Black Edge

by Sheelah Kolhatkar

  Just over forty-eight hours later, the moment that they had all been debating and dancing around for months arrived: Dell reported its earnings at 4 P.M., right after the market closed. The numbers were almost as bad as Tortora had been predicting, down 17 percent. The next day, the stock dropped from $25.21 to $21.73, a fall of 13.8 percent, its largest sell-off in eight years. By selling his shares, Cohen had avoided $1.5 million in losses.

  “Great call and good work from top to bottom,” Steinberg wrote to Horvath after he’d had a chance to look more closely at the numbers.

  Horvath allowed himself to enjoy his success for a few minutes. He had done something right for a change. He wrote a message to Tortora: “Nice man!!! You nailed it!!!”

  Horvath didn’t know it at the time, but he wasn’t the only genius at SAC when it came to Dell’s second-quarter earnings announcement. Tortora and Ron Dennis, the other SAC analyst who was part of Tortora’s information-sharing group, had also spoken on the afternoon of August 28, and Tortora had shared the same information about Dell’s income and gross margins. Within an hour of their conversation, Dennis’s portfolio manager at CR Intrinsic started shorting Dell, too. After Dell’s earnings came out, Tortora sent Dennis an instant message: “your welcome,” it said.

  “You da man!!” Dennis answered. “I owe you.” His boss covered his short and made $800,000 in profit on the trade.

  As was often the case when good information led to a big prize, though, the thrill of success was overshadowed almost immediately by anxiety about how they would do it again. Each time the inside information worked, it raised the expectations for the next quarter, and the next quarter, and the quarter after that. The pressure to find more edge was that much greater. It was like a drug.

  Later that evening, Cohen sent Steinberg an email. “Nice job on dell,” he wrote.

  “Thanks,” Steinberg responded. “This ole dog can still hunt.”

  * * *

  *1 Dennis settled civil insider-trading charges with the SEC in 2014 and agreed to be barred from the securities industry and pay a two-hundred-thousand-dollar fine, without admitting or denying the allegations.

  *2 Goyal’s wife was never accused of any wrongdoing.

  CHAPTER 8

  THE INFORMANT

  On a chilly night in January 2009, a broad-shouldered, unshaven man in his early thirties was walking home from the Equinox gym in Tribeca, his shoulders curled inward against the cold. It was around 8:30 P.M., and Jonathan Hollander had just finished a ninety-minute workout, lifting weights and circuit training. He was damp and hungry, looking forward to getting takeout, going home, and doing a little work. As he hurried down Murray Street, he heard a voice behind him. “Mr. Hollander!”

  It wasn’t a friendly tone. He turned around and saw a man in a dark overcoat, open enough to show a gun on his belt. There was a slightly larger guy right behind him, dressed the same way.

  “Where are you going?” said the second man. “We need to talk to you.”

  The first man held a badge in front of Hollander’s face, too close for him to actually read it. “I’m David Makol, with the FBI,” he said. “We want to talk to you about insider trading. Where can we go to talk?”

  Hollander was confused. His blood sugar was low, and he was starving. As his heart rate accelerated, the scene started to take on a surreal, almost dreamlike effect. He told the FBI agents that he needed to eat, so they walked in awkward silence for two blocks and entered the brightly lit Whole Foods on the corner. Makol and his partner stood to the side, watching Hollander as he filled a carton at the salad bar. “Can I get you anything?” asked Hollander, heading to the register, where he got in line behind a woman in designer yoga wear. The agents declined.

  They walked up the stairs to the seating area and sat down at a table in the corner. Makol talked while Hollander ate, his mind spinning.

  “We know you committed insider trading while you were employed at SAC Capital,” Makol began. “We know you’re guilty. But you can help yourself.”

