Circle of Friends

by Charles Gasparino

  With that, government officials have said, Slaine wasted little time leading them to one of the most important insider trading rings uncovered during Perfect Hedge: a cluster that began with Craig Drimal, his old workout partner. People who know Slaine say Drimal was already on the government’s radar. Either way, Slaine pointed to Drimal as a trader, with sources at various places on Wall Street and one who relied on inside information to make a living.

  Slaine had mentored Drimal early on and had helped him meet the Galleon brass in the late 1990s. Drimal had been a valuable asset at the hedge fund in part because he was a personal trainer, and he devised workout programs for various Galleon executives. Through the years, Drimal continued as a high-end trainer for hedge fund pros, and in exchange, Galleon allowed him to use its offices to trade stocks. He wasn’t an official Galleon employee; people who worked with him directly say he mainly hung out, answered telephone calls for the real traders, and sucked up whatever market insight he could get.

  Slaine and Drimal were once close—“Craig idolized David” was how one former Galleon trader described the relationship. But by the time Slaine had become a government witness, their relationship had cooled somewhat. Some people with knowledge of the relationship say a rift developed because Drimal kept borrowing money from Slaine, and over the way Drimal paid it back. Slaine gave Drimal access to his brokerage account so Drimal could repay the money simply by crediting to Slaine any profitable trades he had made. Drimal may have been a good personal trainer, but he often lost money trading and was frequently low in cash, people who know him say.

  People close to Drimal say the rift had more to do with the way Slaine left Galleon. His fight with Rosenbach made it impossible for Drimal and Slaine to remain tight, though they continued to remain friendly. Which is why, despite these tensions, government investigators believed Slaine could easily ingratiate himself with Drimal for the greater good of the case, and, of course, for the greater good of avoiding a long jail sentence.

  CHAPTER 8

  THE FEDS MIGHT BE LISTENING

  It is a common misconception that the feds need a court order to put a recording device—known as a wire—on a cooperating witness. Not so. The federal law on so-called one-party consent is a loophole in the privacy laws that the government uses with great regularity. It allows the government to have a cooperator clandestinely tape just about any potential target, either by wearing a wire or by having a recording device attached to the cooperator’s telephone, with the government listening to every word.

  A court order is needed to tap into the conversations of potential targets who are not cooperators, of course, and such decisions to pursue wiretaps have been rare in the pursuit of white-collar crime. (That would change as the insider trading investigation progressed.) But once cooperation is established, one-party consent kicks in, allowing the feds to secretly plant a wire on person A and tape person B without the approval of a federal judge.

  Chaves wanted Slaine to be person A.

  Chaves began by testing Slaine’s dedication to truth and justice with a long debriefing. He asked Slaine to tell him everything he knew about the places he worked, and the people he dealt with, which included traders at both Galleon and SAC Capital. Slaine said, for example, that he had evidence that SAC was the recipient of early word of an analyst downgrade involving Amazon.com. It was among the many tips and leads Slaine would provide investigators over the next three years.

  The next step was to send Slaine into the line of fire and have him secretly record and entrap Drimal. Slaine may have introduced Drimal to Wall Street, at Galleon no less, but Drimal was now an experienced trader with access to what Slaine told his FBI handlers was a circle of friends that surpassed anything he had ever assembled.

  There’s an old saying among FBI agents, often attributed to the legendary federal judge Jack Weinstein, who at ninety-one years of age still presides over a full docket of cases that run the gamut of federal law, from mob murders to class-action lawsuits: “Nothing breaks the bonds of loyalty like the threat of imminent incarceration.”

  Weinstein was said to have been opining on the facts and circumstances surrounding witness testimony in a mob case. The witness was a former mobster himself, who had finished testifying against a former partner in crime.

  In the late fall of 2007, the buzz at FBI New York headquarters in Foley Square was noticeable, and it mostly involved two criminals—Roomy Khan and David Slaine—who, agents claimed, had “found religion.” In other words they decided, when faced with imminent and lengthy incarceration and two FBI units racing to come up with the insider trading case of the century, to out their circle of friends.

