David Slaine had told people that his work in developing evidence against Drimal and the rest of this circle made him physically ill. He fought with his government investigators incessantly; both David Makol and Andrew Fish took turns berating him on what would happen to him if he stopped doing what he was told.
With the strain of going under cover for so long, Slaine lost weight, looked sickly, and before long he would break up with his wife, albeit amicably.
The thing that kept him going was the horrible alternative of not seeing his daughter for twenty years. Roomy Khan, meanwhile, was a great liar, Wadhwa and Kang discovered—perhaps the best they’d seen so far in the investigation. She did it so effortlessly, without a hint of despair or apparent remorse.
This is amazing,” Sanjay Wadhwa said as he was briefed by Kang on what Khan was producing, not just from her recorded conversations but through other records. Kang kept Wadhwa in the loop on most matters, but there were limits, particularly when it came to wiretaps. Conversations from Rajaratnam’s phone were off-limits to anyone outside the Justice Department, and that included the SEC, as was the brief detour Kang made in the middle of the Galleon hunt to return to his first love, Steve Cohen.
Little is known about exactly how Kang got the court order to tap the Steve Cohen’s telephone which began, according to one investigator, sometime after the 2008 Rajaratnam wiretaps were launched (Kang declined repeated requests to be interviewed for this book). But according to senior law enforcement officials with direct knowledge of the matter, Kang had to prove both a reasonable suspicion that Cohen was doing something wrong and that he couldn’t get the information using other types of investigative techniques.
That, as it turns out, was the easy part. Much more difficult was finding something to incriminate Cohen on. When the Cohen wiretaps began, Kang could have received his probable cause from any one of a number of sources, including the suspicious trading that Funkhouser’s computers detected. Kang had interviewed Patricia Cohen as well, and Slaine’s information about the inner workings of the big hedge fund didn’t hurt.
The judge granted his request, and for a period of time described by one law enforcement source as a few weeks, the federal government was listening to Steve Cohen’s business affairs as conducted on his home telephone.
Cohen often holds a Sunday conference call with various traders to discuss market bets and other ideas from his home telephone. It was a grueling affair, at least according to those who took part in the weekly meeting. Traders would be grilled on their positions, and mostly their “conviction” level on stocks, meaning how strong they felt about a particular trade.
Kang believed that listening to these calls was one of the best ways to determine if Cohen really wasn’t playing by the rules. But Cohen didn’t bite. “There was a lot of noise,” was how one government official with direct knowledge of the wiretap conversations described what investigators discovered.
In the end it was a frustrating experience, particularly for Kang, people say. The calls provided no clear-cut evidence that Cohen knowingly or intentionally traded on illegal tips. It’s unclear exactly what was said, but Cohen is known to speak in his own code, often about “conviction levels,” and to bullshit incessantly about various stocks. All of which is a far cry from hard-and-fast evidence that shows he engages in insider trading or condones it below his rank,
Or as one former Justice Department official put it, “In the end, we really didn’t get shit.”
The question of why the wiretap came up empty became a huge debate within law enforcement circles. Maybe he was just that good a trader, and maybe the people he hired were for the most part incentivized to do their jobs legally by receiving huge pay packages to play fair. Since SAC was such a massive fund, trading billions of dollars in stocks every day, even the suspicious trades by a few bad players in its ranks when put in this context were just a small fraction of the fund’s overall business.
But others in government believe their suspicions are valid and that something dirty was clearly happening at SAC. It was becoming increasingly difficult for FBI officials and people in the Justice Department and the SEC to believe Cohen ran a completely honest business amid so much trading that touched off so many of their alarm bells.
The conclusion among other investigators was that Steve Cohen was just smart enough to see it all coming, trusting his trader’s gut to ramp up his compliance systems when he knew the scrutiny of his trading practices became more intense. People at the FBI had come to possess an odd respect for their ultimate target, as making a case against him, at least for the moment, appeared nearly impossible. According to someone involved in the matter, when Chaves heard the results of the Cohen wiretaps, he muttered one word: “Brilliant.”
