Black Edge

by Sheelah Kolhatkar

  Longueuil glared at his bedroom table, where he kept his USB flash drive. He and Freeman had nicknamed it “the log.” It contained his notes from his sources. It almost seemed to be mocking him, saying: “You’re toast.”

  Longueuil grabbed the USB drive and the two other external hard drives he used to store notes from his information exchanges with Freeman and Barai. All along he’d been exceedingly careful, never saving any of the illegal information on his SAC computer, and never writing anything incriminating in his work email. All of his questionable dealings had been conducted via one of his numbered Gmail accounts on his laptop, with all his notes saved on the external drives. He tried to do most of his instant-message chats through Skype, which he was sure couldn’t be wiretapped.

  He tore around his apartment looking for a pair of pliers, which he used to rip the USB and hard drives apart, stripping them into little bits. Then he divided the pieces into four ziplock bags. He stuffed the bags into the pockets of his North Face jacket and turned to his fiancée.

  “We’re going for a walk,” he said.

  At 1:52 A.M., in the early hours of the morning of Saturday, November 20, video surveillance captured them hurrying through the lobby of their condominium building, past the doorman and down an elegant slate walkway lined with bamboo plants. They turned past the Chinese restaurant next door and took a tour through the neighborhood. Longueuil looked for garbage trucks making the rounds. When he spotted one he ran it down and tossed one of the bags of hard-drive parts into the back. Over the next thirty minutes he dispersed the bags into four different trucks. As he threw each one, he wondered what would happen if the Feds found them. Maybe it would have made more sense to dump them in the East River? He was pretty sure they were so damaged it would be impossible to read any of the data, even if by some miracle the FBI got its hands on them.*

  They didn’t get home until 2:30 A.M. Everything was gone. He felt much better.

  —

  That same night, Samir Barai, Longueuil’s friend and the founder of Barai Capital, had read the same Wall Street Journal article and had a similar panic attack. At thirty-nine, Barai had succeeded on Wall Street through sheer exertion. He had a severe hearing impediment, and when he was young, nobody thought he would ever amount to much. He got through NYU and then Harvard Business School by sitting in the front row and reading his professors’ lips.

  He had been trading extensively on inside information at his small hedge fund, something that anyone who worked for him quickly discovered as he demanded that they get inside information, too. Barai and Longueuil had developed a close, if nasty, friendship, making wisecracks about Freeman behind his back, laughing at the thought of him having sex with their various sources, even jokingly referring to him as “the Jew.” (Barai’s nickname, meanwhile, was “the Hindu,” while Longueuil was “the Catholic.”)

  The news of the government investigation of PGR couldn’t have come at a worse time. Barai was already distracted by his ongoing, increasingly ugly divorce, and he was a heavy PGR user as well as a close friend of the company’s chief financial officer. Barai pulled information from a wide range of strange characters. One, a consultant named Doug Munro—nickname “10k”—ran a company called World Wide Market Research. Munro maintained an email account under the name JUICYLUCY_XXX@yahoo.com; in it, Munro would compose emails containing inside information about Cisco and other companies but leave them in the “drafts” folder, where they supposedly would not create an email trail. Barai paid him around $8,000 a month, and Freeman paid him, too; in return, both had the password to the email account. Whenever there was something new, Munro sent Barai an email: “Lucy is wet.” Then the men would log in and read whatever was there.

  Barai, Freeman, and Longueuil had pet names for most of their sources. “Cha-Ching” was their guy at Intel; “Saigon” was their consultant who gave them information about National Semiconductor. Their best source was Winifred Jiau. Her nicknames were “Winnie the Pooh” and “the Poohster,” and she was a little nutty. She had a statistics degree from Stanford, had worked at Taiwan Semiconductor, and had friends all over Silicon Valley, although “friends” in her case had a loose definition. The Poohster was available by special arrangement through the expert network PGR, which paid her a $10,000-a-month retainer to speak with a select group of its clients through its private network. Jiau badgered PGR constantly about money, acting desperate and paranoid, as if she would never see another paycheck. She referred to her tippers inside companies as “cooks” and often threatened Barai and Freeman that they’d go on strike. “Cooks don’t talk to me without sugar!” she screamed. After one particularly useful session, she requested a $500 gift certificate to the Cheesecake Factory in addition to the cash Barai and Freeman sent her each month. Another time, Freeman, acting on Jiau’s request, asked his secretary to have twelve live lobsters delivered to the capricious source. The lobsters ended up dying at the FedEx office near Jiau’s residence in California because she couldn’t be bothered to go pick them up.