  The internal competition was said to be fierce between the two FBI groups assigned to the insider trading probe—C-35 run by Chaves and Makol, and C-1 run by Jacobs and Kang. Prosecutors could feel the tension during meetings where both teams were present, with each side trying to take credit for an advance in the investigation. Chaves bristled when he saw in the press that the Galleon investigation was also being referred to as Operation Perfect Hedge, the name he had come up with for the probe that he and Makol were running. He alerted the FBI’s press office to begin correcting the record.

  In the race to make white-collar law enforcement history, Jacobs and Kang held the early lead. For now, the case against Rengan Rajaratnam was set aside. That’s because agents were focusing on his older, richer, and more corrupt brother and the hedge fund empire he had created. Much of the Raj Rajaratnam case centered on what Roomy Khan could bring. She was well on her way to offering full cooperation in the investigation, while the feds were taking their first steps in getting the necessary court approval to tap Rajaratnam’s cell phone, over which, they believed, he conducted the vast majority of his information gathering for his various insider trading schemes.

  Sanjay Wadhwa at the SEC wasn’t far from the action, either. He had been promoted and attained a new status as a team leader, someone his supervisors had looked up to when it came to complex cases. He had also done something else: He convinced the FBI that not all SEC investigators are dumb.

  There has been friction between the FBI and the SEC that dates back to the 1980s cases. The SEC believed the FBI glommed on to the commission’s work and got all the headlines for arrests and convictions. The FBI simply believed the SEC would screw up any case.

  Kang saw Wadhwa as a partner, and vice versa.

  Once Khan was cooperating, it was up to the bureau and the Southern District prosecutors to get as much information from her as possible—and figure out, at least in her case, what was fact or fiction. She said she was working for a hedge fund, Trivium Capital Management, where she was buying and selling stocks on tips she received from Rajaratnam and her circle of friends, including a money manager named Doug Whitman, who lived in a nearby mansion.

  Whitman’s hedge fund, Whitman Capital, wasn’t the powerhouse that Galleon had become, but they shared a similar trait. Whitman was said to have had one knockout year, and in order to keep his returns up and keep the investor money from fleeing, he became an expert in trading on insider information. As he explained it to Khan one day, “What value do you have if you’re not a slimeball?”

  Khan took Whitman’s advice. She earned close to $350,000 that year, she confessed, by trading on these tips. She described her relationship with Rajaratnam as part friendship and part business. The friendship part stemmed from a common ancestry. The business part was all about insider trading. She was a key member of Rajaratnam’s inner circle, giving him information on stocks she had an “edge on,” which was market slang for inside information.

  She didn’t come clean at least initially about the Hilton trade and stuck to her tale that it was the press attention and increased investor focus on the company’s stock after Paris Hilton’s legal issues that prompted her well-timed decision to buy shares rather than advance knowledge of the Blackstone takeover.

  But her story finally unraveled in April
2008 when she confessed that the trade had had nothing to do with Paris Hilton and everything to do with Khan’s own circle of friends. She got her edge on the stock, she finally conceded, through a junior analyst named Deep Shah, who was a friend and a roommate of her cousin, and then shared the edge with Rajaratnam

  Shah worked at Moody’s Investor Service, the big ratings agency, which had advance knowledge of the $26 billion unannounced takeover. Khan paid Shah roughly $10,000 a tip, in an arrangement where the money would be funneled through her cousin.

  The lies continued to pile up as Kang debriefed Roomy Khan. Kang discovered she had deleted emails on issues that involved the investigation (in other words, had destroyed evidence) and began using a new cell phone so she could speak to Deep Shah about the circumstances of the investigation into the Hilton trade, before she came clean with the truth.

