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Fatal Character Flaws Bring Down Wall Street Titans

Posted by Larry Doyle on October 20, 2009 8:49 AM |

Raj Rajaratnam

How is it that an individual with untold hundreds of millions of dollars in wealth could put himself in a position of risking it all?

Welcome to the world of Raj Rajaratnam, the owner of the hedge fund Galleon and the major kingpin arrested in the most recent insider trading scandal to rock Wall Street.

Who is Raj Rajaratnam and why would he take such professional risks? We learn about Rajaratnam from a London based financial site, Here Is The City:

He was born in Sri Lanka, attended S. Thomas’ Preparatory School, Kollupitiya, then moved to England to complete his schooling, and studied engineering at the University of Sussex. Rajaratnam earned an MBA from Wharton in 1983. He is married with three children.

Rajaratnam, a Tamil self-made billionaire hedge fund manager, is the 236th richest American according to Forbes (2009), with an estimated net worth of $1.8 billion.

The hedge fund manager started his career as an analyst at the investment banking boutique Needham & Co., where his focus was on electronics. In 1991, he became the President of the bank at the age of 34. At the company’s behest, he started a hedge fund, Needham Emerging Growth Partnership in March 1992, which he later bought and renamed ‘Galleon’.

Initially invested in technology stocks and healthcare companies, he says his best ideas come from frequent visits with companies and conversations with executives who invest in his fund.

He has made more than $20 million in charitable donations in the last five years. In September 2009, Rajaratnam pledged to donate $1m to help the Sri Lankan government with the rehabilitation of former LTTE combatants. He has also donated generously to clear land mines in the war-affected areas in Sri Lanka, and was also a contributor to various causes that promoted development in the Indian subcontinent and programs that benefited lower income South Asian youth in the New York area.

With this pedigree, why would Mr. Rajaratnam put himself in a position of risking his fortune, his firm, his family, his reputation and ultimately his freedom? Obviously, Mr. Rajaratnam and every other individual involved in this insider trading scandal is presumed innocent and is entitled to due process. That said, he faces an uphill battle given the fact that the Feds employed wiretaps and have numerous individuals closely aligned with Mr. Rajaratnam cooperating with the investigation.

Let’s return to my question as to why Mr. Rajaratnam or others may take this degree of risk. While I have not had direct experience with anybody involved in an insider trading scandal, I have had plenty of experience with individuals for whom no amount of money is ever truly satisfying. These individuals are driven and truly define success in their lives by one number. What number is that? Their net worth.

While not everybody who possesses such a fatal flaw engages in illegal activities, that character deficiency can be extremely dangerous if not professionally fatal. Regrettably, the fatality often brings down numerous other individuals in its wake.

I witnessed this character flaw amongst certain senior executives at Bear Stearns. I witnessed it amongst partners of the hedge fund, Long Term Capital Management. For those unaware of LTCM, the failure of this hedge fund brought the markets to its knees in 1998. Many on Wall Street were well aware that LTCM partners had pronounced that their goal was to become billionaires. A mere few hundred million dollars would not suffice. (To read more about LTCM, check out a post I wrote on March 18, 2009, entitled “AIG and LTCM“).

We will learn more about Mr. Rajaratnam in the weeks and months ahead. Rest assured, the web that has entangled Mr. Rajaratnam will encompass other ‘masters of the universe’ on Wall Street. While I am no psychologist, ‘having seen this movie before’ I am willing to bet that the character flaw which drove certain former Wall Street titans to prison and firms into the grave will once again play out here in 2009 and 2010.


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