We do know this: For all the whales the government has successfully hunted, the “friends” and “expert networks” successfully prosecuted, the real whales—the ones who threaten our entire economy—continue to swim the globe unscathed, secure in the knowledge that if they run into troubles once again, they will be rescued as before by ordinary Americans. And no one who studies the markets and financial systems has any doubt that, given this security, they will repeat the same practices that led to the 2008 collapse. The bill for the bailouts will be paid for by our children and grandchildren.
But we can all sleep soundly at night knowing that our government’s investigators are hard at work making sure the Raj Rajaratnams and Steve Cohens of the world remain firmly fixed in their sights.
CAST OF CHARACTERS
Rodolphe Agassiz—Chief executive of Cliff Mining, who purchased a big stake in his company on the Boston Stock Exchange on a report that the company was sitting on a sizable lode of copper in 1926. He was sued by Homer Goodwin, who sold his shares without insider knowledge of the report. Goodwin lost, setting a weak precedent for future insider trading cases.
Gary Aguirre—A former SEC enforcement attorney who said insider trading was rampant in the hedge fund business and that the SEC was bowing to political pressure in failing to crack down on the practice.
Robert “Rob” Babcock—Player in a scheme in which information on UBS ratings moves would be given to portfolio managers at Bear Stearns, and others, before they got to clients.
Peter Bacanovic—Martha Stewart’s stockbroker, who tipped her off that several ImClone executives were selling shares in the company ahead of an unfavorable ruling from the Food and Drug Administration on a cancer drug called Erbitux.
Preet Bharara—U.S. attorney for the Southern District of New York who is widely seen as one of the toughest enforcers of white-collar crime. Bharara prosecuted Raj Rajaratnam in one of the biggest insider trading busts of all time.
Biovail Corp.—A company that sued SAC Capital Advisors for allegedly having a research company publish negative reports about it in a bid to push down its share prices and support SAC’s short positions. The case was dismissed.
Henry Blodget—An Internet research analyst at brokerage firm Merrill Lynch who allegedly wrote glowing reports about the companies he covered, in a bid to secure deals for the brokerage.
Reed Brodsky—A U.S. attorney who was part of the team that successfully convicted Raj Rajaratnam.
William Cary—Headed the SEC from 1961 to 1964, and sought to increase the commission’s power in fighting insider trading.
David Chaves—Coheaded the securities fraud and white-collar crime division at the FBI’s New York office, and a key figure in Operation Perfect Hedge.
Anthony Chiasson—Former SAC Capital Advisors employee who founded Level Global Advisors. Chiasson was convicted of insider trading regarding technology stocks.
Danielle “Dani” Chiesi—An analyst at New Castle Partners, a Bear Stearns subsidiary, who exchanged insider information on a quid pro quo basis with numerous individuals and had close ties to Raj Rajaratnam.
Citadel Management—A large asset management firm that was a client of analyst John Kinnucan.
Steve “Stevie” Cohen—Founder of SAC Capital Advisors, a Stamford, Connecticut-based hedge fund that manages some $14 billion in assets. Though considered among the greatest traders in modern history, Cohen also has been in the crosshairs of the government’s sweeping insider trading probe. He has not been charged with any wrongdoing.
James Comey—Assistant U.S. attorney for the Southern District of New York who led the prosecution in the Martha Stewart case.
Tom Conheeney—SAC Capital Advisors president and one of Steve Cohen’s top lieutenants at the hedge fund.
Arthur Cutillo—Attorney at Ropes & Gray who took bribes to provide insider information on several corporate mergers, including Bain Capital’s purchase of 3Com.
Raymond “Ray” Dirks—An analyst who played a role in one of the key legal precedents involving insider trading.
John Dowd—Attorney at Akin Gump who led the defense in the Raj Rajaratnam case.
Craig Drimal—A Galleon Group trader convicted of conspiracy and securities fraud for trades made on companies including 3Com and Axcan Pharma.
William Duer—Alexander Hamilton’s assistant Treasury secretary, who used insider information to bet on bank stocks in the late eighteenth century, and sparked a financial crash.