  She lied about where she received inside information on shares of Cisco, pointing to Doug Whitman when in reality it was someone else. Whitman, she told investigators, would exchange insider tips with her on other stocks, which made her lying seem even more absurd. Khan wouldn’t fess up to the totality of these misdeeds until after six sessions with the FBI and the Justice Department, and only after she began working for the bureau sharing inside information with Rajaratnam while the FBI quietly listened.

  If the feds had a second thought about using such a conflicted person—a convicted felon, no less—in the pursuit of someone who wasn’t even an alleged felon, they didn’t show it. In the end, she just knew too much about too many people they wanted to see in jail more than her.

  The act of wiretapping involved the use of an “extraordinary investigatory device,” because the courts have held that it places an “invisible policeman” at the scene of an alleged crime, sweeping into his path not only the guilty but the innocent as well.

  It’s unlike wearing a wire because it invades privacy more directly than by, say, a taped meeting between an informant and a target at a place of doing business. The cell phone is personal property, and a wiretap records all conversations on it, both those germane to the investigation and those purely personal. Because of that, the courts have set a high standard for using phone wiretaps, largely permitting them in extreme circumstances involving organized crime (or terrorism) where either life or death is on the line and/or the conventional law enforcement tools to break up these conspiracies are limited and ineffectual.

  Any wiretap application must meet the legal standard that it is complete, in that all known materially important information should be included so a judge can determine if the wiretap is necessary. Probable cause—the notion that the government has good reason to believe the wiretap will uncover illegal activity—is a given.

  Lauren Goldberg and B. J. Kang knew they needed a wiretap on Rajaratnam’s cell phone, for several reasons. Just taping the calls Khan placed to him wouldn’t uncover his larger circle of friends. Rajaratnam may have liked Roomy Khan enough to trade information with her, but not enough to give up his information pipeline.

  And Rajaratnam, they believed, may not fall for an in-person meeting to share information with Khan, since all they did was speak over the telephone. It would have been a red flag, a reason for him to clam up and possibly finger Khan as a cooperator if she broke from her routine and showed up at Galleon’s New York offices.

  In 2008, wiretapping was still a rarity when it came to white-collar targets. Title III of the Federal Wiretap Act was adopted in 1968 and expanded in the coming years, mostly to crack organized crime and terrorism rings, not circles of friends involving insider trading.

  That detail would prove to be a weakness at trial. Attorneys for Rajaratnam would undoubtedly make the case that when Congress passed Title III, it specifically excluded white-collar crime because such a direct invasion of privacy was meant for only the most heinous of illegal activities, including murder committed by criminal organizations. Insider trading was far from murder, they would argue, and Galleon wasn’t the Mafia.

  It wouldn’t end there. Wall Street might be sleazy, but it’s a heavily regulated industry, thus hardly impenetrable. Rajaratnam’s lawyers would try to show that the government hadn’t exhausted other investigative tools. As proof, Roomy Khan was still helping them with the Rajaratnam case, with a recording device on her telephone that didn’t need a court order since she was already cooperating.

  Even so, the courts have been slowly warming to an expansion of wiretapping into the white-collar realm. In fact, former prosecutors say they used wiretaps of telephones to crack down on penny-stock fraud during the 1990s, which included insider trading. As financial fraud grew during the 1990s stock market boom, the legal system adapted and judges increasingly showed less distinction between the typical gangster from Mulberry Street versus the one on Wall Street.

  That was at least part of the case Kang and Goldberg made to Judge Gerald Lynch to tape Raj Rajaratnam’s cell phone in March of 2008. The other stuff involved establishing probable cause through the information Roomy Khan was dishing about Rajaratnam’s activities, which involved everything from his Hilton trades to Rajaratnam’s ramblings about his market exploits, including how the guys at tech company Xilinx were giving him a lot of guidance.

  With the wiretap on Rajaratnam’s phone, the unprecedented phase of the crackdown was about to unfold, though if Judge Gerald Lynch thought he was making history or something close to it when he reviewed and granted the wiretap request, he didn’t show it.

