Circle of Friends

by Charles Gasparino

  Makol and Fish weren’t the lead investigators on the Galleon investigation, which was headed by Kang and Lauren Goldberg, but Slaine was such a treasure-trove of industry knowledge they also began to probe what he knew about Rajaratnam. Slaine had left Galleon many years earlier so his information was a bit stale. But what he knew fit what the government had begun to uncover as well: Galleon was a place where trading on inside information wasn’t uncommon. In fact, Slaine claimed at Galleon there was significant pressure to crank out big returns even if that meant crossing the line into illegality.

  But Slaine’s knowledge of Galleon was considered a secondary matter; Makol and Fish were most interested in building a case against Drimal and uncovering one of the most convoluted circles of friends FBI agents had ever witnessed—a probe that would ultimately snare numerous traders and lawyers and expose the seedy world of expert networks, including a wannabe hedge fund star who was known by his cohorts as “Octopussy,” because he had so many friends radiating out from his particular node in the circle.

  Hey, how’s it going?” Slaine asked Richard Dickey, his old friend from his days at Morgan Stanley, as they casually crossed paths outside the swanky Delano Hotel in South Beach Miami where Dickey had been vacationing with his family. The two hadn’t seen each other for years, though Dickey, like most people who knew David Slaine, also knew the legend: a street-smart brawler who made it big in the hedge fund world. In fact, Dickey was one of the Morgan executives who broke up the alleged French fry fight at Morgan Stanley, and he could attest to both Slaine’s strength and his good-guy status on Wall Street.

  What Dickey didn’t know when they crossed paths was that Slaine was not merely a hedge fund trader; he was in fact a key government cooperator going underground to snare friends and their circle of friends. “He just said hello and said he was doing some trading and we agreed to get a drink and that was the last I heard of him,” Dickey recalls.

  That’s because Slaine had bigger things on his mind than getting a drink with an old pal. The months following his cooperation agreement with the government were a difficult time for Slaine. Whereas lying to Rajaratnam seemed to investigators almost second nature for Roomy Khan, Slaine’s betrayal of past friends and associates caused him great emotional pain. People who know him describe it as an excruciating experience, particularly during the first two years of his undercover work where his efforts were most intense.

  The biggest emotional hurdle for Slaine was wearing a wire and secretly recording other targets, including, most prominently, Drimal. Being a rat was “humiliating for David,” is how one friend described Slaine’s life working undercover. At several points Slaine asked Makol if he could stop because of the emotional stress of spending much of his days as an imposter. Slaine’s wife even threatened to personally alert Drimal that he was being recorded as she witnessed the emotional toll wearing a wire took on her husband.

  Slaine reported the threat to his FBI handlers, who confronted Elyse Slaine on the matter. It’s unclear exactly what the FBI said to prevent Elyse Slaine from following through, but people who know her say she made it clear to Makol that she believed her husband had done enough, and that the punishment, in her view, didn’t fit the crime.

  “How much more do I have to do!” Slaine screamed during one particularly tense meeting with Makol. As Slaine’s friends recount it, Makol reminded him bluntly of the threat he made when they first met, that if he didn’t cooperate, “You’ll never see your daughter again.”

  The threat was incentive enough to keep moving until his new masters were satisfied and Slaine knew that slapping them in the face wasn’t going to work. What would work was agreeing to help them fully uncover what the government believed was a formidable circle of friends.

  It started with Drimal, whom he began recording in September 2007. But within a year Slaine had led the FBI to many more possible targets, helping establish enough probable cause for Chaves and Makol to get court orders to start their own wiretapping of other targets’ telephone calls.

  Slaine and Drimal appeared to re-establish many of the personal bonds they’d had in the past. Slaine was a notorious Wall Street tough guy, but he was also smart as he lured Drimal into the FBI’s web. Drimal, meanwhile, dealt with concerns that Galleon people would notice him hanging out again with the guy who once slapped Rosenbach by meeting Slaine outside the hedge fund’s offices. It was worth the chance, given Slaine’s own reputation as a proficient trader and as someone Drimal could use to advance his own career.