  Hollander tried to stay calm. He knew what to do in situations like this. At SAC he’d participated in something called Tactical Behavior Assessment training, a strategy for learning how to read people’s body language for signs of deception. Cohen had brought in a group of former CIA operatives to train his staff in the technique, thinking that it might help the firm’s traders and analysts tell when company executives weren’t being forthcoming about things like their earnings or accounting methods. The most critical thing was to appear relaxed. Squirming, Hollander recalled, picking lint off your clothes, or fiddling with your eyeglasses all could signal that you were lying. He tried to avoid saying words like honestly or frankly, which were common signifiers of dishonesty.

  At SAC, Hollander had been a junior-level analyst with CR Intrinsic, the firm’s elite research unit. He was someone who had very little contact with the top-level people. To make a trade, Hollander had to go through his boss, Jason Karp. Though seen as having less-than-infallible judgment, Hollander was widely liked around the office. He was a quirky guy. Outside of work, he volunteered as a baseball coach to underprivileged kids in Harlem, and he had an ownership stake in a trendy Mexican restaurant in downtown Manhattan. He was constantly injuring himself playing sports, tearing tendons and dislocating shoulders. One time, Hollander had gotten into a bar fight after someone allegedly insulted his girlfriend; he punched the guy in the face and broke his own hand in the process. That kind of thing didn’t go over well with senior management at SAC, so Karp and his other colleagues told everyone he had been hurt in a softball accident.

  Makol seemed to be well aware that Hollander had left CR Intrinsic a few weeks earlier. Dozens of people had been let go after SAC dropped 28 percent in 2008, the fund’s only negative year in the sixteen years it had been in business. After canceling the expensive flower deliveries, the full-time massage therapists and the free Snapple, Cohen embarked on the most drastic layoffs the firm had ever seen. CR Intrinsic was shut down. Hollander was fired—which made him, potentially, an ideal cooperator.

  In fact, Makol seemed to know a lot about what Hollander had worked on while he was at SAC. The FBI knew that Hollander had traded stock in Albertsons, a supermarket chain—a friend of Hollander’s who was involved in a takeover of the company had leaked it to him ahead of time, Makol said. “We arrested Ramesh,” Makol went on, referring to the friend, who worked at the Blackstone Group in London and who was at that moment being confronted by FBI agents at JFK airport. “Your two other friends are going to jail. You’re going to jail, too, if you don’t help yourself.”

  There was no use fighting, Makol said. Rich Wall Street guys didn’t stand a chance in front of a New York jury.

  Hollander was indignant. The agents seemed to him to have no idea what they were talking about. Yes, he acknowledged, he had traded Albertsons shares, but the company had been a rumored takeover target forever, and he traded in and out of it for six months. He had a whole binder of financial analysis he’d done before SAC made the investment, concluding that the company’s real estate holdings were worth more than the price where the stock was trading. This was an area he knew intimately. After earning his MBA from Stanford in 2003, he had worked with his dad finding “triple net lease” opportunities in Maryland. They would buy the real estate under a chain restaurant or store, like an Outback Steakhouse or a Walgreens, and then lease the property back to the chain. In exchange for taking on the burden of taxes and property costs, the tenant paid rents that were generally lower than the norm but still left a nice margin for a landlord with access to cheap financing. The strategy worked best when the investor understood the neighborhood and the market extremely well.

  This experience was why SAC hired him, Hollander tried to explain. They wanted his expertise in real estate financing. The Albertsons trades were a textbook case of him applying it. There was nothing illegal about it.

  The agents appeared unconvinced. Makol mentioned
more names of Hollander’s friends at different firms who were supposedly going to end up in jail. Then he pulled a piece of paper out of his pocket and unfolded it dramatically. It was a face chart, the sort of thing Hollander had seen in cop movies, usually tacked on walls with yarns of various colors pinned all over it: the map of a criminal conspiracy. Raj Rajaratnam, the Galleon co-founder, was on it, along with at least twenty other portfolio managers and traders, some of whom Hollander had worked with, some not.

  At the center was a face he recognized. It was Steve Cohen.

  “There’s a lot you don’t know about Steve,” Makol said, pointing at Cohen’s face. He was involved in all sorts of shadowy things Hollander might not be aware of, boiler room sort of stuff. Makol talked about him as if he were a gangster. “You’ll need protection from him, but don’t worry, we’re here to take care of you.”