  It was a pretty perfunctory affair. The application stated that the government believed it couldn’t obtain the information to make its case any other way, though it left out a key detail: that Rajaratnam had been a focus of the SEC’s investigations for years and had turned over millions of documents to government officials.

  It was a mistake, and later, Rajaratnam’s attorneys would add it to their list of complaints and argue it was a deliberate attempt to mislead the courts into granting the request and hiding the fact that the government failed to meet its very high bar to obtain the wiretap, namely that it had exhausted every other means before resorting to the ultimate invasion of privacy.

  But for now it didn’t matter. On March 7, 2008—the same day it was submitted—Judge Lynch granted the application and the taping of Rajaratnam’s phone began.

  Slaine, meanwhile, was well into his FBI-sanctioned espionage work by this point, having met with Drimal several times and recorded their conversations. At least initially, Slaine didn’t think recording people was part of the deal he had cut with Makol and his other handler, assistant U.S. Attorney Andrew Fish, people who know him say. Maybe so, but it would soon loom large in his new life as a cooperating witness.

  Documents show that some of the first evidence Slaine gave the FBI involved Drimal’s trading in the stock of ATI Technologies. That trade had also caught the attention of Slaine’s new bosses at the FBI because it appeared that Slaine had made it right before a market-moving corporate event. But Slaine said it wasn’t his. It was one of the trades Drimal had placed in his account to repay the money Drimal had borrowed.

  That was just the beginning, Slaine pointed out. Even though the relationship between the two men cooled, Drimal remained in awe of Slaine, and, some mutual friends say, Drimal still wanted to impress his mentor, reminding him that the guy who used to be a doorman at a nightclub now had his own trading relationships.

  That would be Drimal’s fatal mistake. Slaine pointed to those relationships immediately, explaining how his old weight-lifting partner now had a pretty sophisticated circle of friends and used them to make dirty trades.

  According to people who know Slaine, the feds were clearly interested in Drimal as a starting point to unravel what they believed was a well-orchestrated scheme to trade on confidential information. They wanted to know everything about him, from his work life to his private life. Drimal’s work as nightclub doorman in the 1980s helped him make connections with Wall Street traders looking to get into some of t
he city’s hottest clubs.

  By 2007, Galleon was one of the hedge-fund world’s biggest players, putting it firmly on Wall Street’s radar screen—and the phones were ringing constantly, with Wall Street trading desks begging for Galleon business, and the commissions they produced for completing trades.

  Drimal was in the middle of what one former trader there described as “the wild west of the hedge fund business.” Unlike competitors such as SAC Capital, there were few rules, and no overarching investment strategies at Galleon. Fiefdoms developed between Rajaratnam’s people—namely the firm’s analysts—and the traders who reported to Rosenbach. Some of Rosenbach’s traders would place huge bets against the same stocks Rajaratnam was touting as a buying opportunity and vice versa.

  Galleon traded so much that it produced around $250 million in yearly commissions for Wall Street’s brokers. One of its stars, Todd Deutsch, earned the name “Rain Man” both for his awkward temperament and his remarkable ability to keep track of hundreds of different trades at the same time. Galleon was also a hub of information, with Rajaratnam bragging about his sources in the technology community who gave him guidance about the direction of stocks, and the Wall Street brokers handing market intelligence to the firm’s traders.

  Drimal was no Todd Deutsch, who once earned approximately $25 million in a year. In fact, he was never officially hired by the firm, but over the years he managed to understand the value of information and find his niche at Galleon, where he was known to all by the oddly effeminate nickname: “Ruby.”

  “It was a name of an old girlfriend, or something,” was how one person who knew Drimal described his trading-floor moniker.

  But he was now married—ironically to a former prosecutor in the Manhattan District attorney’s office and living in the New York City suburb of Weston, Connecticut, a far cry from his early days. Inside Galleon, Drimal thrived for another reason: He had a penchant for skirting the law, Slaine told his handlers, which fit the FBI’s working knowledge of his activities in the hedge fund business.