  During the Boesky-Siegel era, meetings at the Harvard Club in Midtown were par for the course. But the new breed of insider traders had no problem passing lucrative tips at more lowbrow establishments, such as Burger Heaven, a cafeteria-style burger joint on Forty-Ninth Street and Madison Avenue.

  It was here as well as cafés like Pret A Manger, just around the corner from Burger Heaven, that Slaine helped the FBI nail Craig Drimal by unlocking his extensive network of insider trading accomplices, both in the Wall Street trading community and at law firms. Slaine’s first recorded conversation with Drimal didn’t disappoint. Makol took pains to make sure Slaine knew what questions to ask—and how to ask them—he put a recording device on Slaine’s telephone and one on his suit. And it worked. Drimal began sharing insider tips with Slaine immediately, according to federal investigators with firsthand knowledge of the matter. Drimal at times appeared nervous; he often balked at talking over the telephone because he said the feds could be listening, but thanks to his trust in Slaine he agreed to meet once again and personally share something with him.

  In preparation for Slaine’s face-to-face meeting with Drimal, Makol had placed what’s known as a “body wire” directly on Slaine, one so small it couldn’t be detected. By now federal agents had gotten creative in their use of listening devices, placing them on candles in restaurants, on watches worn by informants, and even creating microphones that look like hotel key cards.

  When they met, Drimal revealed that a big deal was at hand: Bain Capital was going to take electronics manufacturer 3Com private. The deal would be announced at the end of September. How did he know this? Drimal said he had a source named Zvi Goffer—the trader who would later be described as Octopussy—who had a source at a law firm named Ropes & Gray, which was representing Bain on the deal.

  Slaine had seen many guys like Zvi Goffer during his twenty-five-year career; a relative kid in his early thirties with a vaunting ambition to make money. The scheme Drimal offered was indeed an easy way to make money even if Drimal added ominously, that he wasn’t sure why the lawyer was risking jail by passing on what was so obviously illegal inside information. But Goffer was paying the lawyer for the information, which has always been enough incentive to commit a crime.

  The old David Slaine would have made a crude remark or a joke, but now with the FBI listening and the threats of jail time in his head he just let his old friend dig himself into a deeper and deeper hole.

  The insider tips didn’t end there. Like Rajaratnam, these guys also traded on inside information involving Hilton Hotel’s takeover, Drimal said. Meanwhile, Drimal’s initial statements were enough for Chaves and Makol to obtain a court order to wiretap Drimal’s telephone and eventually many others in the scheme.

  Zvi “Octopussy” Goffer certainly lived up to his name; Slaine told Makol that while Drimal was well-connected inside Wall Street’s seedy underworld, Goffer’s connections were even better; he appeared to have sources of information everywhere.

  Drimal didn’t know who it was at Ropes & Gray who had provided the 3Com leak. In fact, the cat-and-mouse game would last most of the next two years, with Drimal providing insider tips to Slaine and then Slaine infiltrating the circle of friends directly, attending meetings with Drimal, Goffer, and others and piling up the evidence to bury them all.

  Drimal and Slaine had come a long way since their days working out at the Vertical Club in Manhattan, and Slaine certainly yearned for his old life v
ersus the one he had now as a cooperating witness. Yet for all his misgivings about being a rat, Slaine proved an adept one. He prodded and pushed the ever-growing circle of friends for information—and for the sources of their information. At one point he convinced Drimal to set up a meeting with Rosenbach, his old Galleon friend and later nemesis. “Tell Gary I want to see him, I miss him,” Slaine told Drimal, who passed the information to Rosenbach.