Fairfax Financial—An insurance company that sued SAC Capital Advisors over allegedly manipulating stock prices. Fairfax’s case was dismissed.
Doug Faneuil—A low-level brokerage employee who delivered the message to Martha Stewart that ImClone executives were selling shares in the company ahead of an unfavorable ruling from the Food and Drug Administration on a cancer drug called Erbitux.
Erik Franklin—A portfolio manager for Bear Stearns’ Lyford Cay fund who traded on knowledge of UBS ratings moves before clients could get to them.
Noah Freeman—An ex-SAC fund manager who cooperated with the government in its insider trading probe.
Cameron “Cam” Funkhouser—Securities regulator who perfected a computerized system for watching for suspected insider trading.
Galleon Group—The now-defunct hedge fund founded by Raj Rajaratnam.
Kathryn Gannon aka Marylin Star—A pornography star who received insider tips on mergers through a relationship with Keefe Bruyette & Woods chief James McDermott.
Michael Garcia—Manhattan U.S. attorney during the Bush administration who famously proclaimed “greed is at work” when he unveiled a financial crisis era insider trading probe.
Gerson Lehrman Group—An expert network firm involved in the insider trading case against SAC and former portfolio manager Mathew Martoma. The firm has not been charged.
Dr. Sidney Gilman—Physician who allegedly leaked information to SAC Capital Advisors fund manager Mathew Martoma.
Robert Gintel—Partner at brokerage Cady, Roberts & Co. involved in one of the early insider trading cases.
Rajiv Goel—A former Intel executive who leaked insider information about the chipmaker to Raj Rajaratnam, and later cooperated with the government in its prosecution of him.
Zvi Goffer aka “Octopussy”—A trader at Galleon Group and other hedge funds known for his extensive insider trading network.
Lauren Goldberg—Assistant U.S. attorney who worked on the Raj Rajaratnam case.
Jack Grubman—A technology analyst at Citigroup’s Salomon Smith Barney unit who allegedly penned rosy research reports on companies in exchange for investment banking business.
Rajat Gupta—Former Goldman Sachs director and McKinsey & Co. chief executive who was convicted for providing Raj Rajaratnam with inside trading tips.
Mitchel Guttenberg—An employee on UBS’s research team who illegally passed inside information involving stock research to various hedge fund traders.
Jonathan Hollander—Former SAC Capital Advisors money manager who provided government investigators with information about how the giant hedge fund operates.
Judge Richard Holwell—U.S. district judge who presided over the Raj Rajaratnam trial.
Richard Jacobs—Agent in charge of FBI team “C-1,” which was tasked with taking down Raj Rajaratnam.
Winifred Jiau—Former Primary Global consultant convicted of providing inside information to her hedge fund clients.
B. J. Kang—The FBI special agent who led the Galleon probe.
Debasis Kanjilal—Former Merrill Lynch brokerage client who sued the firm’s former analyst Henry Blodget over allegedly faulty stock research.
Carl Karcher—Founder of Carl Karcher Enterprises, the parent of the Carl’s Jr. burger chain, who settled an SEC civil complaint involving insider trading.
Roomy Khan—A former executive at chipmaker Intel and one of the key cooperating witnesses in the investigation of Raj Rajaratnam.
Robert “Bob” Khuz
ami—The SEC enforcement chief during the agency’s insider trading crackdown.
John Kinnucan—An independent research analyst who headed Broadband Research, LLC; Kinnucan was convicted of securities fraud but may be best known for his email to clients alerting them of the government’s insider trading probe.
Anil Kumar—A McKinsey & Co. executive vice president who was convicted of leaking inside information to Raj Rajaratnam.
Mark Kurland—Cofounder of NewCastle Partners who was convicted of passing insider information during the Galleon probe to Danielle Chiesi.
Benjamin Lawsky—An assistant U.S. attorney and close associate of Manhattan U.S. attorney, Preet Bharara.
Richard Choo-Beng Lee—Spherix Capital founder who traded insider information with Danielle Chiesi and was convicted of insider trading.
Dennis Levine—A Drexel Burnham Lambert managing director who was convicted of securities fraud and was hit with criminal and civil charges.
