It didn’t end there. Trading records showed that two weeks later Galleon had suddenly bought 25,000 shares of Google just before it announced strong quarterly earnings. Another smallish fund, Whitman Capital, also bought shares of Google before the announcement, as did Khan. The reason was discovered as the investigation progressed: Khan had a source inside Google’s investor relations department who had provided her with the numbers before they were made public. Khan, in turn, gave them to Rajaratnam, and a Silicon Valley money manager, Doug Whitman, who was also on her friends list.
The Justice Department assembled what it considered its insider trading A-team for the meeting at which Wadhwa made his case: Assistant U.S. Attorneys Lauren Goldberg and Joshua Klein, widely regarded as experts in the prosecution of white-collar crime, and the FBI’s B. J. Kang, now one of two go-to agents (Makol being the other) in the prosecution of insider trading.
The feds listened to Wadhwa’s presentation and made a few admissions of their own. Roomy Khan wasn’t quite the mystery woman that she had appeared to be. She worked for Rajaratnam in the 1990s as a trader and she had long been suspected of providing insider information to Rajaratnam when she was an employee of Intel, the big chipmaker, in 1998.
There had been lots of suspicious trading just before key events such as earnings announcements. Intel set up an internal sting operation, placing a camera near a fax machine. Khan was caught in the surveillance video dialing Rajaratnam’s telephone and sending him an early copy of a press release about earnings. By 2001, the FBI had assembled enough evidence to offer her a deal: Plead guilty to securities fraud for supplying Rajaratnam with insider trading, and avoid jail by cooperating with them to build a case against Rajaratnam.
It was a lucky break for Khan for several reasons. Khan avoided serious jail time, and before long, the Justice Department’s investigation into Rajaratnam would be dropped. Some people inside the government say the case became a low priority as the FBI began diverting its resources to investigating terrorism following the 9/11 attacks. Others say those FBI agents still assigned to the matter couldn’t develop any of Khan’s leads.
In any event, her activities as a government snitch and a felon would remain under seal, and her friendship with Rajaratnam would continue as if nothing had ever happened.
Goldberg and her colleagues then discussed the suspicions they had about Rajaratnam’s involvement with the Tamil Tigers—they appeared to receive money from the Galleon chief, albeit indirectly.
But it was the Justice Department’s past investigation of Rajaratnam and Khan for conspiring to trade on insider information that had Wadhwa’s head spinning. Wadhwa knew Galleon had appeared on the insider trading watch list in the past. Still, details of the Justice Department’s earlier probe were remarkable. The FBI had wanted to put Rajaratnam in jail six years earlier, using Khan as its primary witness. She had agreed to cooperate, under one condition: complete and total immunity. In exchange, she would disclose “how Rajaratnam did it and who he gets his information from” and stay clean herself.
The feds lived up to their end of the bargain, but Khan didn’t live up to hers.
Still, that was yesterday’s news. Today’s story was how to finally nab Rajaratnam, given the new evidence that Wadhwa brought to the table, and was it worth doing a second dance with Roomy Khan. Just about everyone in the room that afternoon knew that Roomy Khan by herself was largely damaged goods. She was already a crook with a sealed case that would nonetheless be opened for the entire world to see. Rajaratnam’s lawyer would have a field day with her credibility—or lack of it. On top of her rap sheet, she had led the FBI down so many dead ends when she was a witness in the early Rajaratnam probe that no jury would convict Rajaratnam on her word alone.
Yet they also came to the conclusion that Khan, not Rengan with his blood loyalty to his other brother, was their best hope to break the Rajaratnam circle. Kang could try to flip other members of Rajaratnam’s circle of friends whom Wadhwa had come across, but based on the nature of the conversations, Khan appeared to be Rajaratnam’s best source of dirty information and, more than that, someone Rajaratnam obviously believed he could trust, given the pair’s long relationship. When Kang discussed all of this with his supervisor, Rich Jacobs, in a small conference room in the FBI’s lower Manhattan headquarters, they quickly came to the same conclusion: In order to make a case against Rajaratnam they needed more than trading records and some IMs. They needed Roomy Khan—and probably something else.
After long hours reviewing Raj’s IMs, trading records, and other documents Wadhwa had provided them, Kang and his supervisors had developed what they thought was a pretty good character study of the Galleon chief. He would be an amazingly valuable witness himself because he had assembled a large circle of friends—employees at technology companies, other traders, and of course Roomy Khan, as part of his conspiracy to cheat the markets.
But he had gotten away with insider trading for far too long, which only stoked his massive ego. In Rajaratnam’s mind he was smarter than the teams of government investigators who had been searching his trash for so long. And even if they did actually catch him, the betting among the government investigators was that a guy who could lie through his teeth for eight hours during an SEC deposition would also believe he could beat the rap, and beat any Roomy Khan–like witness they threw at him.
And he probably would unless they could get him on tape.
It’s unclear exactly how the decision was made to give the FBI that perfect hedge in nailing one of the market’s biggest players using telephone wiretaps. But based on conversations with various people in law enforcement, the decision began with a request from Kang’s supervisors in the FBI.