Cohen was indeed a man of contradictions. He was an information junkie, and SAC was a veritable information factory. But he appeared to take pains to stop his addiction when it came too close to home.
He loved his privacy, but investigators also came to understand that Cohen’s media image as a total recluse who lived behind large walls, protected by twenty-four-hour-a-day surveillance, was something of a caricature. Yes, he and his family sought a large degree of protection from the outside world, much of it warranted given his wealth. But Cohen didn’t exactly hide from the world.
And in 2007 he weighed turning SAC into a public company. A few hedge funds had done so to raise capital and use stock to keep their best performers from jumping to other firms. He didn’t in the end, but according to one person who briefed Cohen on the matter, it had nothing to do with secrecy. Rather he had nixed the idea because the financial crisis had roiled the markets.
Agents heard he liked Italian food enough that he ate at two of the New York area’s biggest hot spots—Il Polpo in Greenwich, and Campagnola in Manhattan. He was a fat cat who didn’t always hang with the fat-cat set.
He could dine with anyone in the world, and managed money for the likes of private equity honcho Stephen Schwarzman of Blackstone, but one of his frequent dinner partners was former New York City cop and private investigator Richard “Bo” Dietl, whose claims to fame included a book about his exploits as a New York City detective and his regular appearances on the Imus in the Morning radio show.
Cohen, the government investigators were beginning to conclude, also had a surprisingly limited circle of friends, which meant he was either innocent or just very skilled at covering his tracks.
Contrast that with Rajaratnam, who seemed to talk to anyone who could give him a market edge and never seemed to tone it down, even after being deposed by the SEC. His circle included everyone from the former chief executive of McKinsey & Co., Rajat Gupta, who appeared continuously on his telephone logs, to more junior executives such as Anil Kumar, a McKinsey executive vice president.
Wadhwa had joked that Rajaratnam’s circle of friends was Wharton-based and that the feds should indict the entire class. But Wadhwa, himself of South Asian descent, also believed that ethnicity played a role in the criminal conspiracy: They were people largely from the same continent and felt comfortable doing business with one another, even if that business was illegal. Cohen epitomized the typical Wall Street career path: middle-class childhood in Long Island, business school, then intense trading desk work, and like Slaine, a certain disdain for the motives of people he was working with. That disdain didn’t save Slaine and the circle he was busy making a case against, but it appeared, at least to government investigators, to have saved Steve Cohen.
The ethnic aspect of the Rajaratnam investigation was both unavoidable and unsettling, as far as Wadhwa was concerned. Many of the best mob investigators, people like Rudy Giuliani, were Italian American. They were among the most zealous prosecutors of the five big crime families because of the obvious taint the mob’s activities brought to Italian Americans, the vast majority of whom are honest and hardworking.
Wadhwa felt much the same way in his pursuit of Galleon. Matters of race and ethnicity a
side, this group of conspirators orbiting around Rajaratnam also exhibited the same disgusting criminal traits that are common across all ethnic lines, including one in particular: greed. And Wadhwa believed they were tainting a culture built on hard work. Wadhwa was born in India, came to the United States as a teenager, and always appreciated the opportunities his adoptive country had given him and his family. He had left a lucrative job at a corporate law firm for the long hours and low pay of government work, because he believed he was doing the right thing, and the right thing was worth a lower paycheck. That was what stung him the most as he watched Rajaratnam and his countrymen do the wrong thing for a buck.
It also made Wadhwa all the more motivated to take the case to the next level. By now, he was working with the FBI almost daily, listening into Khan’s conversations (except for the Title III wiretaps) and sharing what he and his team were coming up with, namely their own mosaic as to where Rajaratnam was getting his tips.
These tips were, as Wadhwa discovered, centered around certain stocks, many of them the tips that Khan had provided. All were involved in technology of one sort or another, including companies like Polycom, AMD, and Google, to name a few. (Khan herself traded many of these companies.) For Wadhwa, AMD stood out because it was so obviously a dirty trade nearly from the moment he began looking at Rajaratnam’s business.