  Hollander had no idea if any of it was true, or how much they were exaggerating, but he felt anxious.

  “We already have three people inside SAC who are wired up, working for us,” Makol said. “You’re over here,” he went on, pointing to a far corner of the page, the face chart equivalent of Siberia. “You’re not even on here yet. We don’t want you to end up on here. But you’ve got to help us help you.” They wanted him to become an informant.

  Hollander said that he needed to think about it.

  The agents let him leave, and Hollander trudged home to his apartment, still in his ratty gym shorts and T-shirt. His roommate had just moved out, so he was alone. He pulled out all his Albertsons files and started leafing through them. There was a twenty-five-slide PowerPoint presentation he’d given to his colleagues at CR Intrinsic in 2005, a year before any of the stuff the FBI was talking about. The presentation included detailed financial analyses and a model showing how much the company could make selling off various assets. He had done a tremendous amount of work developing his Albertsons idea.

  He called a woman he’d gone out with a couple of times, who was an attorney at the law firm Schulte Roth & Zabel. Hollander asked her about finding a lawyer to help him.

  Within half an hour, around 10:30 P.M., his home phone rang. It was Peter Nussbaum, SAC’s legal counsel, on the line.

  “We hear you got picked up by the FBI,” Nussbaum said.

  Hollander was stunned. How did Nussbaum find out?

  “This happens all the time,” Nussbaum said. “We doubt you did anything wrong. Don’t worry. We’ll defend you, cover your attorney’s fees, anything you need. Everything’s going to be okay.”

  —

  Special Agent B. J. Kang strode across the concourse of a federal building on lower Broadway and turned left onto Duane Street, fighting his way through a wind tunnel as he headed toward Foley Square. It was a chilly March morning, and his suit jacket flapped open in the gusts—he liked his blazers on the boxy side, to conceal the pistol he always carried on his hip. Kang held a packet of compact discs in his hand as he hurried to meet with his colleagues at the U.S. Attorney’s Office.

  Kang had been consumed by the Raj Rajaratnam investigation for more than a year. It had expanded far beyond Raj to include dozens of other traders and hedge fund managers all over Wall Street. Over the preceding months, the investigation had fallen into a satisfying rhythm. The FBI would flip a cooperator, use him to gather new evidence against another trader, and then apply for a wiretap on the new trader. With each new wiretap, the FBI amassed more recordings that Kang and other agents could then use to flip more witnesses. The list of names kept getting longer, and Kang had thought of little else for as long as he could remember, moving the puzzle pieces around in his mind, trying to plan out his next move.

  It was clear to the FBI investigators and the prosecutors working on the case by this time that Rajaratnam was going to be convicted. The question was, how many others could they take down with him? The wiretaps had been up for over a year, and they were going to have to make some decisions about how to move forward. They had a tremendous amount of evidence implicating Rajaratnam and his friends, perhaps more than they needed. But every day, new recordings filled with new names were piling up, other traders at other funds who were engaged in insider trading, spawning new investigations of their own. Each one took up precious resources and time. How long should they let it go on before deciding that they had enough fish and should pull the net up into the boat? By waiting to arrest people, they ran the risk that Raj or others would find out that they were about to be caught and destroy evidence or even leave the country. The FBI, the prosecutors at the Manhattan U.S. Attorney’s Office, and their counterparts at the SEC debated the arguments for letting the investigation continue without making any arrests, to see how many more traders could be drawn in. They understood that as soon as Raj was arrested, all of Wall Street would be alerted to the fact that the FBI was listening to their phone calls.

  More important, the government knew that arresting Raj would give its ultimate target, Steven Cohen, and his hundreds of traders and portfolio managers a warning that they might be next.