Anthony “Tony” Longoria—A supply-chain manager at AMD who moonlighted as an industry expert, selling inside secrets about the chipmaker.
Lyford Cay—A Bear Stearns hedge fund that managed money for many of the investment bank’s big-name clients and was involved in a major insider trading case.
Gerard Lynch—Federal judge who authorized the use of wiretaps in the Rajaratnam insider trading case.
Bernard Madoff—Convicted of perpetrating one of the biggest frauds in U.S. history.
David Makol—One of the top FBI agents involved in Operation Perfect Hedge, considered an expert at flipping suspects and turning them into cooperators.
Henry Manne—Author of Insider Trading and the Stock Market, Manne argues that insider trading doesn’t harm investors and in fact leads to a more efficiently operating market since information is more readily priced into stocks.
David Markowitz—A senior enforcement official at the SEC.
Mathew Martoma—Former SAC Capital Advisors fund manager who was charged by the U.S. government for allegedly taking part in a massive insider trading scheme. Martoma says he’s done nothing wrong.
James McDermott—Former chief executive at Keefe, Bruyette & Woods who was convicted of sharing inside information with pornography star Kathryn Gannon.
McKinsey & Co.—Big New York–based management consultancy.
Andrew Michaelson—An enforcement official at the SEC who worked on the Galleon case and would later join the Manhattan U.S. Attorney’s office during the Rajaratnam prosecution.
Michael Milken—Chief of the junk bond segment at Drexel Burnham Lambert, who was convicted of securities fraud.
Robert Moffat—Former IBM executive who leaked insider tips to Galleon Group via Danielle Chiesi.
NewCastle Partners—A hedge fund giant, and Bear Stearns subsidiary, that employed numerous individuals ultimately linked to insider trading.
Todd Newman—A portfolio manager at Diamondback Capital Management. Newman was convicted of insider trading.
James H. O’Hagan—The central figure in an insider trading case that became the basis of modern insider trading law.
Ferdinand Pecora—Flamboyant Depression-era prosecutor who led a high-profile investigation into the causes of the 1929 stock market crash.
Primary Global—A now-defunct expert consultancy network and one of the key elements of the insider trading probe. Primary Global had hired a number of consultants who would be convicted of passing insider tips to hedge fund clients.
Raj Rajaratnam—Founder of Galleon Group who was convicted of fourteen counts of securities-fraud-related crimes and was sentenced to eleven years in prison for insider trading.
Rengan Rajaratnam—Hedge fund trader and brother of Raj Rajaratnam, who was charged with insider trading. The SEC’s 2007 investigation into Rengan’s hedge fund, Sedna Capital, led to the probe of Galleon.
Gary Rosenbach—Raj Rajaratnam’s partner who ran the Galleon Group’s trading desk.
Arthur Prentice Rugg—Chief justice of the Supreme Judicial Court of Massachusetts who opined in one of the early insider trading cases.
Hector Ruiz—AMD chairman who had close ties to Danielle Chiesi.
SAC Capital Advisors—A Stamford, Connecticut-based hedge fund headed by Steve Cohen that manages $14 billion in assets.
Mary Schapiro—SEC chairman during the commission’s insider trading crackdown.
Securities and Exchange Commission aka SEC—Wall Street’s “top cop,” or chief regulator, which was formed by Congress in the 1930s to stabilize markets and protect investors.
Deep Shah—Provided Roomy Kahn with inside information on Blackstone’s purchase of Hilton Hotels.
Walter Shimoon—A former executive at Flextronics International who pleaded guilty to sharing insider secrets about the tech-supply-chain heavyweight to John Kinnucan.
Martin Siegel—A Drexel Burnham Lambert managing director who was convicted of securities fraud during the 1980s insider trading crackdown.
David Slaine—Former Morgan Stanley managing director and hedge fund trader who became one of the top cooperators during Operation Perfect Hedge.
Eliot Spitzer—Former New York attorney general who was known for his hard-nosed approach to fighting white-collar crime.
Michael Steinberg—SAC Capital Advisors money manager charged with trading on inside information. Steinberg says he’s innocent.
