Sometime earlier, the examinations staff paid a visit to the offices of Sedna. Wadhwa had a good reason to send the SEC’s examinations unit as opposed to the enforcement staff. The SEC conducts routine examinations all the time. Enforcement officials with their subpoenas and threats of filing fraud charges raise too much suspicion, and at times, may lead to the risk of the destruction of evidence.
Under the guise of simply kicking the tires, the inspectors were actually looking for trading records, emails, and IMs—instant messages that are commonly used to communicate between tippers, or the people who supply the inside information, and the end users of it, known in legal circles as tippees. The results of the examination confirmed what Wadhwa’s more cursory inquiry had suggested: Sedna’s trades were large and well timed to market-moving events, and as Wadhwa would say, “in the right direction.” If the announcement was bad, Sedna would short stocks; if the announcement was good, it would buy them up. Wadhwa would later describe them as “highly suspicious” because the search of emails and instant messages, or IMs, and telephone logs showed regular correspondence between Sedna and Galleon, and that they were trading the same stocks.
“Bingo,” Wadhwa thought after hearing the results of the examination now taking place at Galleon. Jokes about fishing expeditions aside, the examiners went about their business at Galleon’s New York City offices largely unfettered, and with that came success: The team was able to identify evidence that both Sedna and Galleon had been trading a number of stocks, many of them in the technology business, and successfully just before corporate announcements. One stock seemed to catch Wadhwa’s eye, AMD. Rajaratnam’s trading of the chipmaker’s stock would loom large as the investigation continued.
As far as Wadhwa was concerned, the trades were just too good to be legal. He also believed he had enough to bring to the criminal authorities to launch a broader case. It was something he learned quickly while at the SEC. Acting alone the SEC can only do so much; it can’t put people in jail, and when confronted with a lengthy jail term, people often cooperate. For that, he’d need to call in the feds.
The cooperator they hoped to turn was Rengan, who was brought into the SEC offices to describe the trades and to explain why he spoke to his brother so much during the trading day when both of them had such high-pressure jobs. Wadhwa described him as “cocky, brash, and at times nervous.” Wadhwa noticed that Rengan was shifting around in his seat a lot while being asked about questionable trades and his conversations with Raj, and that he refused to make eye contact.
At one point during the deposition, Wadhwa looked at Andrew Michaelson, one of his deputies. Both had come to the same conclusion: The case against Rengan was only the tip of the iceberg, and their primary target should be his older brother.
None of this seemed to impress a couple of assistant U.S. attorneys and FBI agent Kang as they listened to Wadhwa lay out his facts: The suspicious trades were more than just coincidence and the product of hard work, as Rengan described them during his deposition. Both funds had been trading in highly suspicious patterns, and if Wadhwa’s hunch turned out to be right, Galleon, one of the biggest hedge funds in the business, was playing dirty.
Raj Rajaratnam was well-known inside the Justice Department, and not just because of his associations back home (which were unknown to Wadhwa at the time). Informants had been whispering his name for years for alleged insider trading. He had been targeted years earlier by a felon and FBI informant named Roomy Khan, but the matter was dropped.
For all the noise involving Galleon, there was never enough to make a case, and at the meeting, Wadhwa heard the same thing. There wasn’t enough in what he was saying for them to drop everything and launch a full-scale investigation. Criminal insider trading cases need more than just a few odd coincidences. Who was Raj getting his insider tips from? Certainly not Rengan, who was probably piggybacking on his brother’s trades.
Their advice to Wadhwa: Come back when you get more.
By now, the SEC’s presence inside the Galleon offices wasn’t so welcomed. Galleon’s attorneys were becoming increasingly suspicious of their demands for more records, more IMs from Rajaratnam, and more phone records. The examination team was effectively thrown out of Galleon’s offices, a completely legal move since it was operating without a subpoena.
But Wadhwa was undeterred—either by the FBI’s brush-off or by Galleon’s roadblock. “These guys are either brilliant or they know something more,” Wadhwa told his boss, David Markowitz, one of the senior enforcement officials in New York.
