Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street

by Sheelah Kolhatkar

  The article had a shocking number of details about what the FBI and the SEC were doing—things that up until then had been completely secret. It identified the expert network firm PGR as one of the main targets of the investigation. It mentioned a handful of drug companies the government was looking at. It also reported that Richard Grodin, C. B. Lee’s former boss at SAC, had received a subpoena.

  For the government, it was a devastating leak that would alter the course of the investigation. Wall Street was now on notice that the Justice Department was waging a campaign that was much bigger than anyone had suspected. The Raj Rajaratnam case was only the beginning.

  A former SAC portfolio manager named Donald Longueuil reacted to the story with particular alarm. He had been fired from SAC for poor performance the previous April. He was looking for another high-paying hedge fund job, and his wedding was only three weeks away. Now he had this to deal with.

  Longueuil was intensely competitive, a mindset he brought to his work. Tall and lean, with a shaved head, he spent most of his free time training for cycling races. He was also a winter sports enthusiast and had tried to make the 2002 U.S. Olympic speed-skating team after graduating from Northeastern University. In 2008 he joined SAC as a technology portfolio manager. During his time there, he became friends with another SAC portfolio manager in Boston named Noah Freeman, a Harvard graduate whom he’d met competing with the Bay State Speedskating Club. Both men were in their early thirties and driven by an obsession with winning their various athletic endeavors. Freeman was so intense about it that one triathlon group, known as “Team Psycho,” kicked him off for being unsportsmanlike.

  At home in Midtown Manhattan with his fiancée, Longueuil read the article again. It was as if the piece were about him and his hedge fund friends. He looked at his fiancée, wondering if his life was about to blow apart. He still couldn’t quite believe that she was marrying him. In addition to being blond and just about perfect-looking, she had a biology degree from Princeton and an MBA from Wharton, where she’d been a competitive rower, and she now had a great job at the Boston Consulting Group. Freeman was going to be his best man.

  During his eight years on Wall Street, Longueuil had built an extensive network of information sources, including at Apple and Texas Instruments. He seduced them with expensive dinners and golf outings, as well as the occasional night at a strip club. And they, in turn, supplied him with inside information that he had traded on while he was at SAC.

  Because the material he got from his sources was so voluminous, he’d become a diligent note-taker, saving details from every conversation so that he could track the quality of the information over time. He and Freeman shared the information and traded on it together, along with another friend of theirs, Samir Barai, the manager of a small hedge fund. Still, even with that extra boost, things had been difficult at SAC. Longueuil used to complain that even with all the cheating going on, you still couldn’t make that much money because the market had gotten so competitive. Hence the firing by Cohen.

  Longueuil glared at his bedroom table, where he kept his USB flash drive. He and Freeman had nicknamed it “the log.” It contained his notes from his sources. It almost seemed to be mocking him, saying: “You’re toast.”

  Longueuil grabbed the USB drive and the two other external hard drives he used to store notes from his information exchanges with Freeman and Barai. All along he’d been exceedingly careful, never saving any of the illegal information on his SAC computer, and never writing anything incriminating in his work email. All of his questionable dealings had been conducted via one of his numbered Gmail accounts on his laptop, with all his notes saved on the external drives. He tried to do most of his instant-message chats through Skype, which he was sure couldn’t be wiretapped.

  He tore around his apartment looking for a pair of pliers, which he used to rip the USB and hard drives apart, stripping them into little bits. Then he divided the pieces into four ziplock bags. He stuffed the bags into the pockets of his North Face jacket and turned to his fiancée.

  “We’re going for a walk,” he said.

