Once Lee began to fully cooperate, he explained in various sessions with the FBI and the SEC how he believed the famous SAC “edge” worked. “At SAC you are expected to develop an edge with information that no one else had,” is how one government investigator present at the meetings described Lee’s remarks. The takeaway from the government’s discussions with Lee: SAC’s trading environment was a breeding ground for insider trading.
Based on the Justice Department’s review of the Cohen wiretap it was clear that the SAC chief didn’t engage in Rajaratnam-like banter, at least on the telephone. So Kang settled on the next best thing. He planned to have Lee approach Cohen for a job, so the feds could plant someone inside the firm.
But first he needed a cover story. Because Lee and his partner, Far, were now government cooperators, they had to shut down Spherix. Kang knew the move would raise suspicions because insider trading actually works: The fund was doing well, posting returns of around 10 percent.
Even worse, the wiretaps were starting to show that the various people under scrutiny were growing suspicious about a possible rat in the circle. Chiesi for one opined that she might end up in jail just like “Martha fucking Stewart.” Indeed, as soon as Lee and Far announced the closing of Spherix, the finance message boards began to speculate that they were in fact the rats.
Kang suggested a cover story to Lee and Far that went something like this: Tell clients and associates you had a falling-out over money, a move that might not raise suspicions in a world where people fight over money all the time. But it did, almost immediately. Rajaratnam, in particular, called Far first and asked if he was working with the government. Great traders have a gut feel for the markets and people, and Rajaratnam’s gut was that Lee and Far were now government spies.
Far dodged the question with the cover story, but investigators were on high alert that their cover might have been blown and the authorities might have to move forward with arrests.
Do you guys know about the expert networks?” Lee asked Kang one afternoon in the late summer of 2009. Up until now, the FBI and even the SEC thought the contingent of traders and analysts sharing and trading on illegal tips was doing so without buffers. But if Lee was to be believed, an entire shadow world existed where so-called experts in specialized fields, mostly in the tech field, sell to the highest bidder information about the companies they work at.
The arrangements were done through various firms, including one outfit known as Primary Global Research, which served as a broker for the information. On its face, the networks and the information-gathering system they said they employed appeared completely legal. What’s wrong with an outside company employing executives from Apple or experts in the medical profession, including doctors, to provide insight into trends in technology or new drugs so a trader can better put together his mosaic?
But as Lee pointed out, hedge fund managers rarely wanted trend watching: They were actually looking for actionable material, such as early calls on mergers, earnings announcements, FDA rulings on new drugs—anything that would move a stock.
The experts were employed by just about every big hedge fund. SAC Capital often relied on a company named the Gerson Lehrman Group, which specialized in getting scientists and doctors with knowledge of drug companies to provide analysis of drug stocks, and at times relied on Primary Global. In late 2008, SAC’s compliance department believed Primary Global lacked the proper controls on its consultants, and it was rejecting requests by fund managers to hire the firm’s experts. The exact reason for the SAC move is unclear. Sometimes the information from the expert networks was like a view from thirty thousand feet—summarizing, for example, industry trends. But often the experts were handing their hedge fund clients confidential information as well. Still, SAC, like other hedge funds, thought experts were an integral part of the research side of their trading business. One such researcher was Dr. Sidney Gilman, a professor at the University of Michigan Medical School and an expert on drugs to combat Alzheimer’s disease. Gilman, a Gerson expert, earned $100,000 from Gerson for his SAC work because the people there believed he was well worth it.
When these revelations made it back to the SEC, they shocked Wadhwa, who thought he had a pretty good handle on what was happening on Wall Street. Naturally he had heard about the expert networks but didn’t realize just how big a business it had become—and exactly what type of “advice” it was peddling to the big hedge funds. Many of the experts never revealed to their companies that they had cut these side deals, earning tens of thousands of dollars on top of their regular take-home pay, and it was clear, based on Lee’s roadmap, that part of their function as part of these networks was to pass on insider tips.
The Galleon investigation was now three years old, and to Kang and Wadhwa it was still in its formative stages. Hearing about the expert networks was revelatory because it deepened their understanding of how illegal information flowed through the markets. In addition to the experts, countless other middlemen roamed through the hedge fund world, offering illegal inside tips disguised as good old-fashioned stock research.
Many of these individuals were former Wall Street analysts, who had looked at the expansion of the hedge fund business as a gold mine, particularly if they did more than crunch numbers, and passed along illicit tips that they managed to squeeze out of their contacts at the companies they once covered.
By Wadhwa’s estimate, there were now literally dozens of potential targets on top of the investigation’s big prizes, like Rajaratnam and possibly Cohen, who for all the attention remained elusive. That said, government suspicions about SAC were enhanced by the expert network revelations since no hedge fund would pay $100,000 to any single person without getting something in return.
The challenge wasn’t in finding enough small-fry analysts whom the government could investigate and pressure to say something nasty about Steve Cohen and SAC; it was how to turn those cases into something bigger, like a conviction. Kang believed the time was right to plant a mole inside SAC, and Lee seemed like the perfect candidate, given his pedigree.