Markowitz didn’t hesitate: “Call him in.”
CHAPTER 6
BIGGER FISH
About an hour into Raj Rajaratnam’s deposition in June 2007, Wadhwa realized that none of his usual tricks were working—but not for a lack of trying. The testimony was given at SEC headquarters in the World Financial Center in lower Manhattan. Rajaratnam was accompanied by two attorneys from Shearman & Sterling, which specialized in SEC cases.
Wadhwa had seated Rajaratnam facing the window, in front of three SEC enforcement officials, including Markowitz and Andrew Michaelson, who like Wadhwa, had left private practice to join the commission.
Michaelson had been with the commission less than a year, but Wadhwa decided Michaelson would ask most of the questions. This freed him up to monitor the questions and to keep in contact with his examiners who were still poring over the Galleon documents.
All three SEC officials were dressed in dark suits and maintained a look of seriousness. A court reporter sat at the end of the rectangular table, typing every word from the star witness. The entire arrangement is designed to rattle even the most confident white-collar crooks.
It didn’t work. Wadhwa and the SEC team later said they never quite saw someone as confident as Rajaratnam was that day. He explained in compelling detail how he was able to time his trades so perfectly, figuring out to buy a stock named Polycom just before a positive earnings release. At one point he denied outright that he traded on inside information. The way Rajaratnam described it, his fund made money because he was smart, he hired smart people, and he paid them very well. Because of his experience in the business, he worked the mosaic like no one else on Wall Street.
Though he certainly didn’t have the physique of a fighter—he was a large, overweight man—friends would say that Rajaratnam viewed himself as a warrior, along the lines of his countrymen in Sri Lanka, forever fighting a valiant struggle for freedom. Rajaratnam’s enemy was the market, and he had fought as an immigrant-outsider on Wall Street to create one of the biggest hedge funds ever.
But in this particular skirmish, Rajaratnam chose a different defense. He turned on the charm. During his deposition, he was funny, gregarious, and imposing, not just because of his broad shoulders and girth. He simply “controlled the room,” Wadhwa would later say as he weighed Rajaratnam’s various explanations for stock trades utilizing the mosaic theory, and his side comments about the markets or his description of how he runs one of the world’s largest hedge funds.
Still, the command performance was utterly unconvincing to the SEC agents in the room. His answers didn’t contain any smoking guns, but he didn’t help himself, either. Can anyone be this good? Not as far as the SEC is concerned. If the mosaic theory could be honed to such perfection, wouldn’t other very smart people start hedge funds that beat the markets year in and year out?
As far as Wadhwa was concerned, Rajaratnam lied to the SEC for about eight hours, giving implausible explanations for buying shares of AMD just before a positive earnings announcement, and repeating every so often, “I love what you guys do to protect the integrity of the securities markets.”
During one of the breaks, Wadhwa received a message on his BlackBerry from an SEC staffer assigned to plow through the Galleon documents. The investigator had found IMs between Rajaratnam and someone named “Rumi,” who professed to have something “really interesting” to share with the Galleon founder.
It
wasn’t the only red-flagged IM or email the staffer came across from this Rumi person. There were dozens of others. The two were chatting on a regular basis about the markets and specific stocks. The language was coded at times, it appeared, but sometimes it wasn’t.
Rumi must be supplying Rajaratnam with valuable information. Wadhwa called Michaelson and Markowitz aside. “This looks pretty interesting,” he said.
“Let’s just nonchalantly bring it up and see what he says,” Markowitz whispered. Wadhwa nodded and emailed the staffer: “Get me more.”
Wadhwa kept a straight face through the rest of the deposition. Still he couldn’t help thinking that Rajaratnam was everything brother Rengan wasn’t: funny, smart, and charming, and most of all, a world-class bullshit artist, which is why he probably went so far on Wall Street.