  At 1:52 A.M., in the early hours of the morning of Saturday, November 20, video surveillance captured them hurrying through the lobby of their condominium building, past the doorman and down an elegant slate walkway lined with bamboo plants. They turned past the Chinese restaurant next door and took a tour through the neighborhood. Longueuil looked for garbage trucks making the rounds. When he spotted one he ran it down and tossed one of the bags of hard-drive parts into the back. Over the next thirty minutes he dispersed the bags into four different trucks. As he threw each one, he wondered what would happen if the Feds found them. Maybe it would have made more sense to dump them in the East River? He was pretty sure they were so damaged it would be impossible to read any of the data, even if by some miracle the FBI got its hands on them.*

  They didn’t get home until 2:30 A.M. Everything was gone. He felt much better.

  —

  That same night, Samir Barai, Longueuil’s friend and the founder of Barai Capital, had read the same Wall Street Journal article and had a similar panic attack. At thirty-nine, Barai had succeeded on Wall Street through sheer exertion. He had a severe hearing impediment, and when he was young, nobody thought he would ever amount to much. He got through NYU and then Harvard Business School by sitting in the front row and reading his professors’ lips.

  He had been trading extensively on inside information at his small hedge fund, something that anyone who worked for him quickly discovered as he demanded that they get inside information, too. Barai and Longueuil had developed a close, if nasty, friendship, making wisecracks about Freeman behind his back, laughing at the thought of him having sex with their various sources, even jokingly referring to him as “the Jew.” (Barai’s nickname, meanwhile, was “the Hindu,” while Longueuil was “the Catholic.”)

  The news of the government investigation of PGR couldn’t have come at a worse time. Barai was already distracted by his ongoing, increasingly ugly divorce, and he was a heavy PGR user as well as a close friend of the company’s chief financial officer. Barai pulled information from a wide range of strange characters. One, a consultant named Doug Munro—nickname “10k”—ran a company called World Wide Market Research. Munro maintained an email account under the name JUICYLUCY_XXX@yahoo.com; in it, Munro would compose emails containing inside information about Cisco and other companies but leave them in the “drafts” folder, where they supposedly would not create an email trail. Barai paid him around $8,000 a month, and Freeman paid him, too; in return, both had the password to the email account. Whenever there was something new, Munro sent Barai an email: “Lucy is wet.” Then the men would log in and read whatever was there.

  Barai, Freeman, and Longueuil had pet names for most of their sources. “Cha-Ching” was their guy at Intel; “Saigon” was their consultant who gave them information about National Semiconductor. Their best source was Winifred Jiau. Her nicknames were “Winnie the Pooh” and “the Poohster,” and she was a little nutty. She had a statistics degree from Stanford, had worked at Taiwan Semiconductor, and had friends all over Silicon Valley, although “friends” in her case had a loose definition. The Poohster was available by special arrangement through the expert network PGR, which paid her a $10,000-a-month retainer to speak with a select group of its clients through its private network. Jiau badgered PGR constantly about money, acting desperate and paranoid, as if she would never see another paycheck. She referred to her tippers inside companies as “cooks” and often threatened Barai and Freeman that they’d go on strike. “Cooks don’t talk to me without sugar!” she screamed. After one particularly useful session, she requested a $500 gift certificate to the Cheesecake Factory in addition to the cash Barai and Freeman sent her each month. Another time, Freeman, acting on Jiau’s request, asked his secretary to have twelve live lobsters delivered to the capricious source. The lobsters ended up dying at the FedEx office near Jiau’s residen
ce in California because she couldn’t be bothered to go pick them up.

  The reason Jiau was able to get away with this was that she was good. Her information was by far the most valuable they got from anyone. She had numbers for revenue, gross margin, and earnings for Marvell and Nvidia, two volatile semiconductor companies Barai, Freeman, and Longueuil loved to trade, that were accurate down to the decimal point. The Poohster offered them something they couldn’t live without.

  Because of Barai’s hearing problems, he made his research analyst, a thirty-eight-year-old named Jason Pflaum, secretly listen in and record almost all of his calls. Pflaum had only a minimal understanding of who Jiau was, but he would eavesdrop and send instant messages to his boss explaining what she was saying so that Barai could keep up with his end of the conversation. Pflaum also took extensive notes so Barai could go back and review the information later, since he usually missed many of the details the first time.