Lee had left SAC in 2004, but knew Cohen well enough for the SAC chief to take his call, which he did in 2009, and the two discussed Lee rejoining SAC. The conversation ended without a job offer. As one SAC insider put it: “People call Steve all the time looking for jobs.” Yet, one reason why Cohen is so good at his job is that he follows his instincts. Something was definitely fishy about Lee, a trader who had just closed his fund down while it was producing 10 percent returns. Even to a casual observer, the odds were just too high that Lee had been turned.
With that, the urgency of making a move on Rajaratnam grew. In the late fall of 2009, the FBI was now following Rajaratnam daily. It had a car camped outside his spacious home in Greenwich, Connecticut, and one outside Galleon’s offices in New York City. Kang was listening for any bit of evidence that might make him think Rajaratnam, with access to a corporate jet, contacts around the world, and billions of dollars at his disposal, might just leave the country and never come back.
That’s about when Kang heard from the wiretaps that Rajaratnam planned a surprise trip to London. The official motive was to see the premiere of a movie he had invested in called Today’s Special, starring Aasif Mandvi, a comic correspondent on Jon Stewart’s The Daily Show.
Even more troubling was a report from U.S. Customs and Border Protection that Rajaratnam had bought a plane ticket to London. With his vast wealth, worldwide connections, and growing suspicions that the feds were closing in, leaving the country might be more preferable than spending more than a decade in a federal prison.
His return trip touched off even more alarm bells. He was coming back to New York. But it wasn’t from London. Instead it was from Geneva, a place where he could conduct business as a fugitive.
For the Justice Department prosecutors it was a no-brainer—they should arrest him as soon as they could put together an indictment. If the tapes could hold up in court—and at least for th
e moment there was no reason to think they wouldn’t—they would have enough evidence to put Rajaratnam away for many years. If they were to let him leave the country and he somehow made his way back to Sri Lanka, which does not have an extradition treaty with the United States, he could live very well for the rest of his life.
The wiretaps on the others in his circle would mean that he could be arrested, but so would the principal players in his orbit. Investigators didn’t quite have their case on Gupta completed yet, but that could wait. Once arrested, Rajaratnam would be offered a deal that would include cooperation against Gupta or anyone else if he wanted to have a few years of his life outside of prison.
On October 15, 2009, early in the afternoon, Wadhwa was sitting in his office, looking over Galleon trading records, when he received a call from Kang.
“Sanjay,” Kang deadpanned, “we’re going to arrest him.”
CHAPTER 11
POUNCE HARD
The FBI’s standard procedure for arresting white-collar targets can best be described as law enforcement’s version of the military’s “shock and awe” tactic. Agents show up early, ideally before dawn. They allow the clearly dazed and confused target a few minutes to dress, but with minimal contact with family members. And then they apply the pressure, explaining the rigors of a life spent behind bars for many years.
Kang didn’t deviate much from the script when he showed up at Rajaratnam’s apartment, situated right off New York’s East River in the exclusive Turtle Bay neighborhood of Manhattan at 6 a.m. on October 16, 2009. Rajaratnam’s account of the arrest as told to Newsweek and confirmed by a close associate, goes someting like this: After announcing himself and his fellow agent, Kang began his shock-and-awe treatment. He told Rajaratnam to look at his children because it could be the last time he’d see them for a long time. You should take a look at your wife as well, Kang said. She’s going to have a good time spending your money while you’re away.
The ride to FBI headquarters at Foley Square in lower Manhattan took about a half hour. Rajaratnam was used to being in total control of every aspect of his life, but all that was about to change.
Once Rajaratnam was processed, and before his lawyer was present, Kang turned up the heat. For FBI interrogators, the hour or so they have alone with the target is the most crucial in convincing the latter to cooperate. Rajaratnam was a big catch in the eyes of the FBI—but there were bigger. Rajaratnam rubbed shoulders with heads of finance across the globe, so his cooperation would be enormously helpful in crushing the shadowy world of inside information.
They wanted him to tell them all about Rajat Gupta, whom they considered an even more important catch than Rajaratnam himself, given Gupta’s position in corporate America. And they wanted Rajaratnam to tell them what he knew about other hedge funds.
Investigators by now understood that for all its size and power in the markets, the hedge fund business was really like a small town. There was an incestuous quality to its employment—traders would work for SAC, for instance, and turn around and take a job at Galleon, and vice versa. In a sense everyone knew everyone else’s business.
Kang then launched into his routine. Newsweek reporter Suketu Mehta, who scored the only media interview with Rajaratnam following his arrest, described the interrogation: “Two FBI agents, wearing prominently displayed guns, played good cop, bad cop. They thumped tables. . . jumped up and down, told him, ‘Just say you did it to one count’ ” of the various allegations they were hitting him with, namely trading on insider information in numerous stocks, as had been recorded on his cell phone or the phones of others.
They had a lot to work with. Agents told him the tapes had turned up dozens upon dozens of suspicious trades in shares of Hilton, Polycom, Intel, AMD, and many more. If he didn’t cooperate, Kang told him, life as he knew it was over.