  The reason Jiau was able to get away with this was that she was good. Her information was by far the most valuable they got from anyone. She had numbers for revenue, gross margin, and earnings for Marvell and Nvidia, two volatile semiconductor companies Barai, Freeman, and Longueuil loved to trade, that were accurate down to the decimal point. The Poohster offered them something they couldn’t live without.

  Because of Barai’s hearing problems, he made his research analyst, a thirty-eight-year-old named Jason Pflaum, secretly listen in and record almost all of his calls. Pflaum had only a minimal understanding of who Jiau was, but he would eavesdrop and send instant messages to his boss explaining what she was saying so that Barai could keep up with his end of the conversation. Pflaum also took extensive notes so Barai could go back and review the information later, since he usually missed many of the details the first time.

  “Who are your sources?” Barai had asked Jiau at one point, incredulous.

  “You should not ask who my sources are,” Jiau replied.

  —

  Reading the Wall Street Journal article, Barai’s mind filled with what-if scenarios and questions about just how he was going to get himself out of legal jeopardy. He sent an instant message to Pflaum. “Did you see the PGR article?” wrote Barai, quoting the story. “Key parts of the probes are at a late stage….Federal grand jury has heard evidence.” He had read the article ten times, he said.

  “So another reuters article,” he wrote a few minutes later after a follow-up news story was posted. “This scope is said to focus on the use of so-called expert network firms….concern for years that some experts may be passing on confi info about public cos to traders….PGR was only one named!!!!”

  Then, a minute later: “Fuuuuuck.”

  His next act was to order Pflaum to delete all of their BlackBerry messages.

  The following morning, Pflaum sent Barai a message. “Yo. Deleted them. Didn’t sleep so well last night. What else do you think we need to do?”

  “I dunno,” Barai wrote. “I think we ok tho. I think u just go into office, shred as much as you can. Put all ur data files onto an encrypted drive.” He told Pflaum to erase all of his emails with PGR executives. Rather than waiting for Pflaum to go in and destroy all the evidence, Barai rushed to their office on Third Avenue and Forty-sixth Street and started shredding everything he could get his hands on. Then he went back home.

  As he raced around in a panic, Barai started to see a way through the disaster. Maybe they wouldn’t be able to nail him with anything. He had talked to people, sure, but that wasn’t illegal. He would hire a lawyer, the best money could buy, and he would fight. They had to prove that he had acted on the information, and that was sure to be difficult. He told himself that he’d invested using the “mosaic theory”—an approach to analyzing stocks that involved collecting disparate bits of public information about a company’s operations and putting them all together to create a “mosaic”
about the business. It was a long-standing defense argument traders used to explain what prosecutors often thought of as insider trading. Everyone did it, Barai told himself. There was nothing wrong with it.

  Just to be safe, he instructed Pflaum to leave his laptop with his doorman on Sunday night so that Barai could pick it up and do a “Department of Defense delete,” an erase of the hard drive that couldn’t be undone. Barai collected the computer and brought it to his fiancée’s apartment, where he copied all the notes onto a thumb drive he had just bought and then tried to wipe the laptop clean. He spent all night downloading software from the Internet that promised to help him erase everything permanently, but he was never able to get it to work.

  On Saturday morning, just as the print version of the newspaper was being picked up from the doormats of buildings across the Upper East Side, Pflaum met with B. J. Kang on the street near his apartment. Pflaum had been cooperating with the FBI for a month. He showed Kang his BlackBerry messages with Barai from the night before. Kang took pictures of the entire exchange, including the orders to shred his documents and delete his email.