They brought their plan to Reed Brodsky, the assistant U.S. attorney who had been specializing in insider trading cases. Brodsky understood the sensitivity of the matter (the federal wiretapping law was supposed to focus on terrorists and mobsters) but also how difficult it is to win insider trading cases, unless they have the culprits in their own words committing the crime. Brodsky made that case to his immediate boss, Michael Garcia, the Manhattan U.S. Attorney, who ultimately agreed.
And there was no better target to use wiretaps on than Raj Rajaratnam. Federal prosecutors, like their counterparts at the SEC, had come to the conclusion that Rajaratnam symbolized all that was wrong with the markets. He had created a trading firm based primarily on breaking the law as it applied to the use of material nonpublic information.
Moreover, they believed they were on to something big in the history of the government’s crackdown on insider trading. Galleon traded so frequently and so widely that Rajaratnam’s connections stretched all across Wall Street.
A top Merrill Lynch broker, investigators discovered, had accompanied Rajaratnam on a vacation to Jamaica. Another Rajaratnam associate on Wall Street was Lloyd Blankfein, CEO of Goldman Sachs, one of the firms that served as Galleon’s prime brokers. Galleon traders were among the hedge-fund world’s best paid and best connected, with friends all across Wall Street and at major hedge funds, including SAC.
In other words, by breaking Galleon and Rajaratnam, the government believed they could finally crack into a much larger circle of friends.
Investigators weighed whether they could get the needed corroborating evidence against Rajaratnam to convict him without a wiretap.Roomy Khan in and of herself was a terrible witness, and even if she didn’t come with baggage, it would be a challenging case. There were so few major criminal insider trading convictions in the past because the quality of the evidence was often circumstantial or weak. He-said-she-said trials are risky. Targets often claim they didn’t know they were trading on illegal information, and intent is a key ingredient of any fraud case.
That’s why getting Rajaratnam on tape was crucial, and not just the taping that occurs when a witness like Khan decides to flip, and she records their conversations either with a wire or with a recording device on her telephone.
Officials in the Justice Department were now weighing was a wiretap on Rajaratnam’s own cell phone, which would completely unlock his circle of friends.
To get wiretapping permission, investigators would need to convince a federal judge that they had probable cause to believe Rajaratnam committed securities fraud. They would also have to prove that they couldn’t get the necessary evidence to convict Rajaratnam in any other way. Government officials determined neither would be difficult to meet given all the resources now being assembled against Galleon and its founder, which produced lots of good evidence with more to come particularly if they could convince Roomy Khan to go undercover.
For all her baggage, Roomy Khan was exactly the type of mole they were looking for: She had the trust of Rajaratnam, and she knew Wall Street and Silicon Valley, so she could snare others who were part of the bigger ring they believed existed.
And she would have no choice but to cooperate once Kang had his patented chat with her and laid out choices: Either help put her benefactor and good friend in prison, or be prepared to serve a long term behind bars herself.
Convincing a target, even one as guilty as Roomy Khan, to cooperate with the government is never an easy task. It is a cat-and-mouse game. As an agent you can’t give up too much information because you need to keep the target guessing. It’s the fear of the unknown that causes many of these targets to start crying the moment the FBI explains their dire situation.
And you usually only have one shot to make an impression, which is why agents like Kang and Makol are so valuable. The Galleon investigation had now become a top priority not just at the SEC but also at the Justice Department, and its intensity and focus were largely a secret outside of the circle of law enforcement officials toiling twelve to eighteen hours to develop evidence. The risk in trying to flip someone like Khan is her loyalty to her circle of friends, whom she might alert and thus damage the case.
Kang’s skill was in breaking that loyalty. Kang spent days preparing how to make his approach, or as one colleague put it “B. J. made night and day into one.” He had seen all the reactions from white-collar criminals. Some just sit there and sweat as the reality of being caught sets in. Some faint; others lose control over their bowels and beg for mercy (in that order, FBI agents tell me), while still others calmly assess their options. One thing most of them have in common is an absolute willingness to do anything necessary to keep themselves out of jail.
But the decision to cooperate almost never comes easily with white-collar criminals. Mob suspects accept being caught as the price of their business. With the death of the conspiracy of silence known as omertà, they calmly accept proffers and witness protection. Being a mob rat doesn’t quite carry the same stigma as it did years ago, particularly when everyone is doing it.
Not so in the white-collar world. Here government investigators discovered a certain lack of self-awareness about the nature of their illegal acts, and their consequences. Most consider themselves good people—no matter how much they lie, cheat, and steal. Others think that they’re merely rubbing up against the line between what’s legal and illegal, while others know they’ve crossed over and into the dark side but think they’re too smart to get caught.
It’s arrogance that lands them in jail—that and misplaced trust in the equally untrustworthy people with whom they’re committing illegal acts. And when they’re caught, the objective is to show how their world has fallen apart—particularly when a B. J. Kang explains how they might be spending some significant time in prison with some of the more undesirable people in the world.
Kang decided that the direct approach with Khan would work best: He would just lay out the evidence at hand, namely all those IMs with Rajaratnam that looked pretty sleazy, and the money she was making from her secret dealings. And scare the hell out of her with threats of jail time since she was a second-time offender.