The people at the FBI give a different account. Kang, they said, was respectful and direct, and Rajaratnam was merely given his options: Turn in Gupta, and help them develop cases against others since Rajaratnam had contacts at every major Wall Street bank. Investigators subpoenaed Merrill, where he did the bulk of his business, and other firms for trading records. Surely he wasn’t the only trader breaking the law. His other option: He could take his chances in court, which, Kang told him, weren’t very good.
The arrests and charges made in the following days targeting the Rajaratnam circle took on the air of a circus. Rajaratnam was a billionaire, with friends like Goldman Sachs chief executive Lloyd Blankfein (who would eventually testify at his trial as a government witness, given the Gupta trades). And yet he made much of his wealth not through his high-class Wall Street contacts but through low-level minions like Dani Chiesi, who that very same morning had also been offered a chance to cooperate against Rajaratnam and others.
Staying in character, Chiesi was initially defiant when the FBI showed up that morning and was prepared for the consequences, namely going to jail. Although she was considered small potatoes in the grand scheme of things, she also held one of the keys to that grand scheme in her direct access to Rajaratnam, which is why she was targeted immediately as a potential cooperator.
FBI agents wanted her to start that very moment. Some people close to the investigation say the notion of cooperating to make a case against Mofat, who had also been arrested that morning, was jarring to Chiesi. But others say the agents wanted her to begin cooperating by placing calls to her West Coast circle of friends, which would have been recorded through the wiretap on her telephone. When she refused their offer, Chiesi didn’t faint, as many targets do, but she did make it clear that it was too early (6 a.m. New York time) to be making telephone calls to the West Coast.
With that, the government placed her under arrest. She didn’t even think to put on makeup before she was ushered into the FBI van parked outside her Manhattan apartment.
Before long she was in full view of the waiting cameras assembled outside FBI headquarters in lower Manhattan. Dressed in a white sweater and black coat, Chiesi looked a lot less glamorous than her Wall Street reputation would have suggested.
Moffatt was, indeed, the second of six arrested that day in one of the biggest insider trading busts in history, and the FBI had just gotten started. Mark Kurland, Rajiv Goel, and Anil Kumar rounded out the group.
Kumar actually did faint when the FBI announced his arrest, a sure sign he wasn’t prepared for jail but that he was ready to spill the beans on Rajaratnam, which he eventually did.
In late 2009, the financial crisis was then barely a year old. The banks were recapitalized and the Dow had recovered from its low point reached in March—thanks to money being printed by the Federal Reserve. But all wasn’t well on Wall Street. Small investors who continued to flee the stock markets could hardly be blamed for ignoring the mass arrests, or seeing it as yet more evidence that Wall Street plays by a different set of rules. Just weeks after the Rajaratnam cluster went down, Chaves and Makol made their move against David Slaine’s circle of friends.
Craig Drimal, Slaine’s old weight-lifting buddy, had to know it was coming. His wife Arlene, a former prosecutor for the Manhattan district attorney’s office, noticed something strange in recent weeks: A car parked outside her home in a rural part of Connecticut with two men who at the time looked to her to be FBI agents. Then a few days later she found out they were when Makol knocked on her door and spent the next half hour with Drimal offering him a chance to cooperate, explaining that he had him on tape sharing inside information, and, by the way, he was facing a twenty-five-year jail term if he didn’t. Makol also asked Drimal if he would help the feds build a case against Slaine, an attempt to keep Slaine’s identity a secret once the arrests went down.
Drimal demurred, but he and his wife were terrified—and not just about the possibility that he could be in jail for a quarter century.
That’s because the FBI also had a window on their private lives from those taped telephone calls, which included discussions between Drimal
and his wife about marital difficulties, according to one person with knowledge of the matter. Knowing the FBI had heard the personal stuff in addition to Drimal’s business affairs added a creepy dynamic to the turn of events. After Makol left, Drimal and his wife discussed the possibility of getting a prepaid cell phone so they could avoid the obvious wiretaps on their home telephone. That’s when the situation got even more creepy. They heard from Makol again, this time on the telephone, warning that he knew what they were up to.
It’s unclear if the FBI had placed a listening device inside the Drimal home. Arlene Drimal has said she believes the FBI used a nearby abandoned house to spy on the family. Given the advanced listening devices the FBI had been using, a bug could have been placed anywhere in the house or one could have been slipped into her husband’s cell phone. In any event, Drimal would meet one more time with officials from the Justice Department and the FBI to discuss a possible cooperation agreement, including one where the ruse of setting up Slaine with Drimal wearing a wire was discussed. Again, Drimal said no, explaining to his wife, “I’m not going to sacrifice someone else’s family to save myself.”
A few days later, before the crack of dawn, Makol and a few other agents were back at Drimal’s door, awakening him from a deep sleep and placing him under arrest for trading on inside information.
His wife didn’t even have a chance to say goodbye.
He wasn’t the only one to get the call from the FBI that morning. Less than a month after the Rajaratnam cluster went down, so did Drimal’s entire circle of friends—all except one, David Slaine, who at least for now remained anonymous, only to be identified in charging documents simply as CS-1
Circle of Friends Page 22
