Black Edge

by Sheelah Kolhatkar

  For decades after its founding in 1934, the SEC was a feared and respected force on Wall Street, its lawyers priding themselves on their discretion and political independence. Over the previous few years, however, the culture at the SEC had changed; incompetence had become ingrained. The SEC enforcement staff was openly discouraged from pursuing ambitious cases, and getting permission to send out subpoenas required four levels of managerial approval, often taking weeks. This was partly a reflection of the SEC’s chairman, Christopher Cox, a Republican congressman from California who had been appointed by George W. Bush in 2005. Cox was a reluctant regulator who made no secret of his staunchly free market, pro-business views. He felt that regulatory agencies had no business trying to tell big banks and major investors on Wall Street what to do and that the financial industry could monitor itself for bad behavior.

  Wadhwa was frustrated by the atmosphere at the SEC but was in no way defeated. Despite everything, he loved his job. He had spent the previous two years quietly helping to build the Rajaratnam case, by far the biggest breakthrough of his career. The case had started as a routine regulatory complaint at the SEC in 2006 and had grown into one of the most significant projects the agency had ever taken on. Investigating it had been one of the most exhilarating experiences of his life.

  Born in India, Wadhwa had moved to the United States at age nineteen, but he was still deeply influenced by his native country’s left-leaning politics. His father had been a high-level executive at a company in Calcutta that produced paper packaging for British consumer products conglomerates, and his mother a schoolteacher, and they were relatively well-off in a country besieged by wrenching poverty. Wadhwa’s parents decided to move with their three children to Florida in the 1980s to escape the atmosphere of declining political and economic opportunity in India. Because of the country’s restrictions on expatriation of personal assets, the family lost everything when they moved. Wadhwa’s father had to take a job at a Rite Aid, and Wadhwa joined him there to help sustain the family. After graduating from a Texas law school that most people had never heard of and getting a master’s degree from NYU, he passed a few unhappy years as an associate at Skadden, Arps, Slate, Meagher & Flom, a powerhouse law firm closely allied with Wall Street. In 2003 Wadhwa applied for a job at the SEC. As soon as he joined, he started focusing on insider trading cases.

  He had spent the summer of 2009 working closely with the FBI on the Rajaratnam investigation and the other hedge fund cases that grew out of it; he and the FBI agents involved in the insider trading cases sometimes spoke multiple times a day.

  The number on Wadhwa’s caller ID screen was blocked, which meant one thing. Wadhwa grabbed for the phone.

  It was Kang on the line. “Look, I can’t get into details right now,” he said, “but I have reason to believe something big happened at SAC last summer. A huge trade, huge profits. It generated a lot of talk at the firm.”

  Wadhwa had heard of SAC, of course, as well as its secretive founder. Cohen’s name had come up multiple times in the Raj case. He knew that SAC held a powerful allure on Wall Street. Cohen had built a massive personal fortune in a way that was not supposed to be sustainable, by placing high-volume bets on upticks and downticks in the market. He was not the sort of investor who took large stakes in companies and held them for years, who immersed himself in how businesses worked and understood the levers of the economy. Cohen was the anti–Warren Buffett.

  On the phone with Wadhwa, Kang didn’t elaborate on what the “something big” was. Even though they had been working together for months, Kang had access to information that could not be shared, by law, with those involved in civil enforcement, including anyone at the SEC. Specifically, anything to do with wiretaps.

  “Do you know what sector?” Wadhwa asked.

  “Pharmaceuticals.”

  —

  Paper had overtaken Wadhwa’s office. There were bankers boxes of files, stacks of complaints, deposition testimony, and subpoena applications, some creeping like a stain across the lumpy couch, where he theoretically could take naps but never did. Copies of The Wall Street Journal yellowed on the windowsill. It wasn’t the most cluttered office in the SEC, but it stood in contrast to Wadhwa himself, who was fastidiously clean-shaven and always wore a suit and tie.