Rajaratnam waxed poetic about how the mosaic theory had made Galleon one of the world’s most successful hedge funds. The mosaic theory had been invented by famed investor Philip A. Fisher, laid out in his seminal book, Common Stocks and Uncommon Profits, first published in 1958. Fisher had actually called the investing process “the scuttlebutt method,” underscoring its process of gathering together various pieces of information—scuttlebutt, so to speak—and then determining whether to buy or sell based on the resulting “mosaic” of information.
The mosaic theory may have made sense on Wall Street, but to the investigators at the SEC, including Wadhwa, it was an invitation to fraud. By culling various pieces of information from many sources, it almost forced investors to seek out information that might not be available to the public, to identify the most profitable trades. What’s more, with everyone doing this, the pressure was ever greater to find that piece of information no one else had—the deep inside dope.
The questioning during the deposition also showed just how far the SEC had veered from its original focus, of tying Rajaratnam with Sedna and his brother Rengan in a probe of cherry-picking, to one focused almost exclusively on Galleon and its founder and insider trading. “Are you familiar with the term insider trading?” Michaelson asked Rajaratnam. “Do you believe it’s wrong?. . . Do you recall any instance where you’ve come into contact with information that you believed was material and nonpublic in any respect?. . . Has Galleon ever made a trade on the basis of nonpublic information?. . . Have you ever suspected that anyone at Galleon ever engaged in insider trading?”
Rajaratnam stayed on his game, denying the use of insider information and falling back on the mosaic theory as the explanation for his success.
At one point, though, Rajaratnam was asked to give more detail on where he got all the pieces to fill in the mosaic. The SEC had learned from mishaps in the past; during its research analyst investigation, the commission was embarrassed when Attorney General Spitzer uncovered emails that showed analysts privately deriding stocks they rated highly. The SEC didn’t subpoena emails back then; it did now.
That’s when Michaelson brought up the mysterious “Rumi,” whose name the SEC staffer had initially gotten wrong, mistaking Rumi for Roomy. “Who is this handle, [email protected]?” Michaelson asked, adding: “Did you ever talk to her about AMD?”
Rajaratnam explained that Rumi was actually Roomy Kahn, a former Galleon trader, Intel executive, and friend who lived in Silicon Valley. As far as why he bought shares of AMD when he did, it had less to do with any insight Khan provided and more to do with Galleon’s extensive research process. Until now she was also unknown to the SEC, even if she had been a confidential FBI informant against Rajaratnam years earlier. She was part of Rajaratnam’s circle, and the FBI’s as well, willing to do whatever it took to make money and stay out of jail.
But it is here in answering the AMD questions that the smooth operator slipped, though it’s unclear if he knew he had done so. Rajaratnam explained away his IMs with Khan as having little consequence; they were little more than idle chatter about the market, and he actually had a “source” at AMD—although he claimed the source merely crunched numbers for him.
Well, thought Wadhwa and the team, what would an executive at AMD be doing crunching numbers for Raj? And if Khan knew so little about stocks, including AMD, why would the head of one of the nation’s biggest hedge funds be having so many conversations with her?
Markowitz and Wadhwa briefly exchanged glances and moved on to other matters with the confidence that they finally had their man.
These guys make monkeys out of individual investors, the SEC’s insider trading regulations and the attorney general’s office,” read an anonymous letter addressed to the SEC’s New York enforcement staff in March 2007. The letter arrived just months before Rajaratnam’s deposition. Galleon was founded as a hedge fund that focused on technology and health care; its investors were major technology company executives, which aided the firm in researching the industry.
The letter said the information passed on to Galleon from those executives, however, wasn’t so innocent. It involved insider information, not mere industry trends and nuggets of data. It claimed that Galleon traded insider information for prostitution and “other forms of illegal entertainment,” which Wadhwa later learned involved lavish dinners and expensive trips such as an African safari.
Wadhwa had never been able to find the source of the letter, and the prostitution allegations never materialized, but whoever it came from was clearly on to something. If anything, the Rajaratnam deposition only reinforced the investigators’ opinion that the Galleon hedge fund was run by someone who had too many coincidences going for him at the same time to be clean.