  As Kang read one of Barai’s messages—“Fuuuuuck”—from the night before, he had the same exact feeling. Guys all over Wall Street were probably destroying their hard drives. The FBI had to do something.

  * * *

  * Longueuil’s fiancée was never charged with any wrongdoing.

  CHAPTER 10

  OCCAM’S RAZOR

  Early Monday morning, November 22, 2010, two days after The Wall Street Journal set off a weekend of frantic evidence destruction, a fleet of unmarked cars pulled up outside 1 Landmark Square, an office tower in the center of Stamford, Connecticut. A dozen federal agents were inside the vehicles.

  Special Agent Dave Makol was a block away. He pulled out his cellphone and dialed a number.

  Inside the office tower, a phone rang.

  “Hello?” a man answered.

  Makol identified himself as an FBI agent. “We know you’ve been involved in insider trading,” he said. “There’s going to be a lot of stuff going down later, and it’s going to affect you and your family. Your life is never going to be the same.”

  Their investigation was focused on expert networks, Makol continued, and they wanted the man to cooperate. When the man asked for more information, Makol said he couldn’t be more specific. “We’re at the McDonald’s next door,” he said. “If you want to come down and talk to us, that’d be great.”

  The man wasn’t sure what to do. He was scared to say anything. He told Makol that he needed to think about it.

  Makol said they didn’t have much time to wait.

  The man was Todd Newman, a forty-five-year-old portfolio manager at a hedge fund called Diamondback Capital. He hung up the phone and ran one floor down to the Diamondback general counsel’s office. He relayed the whole exchange to the company’s legal counsel and its COO, John Hagarty.

  “Is there something you did?” Hagarty asked, staring into Newman’s eyes. Hagarty had only been on the job for three months. For a moment, he wondered whether Newman was wearing a wire or something, the situation was so bizarre. The look on Newman’s face was one of terror.

  No, Newman said, he hadn’t done anything. “I’ll just go over there and talk to them. I don’t have anything to hide.”

  “I don’t know if you want to do that,” Hagarty said.

  “I think I need a lawyer,” Newman said.

  The legal counsel threw out a few names of lawyers he knew, and Newman decided to walk over to the office of one of them, just up the street. Incredibly, even though the block was crawling with FBI agents, he walked unnoticed out the front door of the building.

  As Newman made his way down the street, the elevators opened on the fourteenth floor, just outside Diamondback’s reception area, and a team of FBI agents fanned out wearing bulletproof vests. This was the moment when it seemed as if a man with a bullhorn might jump out and yell “Cut!” and things would go back to normal. The agents looked like they were ready to charge into a terrorist safe house rather than an office filled with Wharton graduates tapping away on keyboards.

  “FBI!” they shouted, flashing their badges.

  Startled receptionists and traders sat up in their chairs, unsure what to do. Agents filed between the rows of desks, commanding people to back away from their computers. Hagarty watched in shock as the agents carted out files and hard drives. His father had been a New York City police officer for twenty-seven years, and his brother was an FBI agent who had helped bring down John Gotti. He had worked in finance for more than fifteen years; he had never imagined that he would be employed by a company that was the target of a federal raid. He asked the agents for a copy of the search warrant.

  Rumors had been making their way through the hedge fund industry that the government was going after SAC Capital, Hagarty knew, and Diamondback and SAC were closely connected. Diamondback’s founders, Larry Sapanski and Richard Schimel, had been two of Steve Cohen’s most successful traders before they went out on their own in 2005. When they told Cohen they were leaving SAC to start their own fund, Cohen threatened to destroy them. As far as Cohen was concerned, they had been nothing when they came to work for him; how dare they go into business against him? To make matters worse, Schimel had married Cohen’s sister Wendy—which made bar mitzvahs and weddings pretty awkward. Several of Diamondback’s other key employees had come from SAC as well. If you wanted a proxy for Cohen’s firm, Diamondback was about as close as you could get.

  Storming into a hedge fund wasn’t how the FBI had intended for this part of the investigation to play out. These were drastic measures, but Makol didn’t see any other choice.