AMD’s 2006 purchase of a chip-making firm named ATI came out of the blue. The Street barely saw it coming and there were no leaks to the press. But Rajaratnam saw it coming. He snapped up ATI just before the merger, earning him more than $20 million, and it had little to do with his vaunted “mosaic.”
The reason for his good timing, as the wiretaps would show, was the executive at McKinsey, Anil Kumar, who was doing consulting work for AMD and feeding Rajaratnam his inside tips for a “consulting fee” of $125,000 every quarter. The Kumar-Rajaratnam deal wasn’t known by the feds, at least not yet. That would come later, as would others, the result of the wiretaps on Rajaratnam’s and Kumar’s phones.
Roomy Khan was good, but investigators were seeing the limitations in their arrangement. For all his bluster and networking, Rajaratnam’s conversations with Khan didn’t yield the wider circle of friends the government was now tracking because of the wiretaps on Rajaratnam’s cell phone.
Targets and potential witnesses piled up by the dozens. Most of them, like Kumar, Kris Chellam of Xilinx, Rajiv Goel of Intel, or Danielle Chiesi, a hedge fund trader, weren’t household names even in the Wall Street community, but a few were. Rajat Gupta, the former McKinsey partner and Goldman Sachs board member, eagerly shared inside information with Rajaratnam, just like everyone else. By establishing there was a conspiracy, prosecutors were able to get wiretaps on other phones as the case exploded in size. In the end, they had recorded thousands of conversations involving Rajaratnam’s circle of friends including the so-called consensual recordings made by the various cooperators.
Somewhat unknown to Kang, Goldberg, and the rest of the government’s insider trading bureaucracy was a bigger story. Indeed, much would happen on Wall Street after March 10, 2008—the date Judge Lynch granted the wiretap application to bug Rajaratnam’s phone. Just four days later, the Wall Street firm Bear Stearns collapsed, setting off a chain of events that would lead to the demise of Lehman Brothers and the rest of the financial system before the government spent billions bailing out the remaining big banks.
Over this period of time, the Justice Department asked a series of federal judges to extend Judge Lynch’s wiretap application, as many as seven times, while also granting permission for the wiretapping of other culprits caught as a result of Rajaratnam’s taped conversations.
FBI agents described it all as a costly affair. Running wiretaps requires tremendous manpower. No one in the Justice Department would provide an estimate on the total costs, but a report issued in 2009 from the administrative office of the federal court system sheds some light. A single wiretap or recording for a federal investigation costs an average of $62,552 for a period of roughly thirty days. Since the Rajaratnam case lasted far longer, it’s easy to see how the costs added up.
But government investigators will claim it was all worth it as each member of Rajaratnam’s entire circle of friends was eventually revealed through the vast tangle of recordings. People involved in the investigation of Rajaratnam tell me there was no discussion to divert resources toward mortgage fraud and the disclosures from the big banks about their financial condition through 2008, from the time Bear Stearns imploded right through the government bailouts.
In fact, just the opposite was true. “We received an increase in funding and people,” an FBI official says, “after the financial crisis and the Madoff scheme.”
At the SEC the sentiment was largely the same. The current chairman was an appointee of President Bush: Chris Cox, a former Republican congressman from Orange County, California. Cox was regarded as a true believer in the free market. One of his first reads among the morning newspapers: the Wall Street Journal editorial page, which had over the years questioned the validity of insider trading as a crime.
And yet Wadhwa was alerted by his supervisors to keep pressing forward. A common misperception, buttressed by the allegations of Gary Aguirre, was that the SEC had gone soft on the bad guys, ignoring the Madoff scandal or the dangerous amount of risk being taken by the banks out of their zealousness to protect the “free markets.” As part of this misperception, Cox, the free marketer from California, is held in particular disdain.