  The mechanism for reporting and tracking suspicious activity in the stock market was tragically antiquated. Financial regulators were like sad, old librarians overseeing a paper card catalog long after the rest of the world had gone digital. Except that these librarians happened to be responsible for ensuring the stability of a market in which trillions of dollars change hands each day. When strange activity was detected—a sudden increase in trading in options of a company the day before a takeover was announced, for example—by a bank employee or an investor, that person was encouraged to report it to the Financial Industry Regulatory Authority. FINRA would then spit out a referral—essentially a letter pointing out that a suspicious trade had occurred, without providing much in the way of details or context. These referrals were then passed along to the SEC, which was supposed to investigate them.

  The problem was, minimal effort was made to put all the pieces of evidence together. FINRA’s referrals, which were the vital seeds of securities fraud cases, were forwarded to the SEC’s office in Washington, D.C., where they were entered into a self-contained database. And there they would sit.

  After the call from Kang, Wadhwa called the chief of the Office of Market Surveillance.

  “Did we receive a referral from FINRA last summer concerning a really big trade done by a fund called SAC Capital?” Wadhwa said. “It would have been around some sort of events announcement.” He knew that most trades that yielded huge profits occurred before news that drove a stock dramatically up or down.

  “It’s funny you should mention that,” the unit chief said, chuckling. “Yeah, I have a referral sitting here….I was leafing through it the other day because it got bounced back.” He meant that it had been returned to him without any SEC lawyer agreeing to investigate it.

  “Really?” Wadhwa asked. “What is it?”

  “Oh, you know, it’s a referral,” the unit chief said, without going into detail. “The total amount is massive.”

  Wadhwa asked how long it had been sitting there.

  “Almost a year,” he said.

  The answer made Wadhwa cringe. The chief explained that he’d been “shopping it around” the enforcement division, trying to find someone to look into it. He had presented it to various associate directors in the D.C. office, but nobody had expressed interest in it.

  To make an insider trading case, the SEC would have to prove that there had been an illegal tip and that the trader in question had been in communication with someone who had access to information from inside a company. Before even getting to the point where he or she could subpoena mind-numbing reams of data, however, the staff attorney would have to go before the full commission to ask for formal permission to send subpoenas and solicit documents. The Republican commissioners, at a minimum, could be counted on to ask a lot of questions.

  From the sound of it, the referral didn’t have the makings of a quick “stats point” case of the sort that was institutionally encouraged.

  “Why don’t you send it to me?” Wadhwa said.

  The next day Wadhwa received an email from the Office of Market Surveillance with the referral attached. “Oh my god,” he thought as he looked it over. “This must have been what B.J. was talking about.”

  “On July 29 2008 at 5 pm, scientists from Elan and Wyeth gave a presentation at the International Conference on Alzheimer’s Disease in Chicago on Phase 2 trial data on their Alzheimer drug that is under development,” read the letter, dated September 5, 2008. “This event was widely attended by the media, research analysts and institutional investors.” The letter went on to observe that the hedge fund SAC Capital had made notable advantageous trades across fifteen accounts in the two days prior to the ne
ws. It estimated the firm’s profits and avoided losses at $182 million. “The extraordinary size and net potential benefit of these timely trades,” the letter read, “required that this Referral be made.” Apparently a trader at a brokerage firm called RBC Capital Markets had noticed the trades and made the complaint.

  Seeing that, Wadhwa couldn’t help but wonder what else was going on at SAC. He tried to think about who was available to take on a new case like this—one that had the potential, he thought, to be even bigger than Raj.

  There was a new branch chief in the New York office, Amelia Cottrell, and she had a new attorney named Charles Riely in her group who didn’t yet have a full load of cases.

  Wadhwa typed up an email to Riely. “Hi Charles, can you come by for a second?”

  Riely had just returned from his summer vacation when he got Wadhwa’s message. Young, eager, and almost impossibly straightlaced, Riely was a year into his time at the SEC and had yet to file his first case. He was frustrated.