Martha Stewart—Home and lifestyle mogul who found herself ensnared in a high-profile insider trading case involving her friend, ImClone Systems founder Sam Waksal. Stewart was eventually convicted of lying to government investigators, but she was never charged with criminal insider trading.
Jon Streeter—Assistant Manhattan U.S. attorney who led the prosecution in the Raj Rajaratnam insider trading case.
Sanjay Wadhwa—Associate regional director for the SEC’s New York office and one of the central figures in the Galleon probe, as well as the ongoing investigation into insider trading at other big hedge funds, such as SAC.
Sam Waksal—Founder and former CEO of ImClone Systems, who was convicted of insider trading.
Doug Whitman—Founder of asset management company Whitman Capital, who was convicted of insider trading in a Galleon-related case.
R. Foster Winans—Former writer for the Wall Street Journal who was convicted of securities fraud for handing out pre-publication details of the market-moving column.
NOTES
“The pagination of this electronic edition does not match the edition from which it was created. To locate a specific entry, please use your e-book reader’s search tools.”
In writing Circle of Friends I relied on a number of sources of information, such as court documents, SEC filings, and depositions, as well as interviews with government officials directly involved in the Perfect Hedge investigation, defense attorneys representing the key players involved in the case, and press representatives. Many (if not most) of these interviews, particularly with the government investigators on the front lines of the insider trading probes, occurred under the condition that the parties involved not be identified by name, for the obvious reason that even as this book goes to press, the investigation is continuing and such information is considered confidential.
In fact, one of the hurdles I needed to overcome is the confidentiality that involves any story about an ongoing civil and criminal investigation of the magnitude of Perfect Hedge, where people involved could be fined millions of dollars and spend years in prison. Needless to say, without relying on people who speak without attribution, neither this book nor the vast majority of what is considered investigative reporting would ever see the light of day.
That said, I have attempted to verify the key scenes in the book with the various players involved, through their representatives. Where there is a discrepancy over the facts, I have attempted to show both sides of the story. Every major character was asked to cooperate and given the opportunity to speak on a not-for-attribution basis. Steve Cohen, for instanc
e, declined numerous requests to be interviewed for this book, but I have provided his representatives with a detailed account of what has been written and have added their comments when appropriate.
In developing a narrative about Cohen and SAC Capital Advisors, I have spoken to friends and former colleagues. I have reviewed court transcripts and other documents, as I have in developing the narratives of the other key characters including former Galleon chief Raj Rajaratnam, and David Slaine, one of the government’s premier undercover witnesses in the investigation.
Much of the work in the book is a result of my reporting at the Fox Business Network, including an interview with former FBI agent Mark Rossini, who first alerted me to the size and scope of the probe and how, despite all the attention the press was giving other players like Raj Rajaratnam, a key target in the probe was actually SAC Capital, and Cohen.
As this book goes to press, Cohen has yet to be charged in either a civil or criminal case, though SAC itself has settled civil securities fraud charges with the SEC, in the usual fashion of neither admitting nor denying wrongdoing. A criminal investigation into SAC and Cohen himself continues, and as I have said numerous times while I’ve reported on these issues, Cohen is innocent until a jury proves he is guilty. It is not my intention to pass judgment, but merely to report on the activities of the government as they relate to Cohen and SAC, and give Cohen a fair hearing of his own.
I have also leaned on the reporting of several journalists who covered the insider trading scandals and the Perfect Hedge investigation. This includes the fine work of Susan Pulliam at the Wall Street Journal, Kaja Whitehouse at the New York Post, Peter Lattman at the New York Times, Matthew Goldstein and Jennifer Alban of Reuters, George Packer for his excellent profile of Preet Bharara in the New Yorker, and Roger Lowenstein’s New York Times piece on insider trading, as well as various reporters at Bloomberg News for their aggressive coverage of the subject. The information I gleaned from these sources can be found in the following endnotes. Some of the material taken from these and other sources has been quoted directly with author attribution in the text because I believed a simple endnote was not sufficient in pointing out the exclusivity of the reporting.
Circle of Friends Page 34