  “Who are your sources?” Barai had asked Jiau at one point, incredulous.

  “You should not ask who my sources are,” Jiau replied.

  —

  Reading the Wall Street Journal article, Barai’s mind filled with what-if scenarios and questions about just how he was going to get himself out of legal jeopardy. He sent an instant message to Pflaum. “Did you see the PGR article?” wrote Barai, quoting the story. “Key parts of the probes are at a late stage….Federal grand jury has heard evidence.” He had read the article ten times, he said.

  “So another reuters article,” he wrote a few minutes later after a follow-up news story was posted. “This scope is said to focus on the use of so-called expert network firms….concern for years that some experts may be passing on confi info about public cos to traders….PGR was only one named!!!!”

  Then, a minute later: “Fuuuuuck.”

  His next act was to order Pflaum to delete all of their BlackBerry messages.

  The following morning, Pflaum sent Barai a message. “Yo. Deleted them. Didn’t sleep so well last night. What else do you think we need to do?”

  “I dunno,” Barai wrote. “I think we ok tho. I think u just go into office, shred as much as you can. Put all ur data files onto an encrypted drive.” He told Pflaum to erase all of his emails with PGR executives. Rather than waiting for Pflaum to go in and destroy all the evidence, Barai rushed to their office on Third Avenue and Forty-sixth Street and started shredding everything he could get his hands on. Then he went back home.

  As he raced around in a panic, Barai started to see a way through the disaster. Maybe they wouldn’t be able to nail him with anything. He had talked to people, sure, but that wasn’t illegal. He would hire a lawyer, the best money could buy, and he would fight. They had to prove that he had acted on the information, and that was sure to be difficult. He told himself that he’d invested using the “mosaic theory”—an approach to analyzing stocks that involved collecting disparate bits of public information about a company’s operations and putting them all together to create a “mosaic” about the business. It was a long-standing defense argument traders used to explain what prosecutors often thought of as insider trading. Everyone did it, Barai told himself. There was nothing wrong with it.

  Just to be safe, he instructed Pflaum to leave his laptop with his doorman on Sunday night so that Barai could pick it up and do a “Department of Defense delete,” an erase of the hard drive that couldn’t be undone. Barai collected the computer and brought it to his fiancée’s apartment, where he copied all the notes onto a thumb drive he had just bought and then tried to wipe the laptop clean. He spent all night downloading software from the Internet that promised to help him erase everything permanently, but he was never able to get it to work.

  On Saturday morning, just as the print version of the newspaper was being picked up from the doormats of buildings across the Upper East Side, Pflaum met with B. J. Kang on the street near his apartment. Pflaum had been cooperating with the FBI for a month. He showed Kang his BlackBerry messages with Barai from the night before. Kang took pictures of the entire exchange, including the orders to shred his documents and delete his email.

  As Kang read one of Barai’s messages—“Fuuuuuck”—from the night before, he had the same exact feeling. Guys all over Wall Street were probably destroying their hard drives. The FBI had to do something.

  * * *

  * Longueuil’s fiancée was never charged with any wrongdoing.

  CHAPTER 10

  OCCAM’S RAZOR

  Early Monday morning, November 22, 2010, two days after The Wall Street Journal set off a weekend of frantic evidence destruction, a fleet of unmarked cars pulled up outside 1 Landmark Square, an office tower in the center of Stamford, Connecticut. A dozen federal agents were inside the vehicles.

  Special Agent Dave Makol was a block away. He pulled out his cellphone and dialed a number.

  Inside the office tower, a phone rang.

  “Hello?” a man answered.

  Makol identified himself as an FBI agent. “We know you’ve been involved in insider trading,” he said. “There’s going to be a lot of stuff going down later, and it’s going to affect you and your family. Your life is never going to be the same.”