  He scurried across the hallway that separated his office from Wadhwa’s and joined him at the conference table, next to Cottrell. “I want to show you guys something,” Wadhwa said. He laid the Elan referral on the table in front of them. They all stared at it.

  In the context of what the SEC had been looking at recently, the amount of money involved was breathtaking. In the Rajaratnam case, which had consumed Wadhwa’s every waking minute for almost three years, they had only found $55 million in alleged illegal profits in eleven different trades that they felt they could prove, which in itself was one of the largest insider trading cases ever. SAC’s “lucky” drug stock trades blew that out of the water. The chances of an experienced fund manager making such a large bet on anything less than a sure thing were slim.

  The name SAC Capital has come up before, Wadhwa said. The first question the SEC attorneys had was whether the information in the referral could possibly be correct. It was rare, in their experience, for a fund to make such a large bet on one or two stocks. Managing risk was an important element of success for traders. You simply didn’t last long in the business engaging in investments that could blow up the whole company if they didn’t work out. Perhaps there was some error, or maybe the trade had involved several people.

  The SEC didn’t have much to go on, but the referral had the potential to finally bring the SEC inside SAC, an organization that had one of the worst reputations on Wall Street. Riely felt himself growing excited. Maybe this case was the break he was waiting for.

  —

  All through the summer and fall of 2009, as he was piecing together bits about SAC and Cohen, B. J. Kang was monitoring Raj Rajaratnam’s telephone calls with a special electronic recorder called a pen register, on guard for any signs that he might be planning to leave the country. Each time Raj dialed out or a call came in, Kang checked the phone number. He had a fairly good understanding of Raj’s communication patterns and which people he was likely to be speaking to.

  Early in the morning on October 15, Kang was jolted awake by the sound of a text message on his smartphone. There was activity on Rajaratnam’s line. At first, he wasn’t going to bother checking it, because it was the middle of the night, but then he decided to look into it anyway. Kang could see that Raj was calling his daughter. It was 3 A.M., a weird time to be calling anyone. Almost unconsciously, Kang started getting dressed; he was certain that his day was about to take a dramatic turn. He contacted the Office of Customs and Border Protection, which monitored border traffic, and was told that Raj had just purchased a plane ticket to go to London the following day, October 16. That set off a five-alarm response. Kang called his supervisor to let him know that it was an emergency, and together they tried to wake up the rest of the FBI’s New York office.

  Kang rushed out of his house and hopped into his agency-issued Crown Victoria and practically lifted off of the New Jersey Turnpike as he sped into the office. His colleagues agreed that they could not let Rajaratnam get on the plane to London. The FBI decided to arrest him and a handful of his associates right away rather than risk letting them leave the country, which would mean they would have to go through a time-consuming extradition process that might last years. The FBI rushed to assemble teams to carry out the arrests.

  At 6 A.M. the following morning, the FBI cordoned off a portion of East Fifty-third Street, and a team of agents descended on Rajaratnam’s Sutton Place duplex. A few minutes later, Kang came out with Rajaratnam in handcuffs.

  CHAPTER 9

  THE DEATH OF KINGS

  A thick, concrete low-rise, 1 St. Andrew’s Plaza sits behind the federal courthouses in lower Manhattan out of view of the street—which is, perhaps, for the best. Inside, the security guards look indifferent, the carpet is so thin that it’s almost translucent, and it’s advisable not to look too closely at the bathroom floor. But that the office’s physical surroundings exist in apparent opposition to the power wielded by those who work there is partly the point. The prosecutors in the Southern District are too important, and likely too arrogant, to care. They are doing exalted work for a fraction of the salary they could be making in private practice. The scruffy offices are a source of pride.

