like firms in private equity that get involved with more troubled companies that require severe cuts. Small, scrappy firms, like Sun Capital Partners and the Gores Group, have a history of looking for nearly bankrupt companies to fix. And yes, for every big success, there is a trail littered with failures.

Speaking about these bottom-feeding firms, Mr. Levy said, “They have more of a crapshoot approach, so they’ll buy companies that have zero or negative Ebitda,” referring to earnings before interest, taxes, depreciation, and amortization. “I think in the past two to three years they’ve had 20 or 30 companies go bankrupt, but mind you, they were digging in on companies that were on their way to bankruptcy anyway, and they figured they would take a shot.”

Of course, the biggest criticism of private equity firms is that they sometimes lard companies up with so much debt that it pushes them into bankruptcy — meanwhile having already taken money out of the business for themselves, effectively rewarding their own failure.

“Not everybody is perfect; we’ve had our mistakes as well, but I don’t think there’s a predatory attitude in doing these deals,” Mr. Levy said.

His firm bought J. G. Wentworth, a financial services firm, in 2005. In 2006, after improving the business by increasing its Ebitda by nearly 300 percent, his firm added debt to the company so it could take out millions of dollars. “The company was firing on every possible cylinder,” he explained. You know where this story is going: “Then the financial crisis hit, so securitizations dried up, the company couldn’t service its debt, the company went bankrupt.”

Mr. Levy’s firm ended up buying the company out of bankruptcy, and now it is doing even better than it was before the crisis.

“Everything has a story and the problem is, as you know, the attention span of everybody is so short and if it’s at all complicated people get confused and it’s very difficult to explain some of these things in a nutshell,” he said, making no apologies.

Finally, Mr. Levy said the conversation in South Carolina and the nation about private equity business is missing a crucial point. “I work for you,” he said. “Look, I’m investing the money for Colorado teachers, Colorado firemen,” he continued, “New Jersey civil servants, Montana, Missouri, New York State teachers, Oregon, Washington; that’s who the investors are, and I don’t think that’s really gotten through very clearly.”

Indeed, as “private” as private equity may sound, the beneficiaries are often the public.

“It’s been said any number of times in the press, but I don’t think it’s really gotten through.”

The voices that could pierce the clamor, though, have remained silent.

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DealBook: K.K.R. Earnings Fall 25%

George Roberts, left, and Henry Kravis, co-founders of Kohlberg Kravis Roberts.Gary SpectorGeorge Roberts, left, and Henry Kravis, co-founders of Kohlberg Kravis Roberts.

Kohlberg Kravis Roberts said on Wednesday that its second-quarter profit fell 25 percent as growth slowed in its main investment businesses.

The private equity giant reported $245.3 million in economic net income after taxes atop $117.6 million in fees. That amounts to an after-tax profit of 36 cents a stock unit; analysts had, on average, expected a profit of 41 cents, according to the market researcher Capital IQ.

Economic net income is a nonstandard profit measure used by publicly traded private equity firms that excludes some stock-based compensation costs. On a generally accepted accounting principles basis, K.K.R. earned $39.6 million for the quarter.

The firm said assets under management grew to $61.9 billion. Much of that growth resulted from an increase in the value of K.K.R.’s investments, as well as from newly raised capital.

“In an increasingly challenged global economic environment, our business continued its growth trajectory across all segments,” Henry R. Kravis and George R. Roberts, the firm’s co-founders and co-chairmen, said in a statement.

K.K.R.’s second-quarter performance trailed that of its main rival, the Blackstone Group, which more than tripled its profit for the period, thanks to its huge real estate arm.

Since becoming a public company, K.K.R. has focused on building up its operations outside of its core leveraged buyout business. The firm has raised billions of dollars for energy and infrastructure investments, and it has bolstered its nascent credit trading division.

Still, K.K.R. pointed to successes in its traditional private equity business. The unit increased assets under management to $47.1 billion, offset by payments made to its investors through the sales of portfolio companies and assets.

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