The two FBI squads chose April 1 as the day. Kang would approach Far first, and Makol would talk to Motey. Another agent would try to flip Fortuna. There were contingency plans in place in case things didn’t go as they hoped. They hoped to have their new cooperators ready and new wires running in time for the second-quarter earnings season, when insider trading was sure to spike. Kang immediately started planning out his trip, booking airline flights and a hotel room.
There had been moments like this in the investigation before, when it seemed as if some new event might alter the course of what followed, but this one seemed more significant somehow. As April 1 arrived, Brodsky, Michaelson, and others at the U.S. Attorney’s Office waited anxiously to hear how the approaches had gone. Would a year of intense, back-breaking work blow up in a single day? They were about to find out how strong their case really was.
—
Two weeks later, on April 16, 2009, B. J. Kang’s new cooperating witnesses arrived at the U.S. Attorney’s Office in downtown Manhattan. Although Ali Far and C. B. Lee were best friends and had been running a hedge fund together, neither knew that the other was in the building. Kang had approached them both separately in California, and they had independently agreed, at least in theory, to flip. As far as the FBI knew, they hadn’t talked to each other since Kang had first spoken to them at their front doors.
An agent met Ali Far in the lobby and escorted him to a conference room on the sixth floor; after making sure the elevator was clear, Andrew Michaelson met Far’s partner, C. B. Lee, and brought him to the fifth floor. Michaelson and another prosecutor, Josh Klein, raced back and forth between the two rooms, trying to act as if nothing unusual was going on. The goal was to play them off against one another and try to pressure them to cooperate fully, all without alienating them. It was a delicate situation.
“Lying to a federal agent is a separate crime,” Klein reminded Lee. If he said something that wasn’t true during the interview, they could charge him with perjury.
Initially, Lee and Far were reluctant to admit they had done anything illegal, which was the first step of cooperating. The prosecutors made an argument that both men had heard before, from Kang: that cooperating was the only way to avoid being prosecuted. The strategy was to play a bit of a tape-recorded conversation that contained just enough evidence to show them that the government had the proof—without revealing too much about how they had gotten it. Lee and Far, meanwhile, were being instructed by their lawyers not to say much or admit to anything until they knew whether or not the government was bluffing.
“I didn’t do anything,” Lee said. “I went to Taiwan to meet with companies, but I didn’t get revenue numbers.”
“Really?” Kang said. “No revenue numbers?”
Kang opened his laptop and pressed play on a digital sound file in which Lee was heard getting earnings numbers for Nvidia, a semiconductor manufacturer. The government had evidence that Lee had been wiring $2,000 payments every quarter to a small army of consultants in Asia, who were gathering inside information about semiconductor companies and giving it to Lee.
“Okay,” Kang said. “Let’s cut the shit.”
Lee and Far were agonizing over what to do. People accused of serious crimes are often in personal turmoil. They have trouble sleeping, sometimes resort to drugs, and have to juggle all sorts of related crises, money problems, angry significant others, anxiety disorders. Lee had a remoteness about him. He seemed more analytical and less emotional than his partner. Far, on the other hand, seemed like he might have a mental breakdown at any moment. Both of them were worried about saving not only themselves but also what was left of their business.
At one point, Lee’s lawyer pulled Michaelson aside. “I want to help my guy, I want to help you, but help me figure this out,” he said. “What do you have on my client? Share a little something with me so that I know that cooperation makes sense.” Then Kang played more recordings.
“This is your one chance,” Klein said to Lee. “If you don’t cooperate, we will prosecute you, we will convict you, and you will go to jail.”
Ever so slowly, Lee and Far began to give in.
One of the first things Lee and Far had to do was close their fund down without drawing undue suspicion from their friends on Wall Street. Once they were working as FBI informants, they couldn’t continue trading for their investors. The fund had been doing relatively well, up 10 percent the previous year, so suddenly shutting down without an explanation was bound to raise questions. They needed a cover story. With help from their FBI handlers, they agreed to publicly offer the fact that they had been fighting about how to divide the fund’s profits as the reason for going out of business. As soon as word reached New York that Lee was unemployed, he was inundated with job offers from other hedge funds.
Lee and Far were now, officially, B. J. Kang’s personal helpers, effectively required to be available at any hour for any task, from answering questions to calling former colleagues and recording them to showing up to a meeting wearing a wire. They would even have to betray their best friends if they were asked to.
While Rajaratnam ran a major hedge fund, it increasingly looked to the government like SAC Capital was the sun that everyone else was orbiting. FBI agents had heard from numerous sources that Cohen was the one fund manager Rajaratnam felt most competitive with. Raj took pride in hiring traders who had worked at SAC—even ones whom Cohen had fired. Stevie Cohen was a legend, people on Wall Street said over and over, the best in the business. Still, Cohen’s company had remained obscure to the FBI. They were determined to find out more. C. B. Lee had been a semiconductor analyst at SAC from 1999 until 2004. The possibility that he could tell them about how Cohen’s fund worked was intriguing.