Rajaratnam’s explanations about his top-notch research staff and strict adherence to the mosaic theory couldn’t explain all those winning trades before key events. Moreover, good research often produces not just great long-term performance, but also short-term losing streaks. Warren Buffett’s Berkshire Hathaway is a prime example. But how does one trade in and out of stocks constantly and with such precision?
The bottom line, the investigators concluded, was that Rajaratnam couldn’t—at least not without a little help from friends such as this mysterious Roomy, who they believed figured prominently in Rajaratnam’s circle. Over the next two and a half months, Wadhwa and his team continued to dig, uncovering additional IMs showing Khan tipping off Raj about a Polycom trade and other stocks. She wasn’t his only source.
“Sanjay, you gotta see this,” said Jason Friedman, one of Wadhwa’s top investigators. Friedman handed Wadhwa a set of trading documents discovered during one of many late nights the Wadhwa team had spent during the investigation, which now entered the “stealth” phase, meaning there was no additional contact with Galleon or Rajaratnam, as the SEC worked quietly to build its case.
What Friedman found was that Rajaratnam was so plugged in that he frequently communicated with an executive at Intel, one of the handful of tech stocks Galleon liked to trade. The executive, Rajiv Goel, had been a classmate of Rajaratnam at Wharton, so it made sense that they had some contact. But Friedman discovered that Goel had a Charles Schwab brokerage account that was accessed from an IP address located in Galleon’s office, suggesting it was used to funnel payoffs to Goel for inside information he supplied Rajaratnam. A little more digging and the SEC discovered that Rajaratnam had dealings with Wharton alum Anil Kumar, who worked at the prestigious consulting firm McKinsey & Co.
Access to a McKinsey partner was a key get for anyone interested in insider trading, since the big consulting firm does business with just about every major corporation, advising them on activities that have a direct impact on share price, such as mergers and acquisitions. Even better, as investigators discovered, Rajaratnam had forged ties to a former McKinsey chief executive, Rajat Gupta, now in retirement but still a presence in corporate America.
Many of Rajaratnam’s circle of friends shared common ethnic bounds, college ties, and most astonishing of all, an absolute desire to make money by cheating the system. When Wadhwa heard the news about Kumar, for example, he could bare
ly contain himself. “Why don’t we just charge the entire fucking Wharton class of 1983,” he snapped.
That was the case Wadhwa was making once again to the Justice Department lawyers at their headquarters in lower Manhattan. They should join in the fight, he argued, and take the case to the next level. Wadhwa had given them more evidence to build their case: He had Raj’s confirmation under oath that he had a “source” inside AMD and that he regularly chatted with Roomy Khan about the markets. Wadhwa believed Khan was paid by Rajaratnam to supply him with inside tips. He couldn’t find the direct money trail, at least not yet, but he had found lots of indirect payments made by Rajaratnam to Khan in the form of information.
Even better was what Wadhwa and his team found out after Rajaratnam’s deposition. In July, just weeks after being grilled by the SEC, investigators found evidence that Rajaratnam traded on inside information concerning the pending takeover of Hilton Hotels by private equity firm Blackstone Group—a $26 billion leveraged buyout that shocked the markets, but apparently did not come as a surprise to Rajaratnam’s circle of friends.
Trading records showed that both Rajaratnam brothers and Khan snapped up shares just before the deal was announced, earning millions of dollars, particularly in the case of Raj Rajaratnam (who bought 400,000 shares of Hilton). Most fascinating was how they bought the stock on July 3, during an abbreviated market session just before the Fourth of July holiday. They crammed all their trades in the last half hour that the market was open, which set off massive alarm bells on the SEC’s stock-trading surveillance system.
What wouldn’t be known, at least for a while, was precisely why the Rajaratnams had bought the shares with such gusto, and why Rajaratnam kept in such close contact with Khan. As investigators later learned, Khan had passed the Hilton tip to Rajaratnam through a source at the ratings agency, Moody’s Investors Service, which was analyzing the deal.
Circle of Friends Page 13