  Their investigation was focused on expert networks, Makol continued, and they wanted the man to cooperate. When the man asked for more information, Makol said he couldn’t be more specific. “We’re at the McDonald’s next door,” he said. “If you want to come down and talk to us, that’d be great.”

  The man wasn’t sure what to do. He was scared to say anything. He told Makol that he needed to think about it.

  Makol said they didn’t have much time to wait.

  The man was Todd Newman, a forty-five-year-old portfolio manager at a hedge fund called Diamondback Capital. He hung up the phone and ran one floor down to the Diamondback general counsel’s office. He relayed the whole exchange to the company’s legal counsel and its COO, John Hagarty.

  “Is there something you did?” Hagarty asked, staring into Newman’s eyes. Hagarty had only been on the job for three months. For a moment, he wondered whether Newman was wearing a wire or something, the situation was so bizarre. The look on Newman’s face was one of terror.

  No, Newman said, he hadn’t done anything. “I’ll just go over there and talk to them. I don’t have anything to hide.”

  “I don’t know if you want to do that,” Hagarty said.

  “I think I need a lawyer,” Newman said.

  The legal counsel threw out a few names of lawyers he knew, and Newman decided to walk over to the office of one of them, just up the street. Incredibly, even though the block was crawling with FBI agents, he walked unnoticed out the front door of the building.

  As Newman made his way down the street, the elevators opened on the fourteenth floor, just outside Diamondback’s reception area, and a team of FBI agents fanned out wearing bulletproof vests. This was the moment when it seemed as if a man with a bullhorn might jump out and yell “Cut!” and things would go back to normal. The agents looked like they were ready to charge into a terrorist safe house rather than an office filled with Wharton graduates tapping away on keyboards.

  “FBI!” they shouted, flashing their badges.

  Startled receptionists and traders sat up in their chairs, unsure what to do. Agents filed between the rows of desks, commanding people to back away from their computers. Hagarty watched in shock as the agents carted out files and hard drives. His father had been a New York City police officer for twenty-seven years, and his brother was an FBI agent who had helped bring down John Gotti. He had worked in finance for more than fifteen years; he had never imagined that he would be employed by a company that was the target of a federal raid. He asked the agents for a copy of the search warrant.

  Rumors had been making their way through the hedge fund industry that the government was going after SAC Capital, Hagarty knew, and Diamondback and SAC were closely connected. Diamondback’s founders, Larry Sapanski and
Richard Schimel, had been two of Steve Cohen’s most successful traders before they went out on their own in 2005. When they told Cohen they were leaving SAC to start their own fund, Cohen threatened to destroy them. As far as Cohen was concerned, they had been nothing when they came to work for him; how dare they go into business against him? To make matters worse, Schimel had married Cohen’s sister Wendy—which made bar mitzvahs and weddings pretty awkward. Several of Diamondback’s other key employees had come from SAC as well. If you wanted a proxy for Cohen’s firm, Diamondback was about as close as you could get.

  Storming into a hedge fund wasn’t how the FBI had intended for this part of the investigation to play out. These were drastic measures, but Makol didn’t see any other choice.

  —

  While Diamondback’s hard drives were being carried out the door, David Ganek was driving into the offices of Level Global, the hedge fund he founded after leaving SAC, across the street from Carnegie Hall. When he got there, he found five of his employees milling around on the street. Not just the smokers but nonsmokers as well. They looked stressed.

  “What’s going on?” Ganek asked.

  “We’ve been raided,” one said. “The FBI is upstairs.”

  “What?” Ganek said. His mind flashed briefly to a film he’d seen recently, about the siege of the U.S. embassy in Tehran, where embassy workers furiously shredded documents as a mob of Iranians battered the door down. When he thought of the word raid, that was the sort of thing that came to mind.

  He called his general counsel, who advised him not to go inside. The office was swarming with federal agents, the counsel said, and they had a search warrant signed by a judge over the weekend.