Lee told Kang how things operated at SAC. He had worked at other investment firms before, but once he got to Cohen’s fund, he explained, his employers pushed him to be much more aggressive. The only way to satisfy them, Lee felt, was to get inside information. Lee had been at SAC when technology companies were moving most of their manufacturing business out of the United States to Asia. He was fluent in Chinese and knew people in Taiwan and mainland China. Most of the Taiwanese firms didn’t care about America’s regulatory rules or whether they might be violating them by sharing confidential information with Lee. He was smart and knew what to do with this information once he got it. Over time he developed an intuitive feel for the semiconductor manufacturing cycle, which he was able to exploit to come up with profitable trading ideas.
Lee also described the internal landscape of SAC and its unusual structure. It was organized like a bicycle wheel, with the spokes consisting of about a hundred portfolio managers with their own teams of analysts and traders. Cohen was the hub, sitting at the center of everything. Information made it all move. Each team had an industry it specialized in, comprising thirty or more stocks—technology, healthcare, consumer companies like Target and GE—and they were pitted against the other teams to come up with the trading ideas that would make the most money.
The teams rarely shared ideas with one another, just with Cohen, who took their best ideas and traded on them himself. The arrangement was different from the way most other hedge funds operated, where people tended to work on the same portfolio rather than against one another. Cohen could see what everyone around him was doing, while all the others stayed isolated from one another.
If Cohen caught someone making a trade before giving the idea to him, he became infuriated. And if someone working for him lost money for a stupid reason, sometimes even once, his anger was hard to describe in human terms. If a trader did well there, he was paid like a professional athlete, Lee said. But if he didn’t, he was dumped as quickly as a bad investment. It was not a happy place to work.
Part of his job, as Lee understood it, was to get inside information for Cohen to trade on. “I was expected to call companies and get the numbers,” he told Kang. Lee also said he thought SAC was “dirty.”
That was just what Kang wanted to hear.
Lee also explained how SAC was organized to insulate Cohen from the behavior of the lower-level traders and analysts. All of the ideas for trades were filtered through layers of portfolio managers and assigned codes for how strong they were before they reached him—a “high conviction” idea might be given to the boss without explaining why the analyst was so sure about it. Cohen wanted guaranteed moneymaking ideas; the system was designed so that Cohen did not need to know what his traders had to do to get them.
Because he had left SAC more than five years earlier, the information Lee provided on specific trades was too old to prosecute. But the insight he offered into Cohen’s world was revelatory.
At first, Kang wasn’t sure what to make of what Lee was telling him. Here was an enormously profitable hedge fund that seemed to be on the right side of every investment it made, almost as if it could predict the future. The fund made huge profits, year after year, evidently without the ups and downs that other funds went through. The analysts and traders working there were under intense pressure to deliver and were paid huge bonuses when they did.
“Okay, so what?” Kang thought. Squeezing your employees wasn’t illegal. If it was, half of Wall Street would have to shut down.
But then Kang started to compare what Lee was telling him with what he was hearing from his other sources on Wall Street. Traders he talked to at other funds kept saying things like, “You think my fund is dirty? You should check out what SAC is doing.” There was an expectation at SAC that traders would try to get inside information, Kang was told, or even try to manipulate stock prices by spreading false information.
“This has got to be more than just smoke,” Kang thought.
—
For the people in the middle of it, the insider trading investigation had taken on huge implications. Making decisions about what next steps to take meant confronting difficult questions and possible trade-offs. Was all of this effort, the months of wiretaps and flips and working late, and all the evidence, in the end just about charging Raj Rajaratnam and a couple of his friends? Or was this case going to be something bigger, an indictment of the greed and corruption and win-at-any-cost culture that permeated Wall Street?
There were two obvious new avenues they could pursue to expand the investigation even further, and both involved becoming much more ambitious.
One was the opportunity to break into the labyrinthine world of the expert network firms, which investors paid to connect them with employees at public companies for consultations. The use of these expert networks was widespread in the hedge fund industry—once a few funds started using them, everyone else had to do so as well to try to keep up with their competitors. It had become obvious to investigators that many of the expert networks provided a cover for the exchange of inside information, and that traders were making money using this information at the expense of other investors.
The second avenue was attempting to gather enough evidence to go after Cohen. Shutting SAC down would set a powerful example for the rest of the industry.
The next steps in building the expert network case were straightforward enough: They needed more wiretaps. The FBI believed that Primary Global Research, or PGR, was one of the worst offenders, based on a handful of phone calls that Kang and other agents had heard on the tapes. C. B. Lee had been able to demonstrate what expert network calls were like by posing as a hedge fund investor and contacting PGR consultants.