  —

  While Diamondback’s hard drives were being carried out the door, David Ganek was driving into the offices of Level Global, the hedge fund he founded after leaving SAC, across the street from Carnegie Hall. When he got there, he found five of his employees milling around on the street. Not just the smokers but nonsmokers as well. They looked stressed.

  “What’s going on?” Ganek asked.

  “We’ve been raided,” one said. “The FBI is upstairs.”

  “What?” Ganek said. His mind flashed briefly to a film he’d seen recently, about the siege of the U.S. embassy in Tehran, where embassy workers furiously shredded documents as a mob of Iranians battered the door down. When he thought of the word raid, that was the sort of thing that came to mind.

  He called his general counsel, who advised him not to go inside. The office was swarming with federal agents, the counsel said, and they had a search warrant signed by a judge over the weekend.

  Ganek had read the Wall Street Journal article over the weekend. He was a regular presence on the Manhattan social scene, a trustee of the Guggenheim Museum who lived in a $19 million penthouse on Park Avenue. That Saturday night he had gone to the bar mitzvah of the child of a prominent Wall Street figure, and the investigation had been all that anyone there could talk about. Thirty-six hours later, a dozen agents were inside his office, collecting cellphones, laptops, and notepads and making images of the firm’s servers to be analyzed later.

  It was like a nightmare. Just a few months earlier, at the end of March, he had worked out a deal to sell a 15 percent stake in his $4 billion fund to Goldman Sachs. Level Global was his life’s work.

  Watching his employees waiting on the sidewalk, Ganek exhaled deeply. Then he turned around and left.

  —

  In early December, a couple of weeks after the raids on Diamondback and Level Global, Donald Longueuil was still feeling insecure. After smashing his hard drives he was hopeful that he had destroyed any evidence that would implicate him in any illegal trading. Still, he told his friend Noah Freeman, they should communicate from now on only by Skype.

  Freeman, since his firing from SAC the previous January, had attempted to turn his life around. He had a wife and a baby daughter and was trying to be a hands-on father, a pre
sent father. He had started teaching economics at the Winsor School in Boston, a private all-girls academy. He missed the money from his old life, but he felt better about himself.

  One afternoon, as he was crossing the school’s leafy campus, Freeman noticed a man waiting for him by his car. “I’d like to talk to you,” B. J. Kang said.

  Kang invited Freeman into his car so they could speak privately. Freeman climbed in. Then Kang prepared to release his grenade. As Freeman sat there awkwardly, his spine as stiff as a board, Kang played a snippet of a recording of a phone call. It sounded like Freeman talking to his expert network consultant Wini Jiau on the phone. Kang let the recording do his work for him. Then he suggested that Freeman should help himself by working with the FBI. Freeman had been a copious user of PGR experts when he managed $300 million for SAC. He knew he was in trouble.

  “It’s better to be the first one to cooperate,” Kang told him.

  A few days later, on December 16, Freeman arrived at 1 St. Andrew’s Plaza with two attorneys. They sat down with Kang and a pair of prosecutors, Avi Weitzman and David Leibowitz. Freeman had agreed to talk to them, but the prosecutors weren’t sure what to expect. Kang first asked about Freeman’s background, writing down the name of Freeman’s wife and the various analysts he’d worked with at his different jobs. Then Freeman started describing his sources, at companies like Cisco Systems, Fairchild Semiconductor, and Broadcom, and the information he got from each and how he took pains to store it safely. He had barely hesitated before implicating Longueuil, his best friend, in all of it.

  Freeman recounted how he and Longueuil, whom Freeman had nicknamed “Long Dong,” collaborated to get nonpublic information and shared it with each other when they were at SAC. Longueuil had been trading on inside information in his personal account as well as at work, Freeman said. His cooperation agreement with the FBI required that he report information he had about any crimes that had been committed by himself or anyone else, even if they had nothing to do with securities fraud. Freeman told Kang that he had occasionally smoked marijuana and gave the name of the person he had bought it from. Freeman also told them he had cheated in his triathlons by blood doping with EPO.