Repeat offenders can spend more than a decade in prison—particularly those who make a lot of money breaking the law, which is the category Khan would find herself in. Galleon made millions off the Hilton Trade but Khan didn’t do so badly herself, making a quick $600,000 by purchasing shares of the company just prior to the Blackstone takeover. And that was just the beginning.
Roomy Khan lived in a $13 million mansion in an exclusive Silicon Valley gated enclave known as Atherton. Kang would later describe the home as a “sprawling palace,” with large walls surrounding it. So this is what you get for making six hundred thousand dollars on a single trade, Kang thought, as he approached the residence with another FBI agent, Kathleen Queally. If you combined both agents’ government salaries, they wouldn’t earn half as much as Khan and her circle did with just that one piece of insider information on the Hilton trade. It’s hard to believe that the inequality of their situation was lost on either of them as they approached her front door.
But there was more to Khan’s story than her expensive home, as Kang and his partner’s research had discovered. True, she and her husband lived richly (her husband, Sakhawat Khan, was an engineer who had thirty patents under his name for chip designs), but they seemed to have run through much of their wealth.
In other words, Rajaratnam, the billionaire, might have the will and the financial means to fight, but odds were that Roomy Khan, knowing her financial situation and how much jail time she would face, would have compelling reasons for becoming the most important witness in the Galleon probe and perhaps the most important witness in the government’s long crackdown on insider trading.
At least that was their bet as they rang Khan’s doorbell and a woman with dark hair and brooding eyes answered.
“Roomy Khan?” Kang asked.
“Yes, that’s me,” she answered.
“I’m Agent Kang and this is Agent Queally of the FBI. . . . We need to talk.”
Khan’s response only added to the suspense. “What took you so long?” she said before letting both agents into her spacious home.
CHAPTER 7
THE FLIP
Any government hopes that Roomy Khan could immediately be flipped from conspirator to cooperating witness were quickly dashed. Khan, of course, had seen this drill before. It had been six years ago that she had secretly agreed to cooperate against Rajaratnam in return for her own freedom. So she knew that in order to score a no-jail deal this time around she would have to provide the feds with much more than just dirt on the Galleon boss.
As Kang entered her home he immediately got down to work. He told Khan she had been caught trading on inside information. They had plenty of evidence and if she went to trial she would be going as a two-time loser, given her past record. If she wanted to avoid serious jail time, she needed to cooperate.
As Khan listened, Kang further explained the crimes they were certain Khan had committed: passing insider tips to Rajaratnam on various stocks including companies like Polycom, Hilton Hotels, Google, and probably a lot more through her well-maintained source network in the Silicon Valley tech community.
Kang described to her the intercepted instant messages and how they provided enough evidence to arrest her almost on the spot. Then he emphasized that since she was a two-time offender, what she faced if she went to trial and lost—which is what happens, they explained, to more than 90 percent of those indicted for various white-collar crimes—was years in jail.
“I’m a consultant,” she initially and almost defiantly explained in response. She never mentioned her business relationship with Rajaratnam, just that they were friends. Her communications with the billionaire about stocks were merely Rajaratnam’s attempt at being “nice” to her, she said.
Khan explained that she had worked for Galleon in the past, tried unsuccessfully to get rehired a few years back, but a mutual friendship built over a love of trading stocks and a common ancestry continued. And she wasn’t that rich, she told Kang. Despite her big home, cars, and swimming pool she and her husband had hit a rough patch financially (the full embarrassing details would come out
later, including underpaying her maid and possibly violating state labor laws). Khan pointed to the five computers and six telephone lines in her home. She explained how she went to conferences and company road shows in order to do her job as a consultant and a trader for a company called Trivium Capital Management.
The information she passed along to Rajaratnam and others was not stolen from companies, as is insider information of the illegal type. Rather, she maintained, she was merely doing what a good reporter does: talking to a lot of people at these public events and passing along what she heard. Mainly what she had been passing along to Rajaratnam was “broker chatter.”
Her explanation hardly impressed Kang, who knew full well that insider tips are often passed around at such venues, and was convinced that Khan was someone who feasted from this underworld of sleaze (as her lifestyle, including the $13 million, 9,000-square-foot mansion he was sitting in, made evident).
The FBI’s experience with cooperating witnesses is good but not perfect. No real statistics exist on recidivism among bad guys who turn stool pigeon and provide information, but the general consensus is that when most people are given a second chance to start a new life after a life of crime they go on the straight and narrow.
But there are always a few who don’t. Sammy “the Bull” Gravano infamously became a drug dealer after cutting a deal in order to put away for life someone the feds considered a bigger criminal: John Gotti. In return, Gravano avoided a long jail sentence for murder and racketeering. Gravano, friends would say, yearned for the gangster life.
Likewise, it seemed like Roomy Khan had never gotten insider trading out of her blood. She was well sourced inside Silicon Valley, particularly among the burgeoning South Asian community, which, government officials believed, acted no differently than past immigrant groups—that is, being insular and chatty with people they consider their own.
Circle of Friends Page 14