  Their biggest challenge was that, at that moment, the two lead FBI agents on the case, Kang and Dave Makol, were locked in a bitter turf war. Like Kang, Makol was an excellent, motivated agent. Each time a promising new lead surfaced on the wire or through a cooperator, they both raced to see who could investigate it first. Because the insider trading rings they were pursuing were so complex, affecting dozens of interconnected hedge funds, law firms, and corporate executives, they often intersected with one another, with a witness that one agent was pursuing suddenly turning up in the middle of another agent’s case. Makol would spend weeks working sixteen-hour days gathering evidence—only to find that Kang was already working on it.

  Though they were competitive with one another, both agents were very good at what they did. Prosecutors who worked with them in the U.S. Attorney’s Office in Manhattan joked that if they could only fuse them together, they’d have an unstoppable superagent and securities crime would be eradicated from the earth.

  Kang tried to put the rivalry out of his mind as he arrived at 1 St. Andrew’s Plaza and rode the elevator up to meet the head of the securities unit. Kang was there to brainstorm and talk about how they should move forward with the investigation, with Makol and two of the prosecutors working on the case, Andrew Michaelson and Reed Brodsky. In spite of their differences, the two FBI agents were in agreement on one thing: that there was enough evidence developing to go beyond Rajaratnam and his immediate circle and mount a much broader attack on the hedge fund industry. They were eager to go forward. Michaelson and Brodsky looked at each other. It was an intriguing idea. The arguments in favor were obvious: an end to corruption across a powerful industry that had been operating largely in the dark; a thrilling series of prosecutions that would generate headlines; a rebuke to the critics who insisted that law enforcement shied away from Wall Street cases. Ray Lohier, their boss, asked what the risks were to moving ahead aggressively.

  Well, the FBI agents said, the more people they pursued and the more witnesses they flipped, the greater the possibility that someone would start to talk. The whole investigation was secret right now; only a handful of people, mainly the agents and prosecutors in the room, knew about it. They needed more cooperators if they wanted to go after the biggest targets, which would naturally increase the risk of a leak. Lohier and the prosecutors agreed that, as a first step, the FBI should take some of the new wiretap evidence they’d gathered and use it to approach a few new traders—Ali Far, a hedge fund manager in California who once worked for Rajaratnam, and his partner, C. B. Lee, who had previously worked at SAC; Karl Motey, who ran his own investment research firm and was also in California; and a fund manager in Boston named Steve Fortuna—and try to flip them and see where it led. All were in agreement that it was a risky step. The whole investigation could come apart if a potential witness told them to go to hell and then warned his friends that the FBI was tapping their phones.

  The
two FBI squads chose April 1 as the day. Kang would approach Far first, and Makol would talk to Motey. Another agent would try to flip Fortuna. There were contingency plans in place in case things didn’t go as they hoped. They hoped to have their new cooperators ready and new wires running in time for the second-quarter earnings season, when insider trading was sure to spike. Kang immediately started planning out his trip, booking airline flights and a hotel room.

  There had been moments like this in the investigation before, when it seemed as if some new event might alter the course of what followed, but this one seemed more significant somehow. As April 1 arrived, Brodsky, Michaelson, and others at the U.S. Attorney’s Office waited anxiously to hear how the approaches had gone. Would a year of intense, back-breaking work blow up in a single day? They were about to find out how strong their case really was.

  —

  Two weeks later, on April 16, 2009, B. J. Kang’s new cooperating witnesses arrived at the U.S. Attorney’s Office in downtown Manhattan. Although Ali Far and C. B. Lee were best friends and had been running a hedge fund together, neither knew that the other was in the building. Kang had approached them both separately in California, and they had independently agreed, at least in theory, to flip. As far as the FBI knew, they hadn’t talked to each other since Kang had first spoken to them at their front doors.

  An agent met Ali Far in the lobby and escorted him to a conference room on the sixth floor; after making sure the elevator was clear, Andrew Michaelson met Far’s partner, C. B. Lee, and brought him to the fifth floor. Michaelson and another prosecutor, Josh Klein, raced back and forth between the two rooms, trying to act as if nothing unusual was going on. The goal was to play them off against one another and try to pressure them to cooperate fully, all without alienating them. It was a delicate situation.