  Rosenbach demurred, Drimal has told people, after speaking to his wife who said it wasn’t a good idea to get involved with someone who had nearly ripped his head off in a steam room. It’s unclear how valuable Rosenbach would be to investigators in any event. Rosenbach may have been a tough boss, but former Galleon employees say Rajaratnam went to great lengths to hide key details about the hedge fund and how he obtained trading information from Rosenbach, who has not been charged by investigators. Others weren’t so lucky, because, as Chaves and his team would determine, Slaine was a natural. He could mingle and elicit incriminating details about insider trading schemes from people he had never met before, and because of that the circle of friends now included not only Drimal and Zvi Goffer, but also Zvi’s brother Emanuel, a trader named Michael Kimelman, and in a short time, many more.

  “It’s better for everybody” if you don’t know our source, Zvi Goffer advised Slaine one afternoon in late August 2008 as they sat for one of their many meetings while the feds listened in from another location. Before this meeting Goffer and Drimal had approached Slaine about the possibility of a business venture—that the group would start its own hedge fund. Slaine was asked to invest $2 million to start the venture, but first he had to know the source of the insider leaks.

  “A construction worker,” was Goffer’s first answer. Slaine was unimpressed at the time, but Goffer was adamant: It pays to know less, just in case Slaine were ever caught by the feds. “It’s the guy fixing the pothole,” Kimelman then joked, before turning to other matters. The government couldn’t determine based on the evidence at hand whether Kimelman knew or didn’t know about the source of the inside information on 3Com and a host of other stocks that Zvi Goffer and the circle had traded on. At this point they didn’t care as they made final preparations to close in on the guy who undoubtedly knew all: Goffer, the so-called Octopussy, and the name had nothing to do with the James Bond movie of 1983.

  He earned the handle from FBI agents on the case because he seemed to embody all that was wrong with Wall Street—only more so. In 2008, he had just got a trading job at Galleon, but his real aim was to establish a presence at a major hedge fund, share tips with Galleon chief Raj Rajaratnam, and then make the big bucks trading at his own hedge fund and keeping the lucrative fees for himself.

  Goffer had “balls,” was one way investigators described the thirty-one-year-old trader, the more they listened to his conversations on tape. He openly discussed ways to cheat the system as well as ways to evade being caught. He once purchased a cell phone for one of the sources and had programmed two telephone numbers labeled “you” and “me” so they could communicate secretly, at least in his mind. After the 3Com deal, he broke the phone in half, keeping one half and telling the source to destroy the other.

  In fact, Goffer constantly cautioned his cohorts to be careful, because you never know when the government is listening. He openly called himself paranoid, but he thought that his paranoia and all those steps he took to protect the source of his deal leaks would save him. Of course, they wouldn’t. By mid-2008, Goffer’s telephone had been tapped for more than six months, with government investigators listening to everything from his dinner dates with business prospects, trips to Madison Square Garden to watch the Knicks, to his attempts to game the market through trading on and passing along inside information.

  By late 2008, Chaves and Makol believed they were sitting on a gold mine of potential cases—but they wanted more. The telephone wiretaps had already been in place on Drimal’s telephone thanks to the probable cause evidence Slaine had come up with, and as Chaves and Makol kept listening, the list of targets grew, leading to a series of other wiretaps that enlarged this circle of friends even more.

  As good as Slaine was as a spy, nothing could replace the wiretaps for effectiveness. Because Goffer’s telephone was now bugged, and because of Slaine’s recorded conversations with Drimal, the feds soon uncovered the source of the leaks: a thirty-one-year-old lawyer named Jason Goldberg, who had a friend inside Ropes & Gray, a thirty-three-year-old lawyer named Arthur Cutillo.

  Cutillo made a good living as a corporate lawyer, a living made even better because he aided the Goffer circle of friends by passing along nonpublic deal information, such as the Bain Capital purchase of 3Com, and much more. His price: kickbacks of cash for passing along the deal information to Goffer, who would then pass the information “downstream” to others like Drimal.

  As Makol and Chaves sat and studied the activities of this circle of friends, they realized just how brazen the participants in this scheme were: young lawyers and traders looking to make money and doing whatever they could to meet that end.

  They also realized it was probably standard operating procedure in the hedge fund business. Zvi Goffer was hardly a criminal mastermind. In other words, he had learned the business of insider trading from someone else, so there had to be many more people like him out there.