To Kang, the whole concept of the expert network business model sounded corrupt. He could see that certain expert consultants got hired again and again because word had spread through the hedge fund industry about how “good” they were—meaning that the information they provided was, in Kang’s view, probably illegal. Why would savvy hedge fund guys pay thousands of dollars to get information from these consultants that was publicly available elsewhere? Some funds that used them suspected that PGR saved its “best” consultants for its highest-paying clients. And who would those be? One of PGR’s biggest customers, running up a tab of $520,000 in 2009, was SAC.
Two FBI agents, Dave Makol and James Hinkle, started gathering evidence for an application to wiretap PGR’s phone line. They were sure there was much more going on.
At that point, the tension that had been building between Kang and Makol exploded into the open. The two agents were leading separate FBI squads—C-1 for Kang, C-35 for Makol—investigating insider trading, and they had been circling each other’s territory for the previous year like wolves. Every time one of them thought about approaching a new cooperator, Kang or Makol had to check with the other squad to make sure that it wouldn’t disrupt whatever they were doing. Each agent was reluctant to divulge his activities, which meant that progress on the investigation was slowing down. And each side was constantly trying to get credit for the progress that was happening.
Kang got upset when Makol took the lead in the expert network case, arguing that he had been tipped off to PGR first, when it had surfaced on the C. B. Lee and Ali Far wiretaps. The chief of the securities unit, Lohier, had a special gift for diplomacy, and spent much of his time trying to make peace between the two sides. But eventually, even his boundless patience was tested. The Kang-Makol war became a joke in the office. After the fight over PGR, Lohier got so exasperated that he ordered the two of them to report to his office.
“You two need to talk,” he said. He told Kang and Makol in no uncertain terms that they were not to come out until they had made up, and then left them alone. The two agents made a grudging commitment to try to get along.
In the spirit of cooperation, the prosecutors and FBI agents working on the insider trading investigation gathered again to brainstorm their options for pursuing their other target, Steve Cohen. To build a case against him, they basically had two choices: find a cooperator who was close to him who could wear a wire and collect evidence that he was trading on illegal information, or try to get permission to wiretap Cohen’s phone.
If they wanted to wiretap, they would need one of their existing cooperators to elicit a dirty call with Cohen for the application. If they wanted to flip someone new who was close to Cohen, they needed evidence they could use to try to compel that person to cooperate. The choice of which confidant to approach for a flip wasn’t easy. It needed to be a person who was intimate enough with Cohen that he was likely to have access to incriminating information about his trading, but not so close that he would tell Cohen what the FBI was up to.
On the question of whether to wiretap or try to flip someone, Makol and Kang were, not surprisingly, on opposite sides. Kang argued that they had a well-positioned cooperator in C. B. Lee, someone who used to work for Cohen and who could easily get him on the phone and collect evidence for a wiretap application.
Makol, meanwhile, had identified a potential cooperator, an SAC portfolio manager who was managing a $500 million portfolio for SAC, who seemed to be someone Cohen trusted. Makol was confident the portfolio manager would flip. He just needed more time to prepare.
The prosecutors weren’t sure they could wait that much longer. To Makol’s consternation, Lohier and the rest of the group decided to pursue a wiretap on Cohen’s phone instead of going after the portfolio manager. Kang started coaching C. B. Lee to prepare to make a call to Cohen and try to get the evidence they needed. Kang came up with a plan whereby C.B. would phone Cohen and ask if he could have his old job back. He could talk about what “edge” he had and try to entice his old boss by listing all his valuable connections. If the plan worked, they’d have their wiretap and a mole inside SAC Capital.
—
The FBI had learned about Cohen’s Sunday Ideas Meetings, during which his portfolio managers called him to talk about their trading ideas for the week, and the agents decided to target those calls first. They weren’t sure where Cohen usually was when those calls took place, however. They had to choose one phone line for the wiretap application, and there were four choices: his Stamford off
ice line, his home phone in Greenwich, his house in East Hampton, or his cellphone. They decided to pursue the line in Greenwich. Kang and Michaelson prepared a Title III application, requesting permission to wiretap Cohen’s home phone for thirty days beginning in July. This would coincide with the third-quarter earnings season.
There was one important and rather obvious factor that the FBI and the U.S. Attorney’s Office failed to consider, however: During the summer months, when the humidity in New York City often reached rainforest levels, everyone of any significance in the financial industry fled to the Hamptons. Traditionally, Wall Street executives’ wives moved out there with their children and domestic staff, while the men commuted back and forth to the city. In July and August, seaplanes and helicopters ferrying billionaires buzzed around the skies of Long Island like drones, and Cohen was often in one of them. He was barely in Greenwich at all during the first month of the government’s wire. Still, there were a few conversations that took place over the phone line that prosecutors used to get permission to extend the wiretap for an additional thirty days.
Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street Page 17
