During their heady years as hedge fund managers on Wall Street, one quality divided the Rajaratnam brothers: Raj, the elder brother, was always more successful and better connected than his younger sibling Rengan.
Even though the two enjoyed similar upbringings — both were born in Colombo, Sri Lanka, into a privileged family and attended prestigious universities like the University of Pennsylvania’s Wharton School and Stanford — Rengan Rajaratnam spent his entire career working in the shadow of his brother. The relationship between the two seesawed over the years with Rengan’s brash ways and business setbacks at times causing short-lived rifts between the brothers. People who know the two compare Rengan to a spoiled child — he is the youngest member of the Rajaratnam family — and his brother Raj, who is 13 years his senior, as a protective older brother who can’t help but be irritated at times with his sibling’s foibles.
Rengan was acquitted on Tuesday of conspiring to trade on insider information after a federal judge in Manhattan threw out two securities fraud counts against him. During the three-week trial, Rengan’s lawyer, Daniel Gitner, seized on the sometimes fractious relationship between the brothers to underscore that the case against Rengan was not the same as the government’s successful prosecution of his brother. Three years earlier, Raj Rajaratnam, who founded the Galleon Group, was found guilty on all 14 counts of securities fraud and conspiracy to commit insider trading in the same courthouse in Manhattan. He is serving an 11-year sentence at a prison in Massachusetts. Ironically, the government’s case against Raj was started after an investigation by the Securities and Exchange Commission into Rengan drew red flags and uncovered suspicious instant message exchanges between the two.
Like his brother, Rengan had ambitions to start his own hedge fund. After graduating from the University of Pennsylvania in 1992, Rengan bounced around Wall Street, working at Morgan Stanley for a time and then joining SAC Capital Advisors, the hedge fund named after its founder, Steven A. Cohen.
But despite his pedigreed education and impressive résumé, Rengan lacked the charm and street smarts that made Raj a master at cultivating important, well-placed people. Even though Raj started his career on the fringes of Wall Street, working at a scrappy boutique investment bank, Needham & Company, he managed to build relationships with hedge fund titans like Stanley Druckenmiller and George Soros, who was one of Galleon’s first investors. Rengan, by contrast, was known for his prickly manner and propensity to alienate.
He left SAC Capital after eight months because of a falling-out with Mr. Cohen. As Rengan tells it, when he first joined SAC, Mr. Cohen wanted to focus on longer-term investing. Once he was working at SAC, however, Mr. Cohen felt that “longer-term investing wasn’t what he really wanted to do plus quite honestly I had a disagreement on how much I got paid,” Rengan told S.E.C. lawyers during a deposition in December 2006. The S.E.C. had asked Rengan to give testimony as part of its effort to build a case against Raj, who by 2006 was considered one of the leading lights in the hedge fund universe.
Rengan told the S.E.C. lawyers that the disagreement between him and Mr. Cohen turned into a screaming match, with Mr. Cohen interrogating Rengan on why the firm was not involved in trading telecommunications equipment stocks —Rengan said he traded them a few months earlier — and Rengan complaining about his pay. “There was yelling and screaming,” Rengan told the S.E.C., and the compensation issue “came up and he said, ‘If you don’t like it, leave,’ that was my option.”
A spokesman for Point72 Asset Management, the successor firm to SAC, declined to comment.
The spat sowed the seeds for Rengan’s move to start his own hedge fund. In May 2004, he and a former SAC trader, with whom he shared a small office, plowed in “every single dime we’ve ever earned” — about $900,000 he told the S.E.C. lawyers — together with some seed money, about $10 million, from two former classmates of Rengan’s at the University of Pennsylvania, to start Sedna Capital.
In the hedge fund world, Sedna Capital was a minnow compared with Galleon. At its height, Sedna managed about $90 million, dwarfed in size by Galleon, which at its peak ran more than $7 billion in assets. Galleon had offices in the landmark IBM building on 57th and Madison, but tiny Sedna Capital rented space from its Wall Street broker.
Though Rengan’s ambitions were obvious to those who knew him, he never came close to Raj’s stature. He had a net worth of about $4 million — sizable by almost everyone’s standards but paltry compared with Raj, who in 2009 was named to the Forbes 400 list of richest Americans with an estimated $1.5 billion to his name. Unlike his big brother, who had relationships with corporate insiders like the former McKinsey managing partner Rajat Gupta, Rengan’s circle of contacts largely consisted of midlevel corporate executives, Wall Street analysts and traders and business school friends.
He lived in a one-bedroom apartment but enjoyed the luxuries that his brother’s wealth afforded. He often hung out on weekends with Raj, who owned both a penthouse in Manhattan’s fashionable Sutton Place and a McMansion in the back country of Greenwich, Conn.
The relationship between the two was complicated. Rengan often turned to his brother for advice, and whenever Rengan was at loose ends, Raj tried to help out. In 2001, after the Nasdaq stock market crashed, Raj raised $25 million to invest in beaten-down technology stocks. He hired Rengan to manage the Dollar Stock Fund, but Rengan picked the wrong stocks and deployed too much leverage, a former Galleon employee said. Raj lost patience with his brother and the fund did not live up to its full potential. In mid-2006, during a family vacation to Gila, Mexico, Rengan sounded out Raj about creating a high-risk, high-return fund for sophisticated investors. Raj was supportive of the idea and threw $1 million into the new Sedna Strategic Opportunities Fund. It was trades in this fund that first caught the S.E.C.’s attention.
However, long before the investigation into Sedna could gather momentum, the hedge fund closed because of poor performance. In 2007, Raj bailed out Rengan, bringing him and a number of his employees at Sedna on board at Galleon.
It was the start of a trying time for the two. As financial markets began to collapse in 2008, and Galleon, like many hedge funds, flailed as assets flooded out and performance faltered, tensions grew between the brothers. A catalyst was a money-losing bet that Rengan made on Bear Stearns just before the New York investment bank collapsed that cost Galleon at least $30 million. “Rengan was the ne’er-do-well brother,” said one former Sedna Capital employee who worked with both brothers at Galleon. “He must have blown up five portfolios at Galleon and retained his job.”
Now, he can lay claim to another achievement: avoiding prison despite his close ties to the man who prosecutors say masterminded the biggest insider trading ring in history.
Anita Raghavan is the author of “The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund,” published by Business Plus.