  They would have liked to have arrested Goffer on the spot, based on what they knew, but really big cases aren’t made that way. They’re made by moving up the ladder; you start small, targeting one cooperator, and move upstream until you nail the ringleader.

  Upstream movement would put Craig Drimal next in line, but that too would have to wait, as the probe kept leading investigators to an ever-widening array of bad guys.

  “Amazing,” is all Chaves thought as he studied a large whiteboard in his office in late 2008. His cluster of suspects had numbered to over a dozen—but with so many wiretaps going at the same time, he and his team had come up with scores of leads and potential targets. And based on the leads Slaine had provided, the possible targets seemed endless.

  CHAPTER 9

  ODD COUPLES

  Hey, so did you hear anything on Xilinx?” Roomy Khan matter-of-factly asked Raj Rajaratnam one afternoon in early 2008.

  The call was no different than the dozens of other conversations the two had had since they began their business relationship of sharing market intelligence years earlier. Only this time, Khan was a cooperating witness for the government in its probe of Rajaratnam.

  Even better, the feds were listening to every word of the call. They could rewind and replay the tape to their hearts’ content.

  “I think this quarter is okay. Next quarter not so good,” Rajaratnam said, adding: “I haven’t made the call I have to make. I got to call a couple of guys there at Xilinx.”

  To be sure, the call in and of itself wasn’t enough to bring charges against Rajaratnam, but as Rajaratnam’s lawyers would even concede, it was a great start for the FBI. Later the FBI would track down one of the guys: Kris Chellam, the technology company’s chief financial officer, who would eventually settle civil fraud charges and pay a hefty fine that amounted to nearly twice the $1 million he had earned for passing along tips as a key member of Rajaratnam’s circle of friends.

  But that would have to wait. Meanwhile, Roomy Khan was turning out to be an excellent accomplice in their effort to bring truth and justice to the markets, particularly if you could look beyond the messy details of her cooperation.

  Khan’s phone lines showed calls to a vast array of Silicon Valley insiders, people who, she would later admit, were part of her own circle of friends that she had never let go of even after being caught by the FBI years ago. Doug Whitman was described as a “putz” by one of his competitors, a one-trick pony who started his fund with some lucky picks and then fell back on his circle of friends to keep returns high and his investors from bolting. He and Roomy Khan were longtime friends and remained key partners
in her various schemes, the government discovered. Another one of her best sources of insider tips was a top executive at the tech firm Polycom, who was a neighbor. They often shared illegal information at the local coffee shop.

  Still, criminality was turning out to be a tough habit for Khan to break even as she took her second turn as a government informant. She ’fessed up to most of her illegal trading activities, but the government kept finding more. In addition to deleting email messages from Deep Shah, the Moody’s analyst who tipped her off to Blackstone’s purchase of Hilton, she also used a cell phone listed in her gardener’s name to cover her tracks as she continued to talk with Shah. That is until she eventually gave him up to the feds on their way to building the case against Rajaratnam (and through these wiretaps, many of his associates).

  To put it plainly, she was still violating the law while she was cooperating with the FBI. She wasn’t quite on the level of infamous Boston mobster Whitey Bulger, who was killing people and dealing dope even while he was ratting out his fellow mobsters. But Khan’s ongoing shenanigans might well make her toxic on the stand, particularly against the legal firepower Rajaratnam would assemble, even if they made her essential to entrapping Rajaratnam in his own words.

  And entrap she did, in the same casual banter she had used with the Galleon boss for years. “What’s going on with the earnings this season? Are you hearing anything on Intel?” Khan asked Rajaratnam matter-of-factly in 2008.

  “Intel I think will beat the current estimates by, they’ll be up like nine to ten percent and then guide down eight percent,” he shot back.

  After Khan asked for more “color,” or more exact data on the company’s profit margins, he replied: “Margins I think will be good this quarter but next quarter will be below. . . . I’m not trading Intel anymore. . . . They’re a fucking pain-in-the-ass stock.”