  On this particular afternoon, Preet Bharara was sitting at his desk, looking out at the East River. Raj Rajaratnam had just been arrested, only eight weeks after Bharara’s August swearing-in ceremony. As the new U.S. Attorney for the Southern District, Bharara finally had the position he had dreamed about since he was a child. The Southern District is arguably the most prestigious and influential branch of the Justice Department, responsible for prosecuting federal cases in Manhattan, the Bronx, and other parts of New York State, including Westchester County. Because of its location, it brings most of the biggest cases in the country dealing with terrorism, narcotics, organized crime, and the most significant financial crimes cases. Bharara was still trying to familiarize himself with the dozens of cases being prosecuted by the office’s two hundred assistant U.S. attorneys when he was thrust into a whirlwind of attention. There was the prosecution of a Somali pirate accused of hijacking an American cargo ship, and the case of a former detainee from Guantánamo Bay prison. But financial cases were what the public seemed to care the most about at that moment. The Raj case had become a media sensation.

  People across the country were struggling to deal with the fallout from the financial crisis, and public sentiment had turned strongly against Wall Street. Families were being evicted from their homes while traders at AIG and other companies that had been bailed out by the government were once again pocketing eight-figure bonuses. Although they weren’t directly connected to the financial crisis, the insider trading cases were at the top of Bharara’s list of priorities. Up until the moment of Rajaratnam’s arrest, the insider trading investigation had been moving quietly forward, driven by a handful of government employees whose names were unknown. With Bharara’s appointment, the investigation finally had a public face, a mediagenic front man with political ambition who wanted to make Wall Street crime the centerpiece of his career. And he had the resources to make it happen. Rudy Giuliani, a previous Manhattan U.S. Attorney to whom Bharara was sometimes compared, had earned a national reputation with his pursuit of Michael Milken and Ivan Boesky in the late 1980s. This historical precedent was not lost on the new U.S. Attorney.

  Preetinder Bharara was a toddler when his parents brought him to the United States from India and settled in Monmouth County, New Jersey. Like so many other immigrants before them—and like Wadhwa at the SEC—his parents were trying to escape poverty and political uncertainty at home. Bharara watched as his father worked to become licensed to practice medicine in the United States and opened a pediatric clinic in Asbury Park. His parents put all their resources into their children’s future. Bharara and his brother, Vinit, were enrolled in an elite prep school and Bharara’s parents expected them to be exemplary students from an early age. “If you got a 98,” Bharara said of his father, “he wanted to know why you didn
’t get a 100.” The plan was for both brothers to become doctors. Vinit described their father as a stern disciplinarian. “School, studying, grades,” he said. “It was ultra-competitive.”

  Preet graduated as high school valedictorian and went to Harvard, class of 1986, where he majored in government and political theory. Some of his classmates were impressed by how well he did considering how little he seemed to study. He spent most weekends with his girlfriend, a student at Wellesley, and engaged in alcohol-fueled political debates with his friends. He went on to Columbia Law School, where he took a course in trial practice taught by Michael Mukasey, the district court judge who later became attorney general under President George W. Bush. The class inspired Bharara to become a prosecutor. He worked as an assistant U.S. attorney in the Southern District from 2000 until 2005, when he became chief legal counsel to Senator Charles Schumer. There he helped lead an inquiry into Bush’s firing of eight United States Attorneys around the country, a politically motivated purge that Bharara worked to expose—the scandal ultimately led to the resignation in 2007 of Bush’s attorney general, Alberto Gonzales. Bharara was working as Schumer’s chief counsel when President Barack Obama appointed him to lead the Southern District. The headline in The New York Times on the day Bharara was sworn in by the Senate read: “Schumer Aide Is Confirmed as United States Attorney.” He didn’t intend to be referred to as anybody’s “aide” for long.

  As soon as Bharara took over, lawyers inside and outside the U.S. Attorney’s Office noticed a change in atmosphere. He had an acidic sense of humor that often veered into sarcasm and generated constant press attention. Under Bharara’s most recent predecessors, the office’s outdated media operation did little to bring attention to what the office was doing—and for years, that was how the prosecutors in the office wanted it. The work they did and the cases they prosecuted were supposed to speak for themselves.