SEC officials say the real story was more complex. The SEC was once a lean operation with some of the best attorneys in the business at the helm. It was now a bloated bureaucracy, and like most such creations, was always pressing for increased funding. Also, as with any bureaucracy, it measured performance in absurd ways. Staff attorneys like Wadhwa were judged by the number of cases, not necessarily by the impact of the crime against the average investor, and it led attorneys to think twice about pursuing a Bernie Madoff or a boiler room of penny stock crooks who worked at one firm since both would be counted as one case. Commission lawyers were urged to make numbers and do so in areas that generated the most publicity, rather than what various enforcement chiefs over the years referred to as more routine “slip and fall” cases.
In the Rajaratnam case, the SEC saw a perfect storm: numbers and big publicity impact. And they wanted more. Wadhaw had always believed the SEC faced limitations precisely because it lacked the tools that were available to the criminal authorities—namely the threat of jail time—and the ability to wiretap phone lines, or even listen to these so-called dirty calls once court authority was established. (SEC targets face civil charges: fines and industry bans, not jail time.) Thus they could listen to Roomy Khan’s calls to Rajaratnam, but they could not listen, or even know about, what Rajaratnam said on his wiretapped cell phone.
Around the time of the Rajaratnam wiretaps, a tense meeting with Assistant U.S. Attorney Lauren Goldberg took place in which attorneys for the SEC and the Justice Department hashed out the possibility of equipping the SEC with the ability to wiretap—or at least listen to the wiretapping. The general feeling was that in the current statute, under Title III, nothing specifically prevented the commission from listening to conversations or even seeking approval. The biggest question: What if a defendant like Rajaratnam with the resources to hire the best lawyers mounts a successful challenge? It could pollute the entire case, causing a judge to throw out all of the wiretap evidence.
With that the decision was made to fight this particular fight another day.
Raj, you better listen to me. . . let me make a little bit money too okay. . . . Akamai. . . please don’t fuck me on this. . . . They’re going to guide down. Just got a call from my guy. I played him like a fine tuned piano.”
Notwithstanding her colorful language, Danielle Chiesi’s little chats with Rajaratnam were all business, though, as the FBI was discovering, she wasn’t against using more than a whiff of sexualit
y to woo tippers of inside information if it would benefit her and the Galleon chief.
Officially, Chiesi, known inside her circle of friends as “Dani,” was an analyst for a hedge fund called NewCastle Partners, a subsidiary of Bear Stearns, the big Wall Street firm with a history of bending securities laws to reap enormous profits. That history, of course, came to an abrupt end in March 2008, when Bear became insolvent, a victim of its own recklessness, and was taken over by J. P. Morgan.
The big bank would eventually spin off NewCastle, but not before Chiesi and her boss, Mark Kurland, had been snared through the wiretaps on Rajaratnam’s cell phone, and eventually a wiretap on their own telephones. Bear had long suspected that NewCastle, and Chiesi in particular, were dealing in dirty information. It had blocked attempts by Kurland to get its own trading desk—as opposed to using the one at Bear Stearns—for that very reason. But keeping in its tradition as one of Wall Street’s most legally challenged outfits, it kept the subsidiary alive because it was extremely profitable.
All along, Chiesi and Kurland were each key elements of Rajaratnam’s circle of friends, and through their conversations, that circle would soon include nearly two dozen others, some of whom were paid directly by Rajaratnam, while others, like Chiesi (and for that matter Roomy Khan), maintained a quid-pro-quo relationship with the Galleon chief to be privy to his tips.
For the government investigators, Chiesi revealed a couple of things about Rajaratnam’s network. He began Galleon by leveraging relationships with technology executives whom he knew from earlier in his career and were original investors in the fund. Those relationships over the years began to lose their effectiveness, particularly in helping Rajaratnam bet on the direction of stocks. That’s when he began to create a separate circle, which included people he knew from his days at Wharton, and others like Chiesi, whom he met at a technology conference and who impressed him with her knowledge of stocks and her ability to get information. What would astound investigators about Rajaratnam’s new circle was not only that it went deeper into corporate America than expected, but also that it brushed up against people with whom a billionaire wouldn’t usually be caught associating.
Circle of Friends Page 19
