It wasn’t long before the Drimal circle figured out the identity of CS-1 since Slaine was the only member of the crew not to get busted. Slaine’s old friends on Wall Street have characterized his work in helping the government as a betrayal, against Drimal and others who did nothing more than what Slaine himself had done, that is break the law to make a quick buck.
Slaine, for his part, was said to be devastated the day the arrests came down, comforted only slightly by the words of his government handlers—that he had done his part in making Wall Street a better place. Taken together, the wiretap on Drimal’s telephone and Slaine’s cooperation built cases against such people as the infamous “Octopussy,” Zvi Goffer, who had finally fulfilled his wish to work at Galleon—thanks to Drimal, who had persuaded Rajaratnam to make the hire without Rosenbach’s knowledge. That is until one day when Rosenbach noticed Goffer in the back of the trading floor.
But it was a short-lived stay at the firm. Goffer’s arrest came nine months later just as Galleon was about to shut down. Authorities also rounded up Arthur Cutillo, the lawyer at Ropes & Gray who fed the cluster inside tips on mergers, and Michael Kimelman, the trader who was looking to set up a hedge fund with Slaine and pass around the same illegal information—along with ten others—were rounded up as well.
The Drimal case was fascinating for a number of reasons. His old friends at Galleon couldn’t believe how someone regarded as a mid-tier trader often in need of cash had managed to create such an intricate insider trading ring. “Ruby was always complaining that ‘things are tough,’ ” said one former Galleon trader. “He came across kind of pathetic, like he was looking for scraps from us, and then we saw this and we were blown away.”
For investigators it was fascinating because the case provided a link between two different circles of friends. In assessing the information, FBI agents now realized that the wiretap on Drimal’s telephone linked him to aspects of the Rajaratnam case. Before he went to work at Galleon, Zvi Goffer worked at a firm called Schottenfeld Group, where a trader named Gautham Shankar received tips from an analyst who regularly spoke with Roomy Khan.
Untangling the web of relationships was causing headaches for the government staff. The organizational charts began to look more like a Rorschach test than the neat, Mafia-like organization chart they had when they started. Relationships were overlapping, built on a mutual disdain for the law and love for making money.
Instead of two concurrent probes, the Jacobs-Kang and Chaves-Makol investigations were now being coordinated and combined. Stoking the investigators’ suspicions about Steve Cohen’s operation was the inordinate number of traders, money managers, and analysts who either worked for SAC or did business with the firm and could be found among the various clusters.
Another common element was the manner in which everyone seemed to operate: Their code of conduct was the good old-fashioned quid pro quo. They were essentially sharing information with people who would share back. Some of the information came through tips and some of it was paid for; the most disturbing part of what cooperator Richard Choo-Beng Lee told the government was that most experts never told their companies they were moonlighting as hedge fund employees. And why would they? The expert networks were really people who were busy stealing company secrets from the firms where they worked.
Through simple deduction, it was easy to see why the experts would stretch and provide not just advice but “color” that resulted in handing over secret, illegal data. Many hedge fund traders wouldn’t even speak to experts unless the information resulted in a quick moneymaking event. If they wanted to get (sometimes literally) envelopes full of cash, they would have to push the figurative envelope and steal confidential information from their own company.
Places like Primary Global simply acted as brokers for the selling of the stolen goods.
Oh crap!” was the way Mark Anthony “Tony” Longoria reacted to news of the Rajaratnam arrests and government officials’ boasting that more were on the way. Longoria was a midlevel supply chain manager at AMD. At least that’s what he did during the day; his side job was moonlighting as an “industry expert” working with major hedge funds through the outfit Primary Global.
What worried him wasn’t necessarily that he knew Rajaratnam or did business with Galleon—he didn’t. But one of the stocks Galleon had profited on through illegal trading on inside information was AMD.
Longoria didn’t know it at the time but this conversation and many others were being recorded by the feds as they extended their investigation into the seedy realm of the expert networks—the analysts, midlevel managers, and executives who were paid a fee by hedge fund traders for “actionable data” and advice about their companies. For the most part, the companies were kept in the dark about the practice, and even when they did disclose to their employers what they were doing, the experts described what they did in the most benign ways.
They were giving high-level advice, speaking in a general fashion about industry trends, providing context to help Wall Street better understand their business.
Lee’s cooperation on these expert networks led investigators to Longoria, who was paid through Primary Global a rate of $300 per telephone call to discuss company business with traders throughout the hedge fund industry. He made about two hundred of these calls a year and he was often passing on tips about key events inside AMD before they were made public. That’s why the Rajaratnam news was so jarring to him. His first call that day was to James Fleishman, his main contact at Primary Global. Fleishman conceded that he had seen the Rajaratnam news as well, though he seemed less nervous about its implications. “I saw that. . . . But I can tell you point-blank they are not a client.”
“I was just really freaking out when I read that,” Longoria shot back. “So there’s no way they can tie them back to me. Because, oh my God!”
Fleishman replied, “Hopefully this will just kind of. . .”
“Blow over,” Longoria muttered.
Longoria wasn’t convinced. “Okay, okay, so there’s no way they can tie them back to me?” he asked again, relaying a story from work that day. Someone in AMD’s finance department mentioned that as part of the charges against Rajaratnam there was trading in shares of AMD. This person said Rajaratnam must have had a source inside AMD because he had an early read on the firm’s revenues, which Longoria said “really freaked people out” inside the company.
Longoria was one of those people. As if he were looking to assure himself, Longoria stated he would “never speak in exact” ways that would cross over the line into giving specific company information. Or at least that’s what he told Fleishman, who simply muttered, “Okay, okay, yeah,” before hanging up.
Fleishman was right about one thing: Longoria’s problem wasn’t necessarily with Galleon. But that didn’t mean either man was clean. That’s because several months earlier Longoria had a conversation with Choo-Beng Lee, just after Lee shut down his hedge fund, in which Longoria provided detailed estimates about AMD revenues and financial numbers. That one piece of information opened up a new phase in the investigation of the expert networks, providing investigators with more than a few surprises over the course of the next year. They were finding a wide variety of people involved. Some were bookish technology nerds like Walter Shimoon, an executive at the technology company Flextronics, who sold inside tips through Primary Global. Others were more like John Kinnucan, a rogue of sorts, who, although he didn’t work for the technology outfit, had more than twenty years’ experience covering technology companies for Wall Street firms and so had plenty of contacts inside the Silicon Valley tech infrastructure. He also knew that hedge funds would gladly pay for his “expert advice.”
Kinnucan’s name came up in a number of places; several informants commented that he had one of the best rosters of hedge fund and mutual fund clients. He worked extensively with players such as SAC Capital, Citadel Investment Group, and even mutual funds like Janus and Friess Associates, the latter owned
by hedge fund pioneer Foster Friess (as of this writing, none of those funds or their executives has been charged).
Kinnucan came onto the FBI’s radar screen through a cooperating witness developed by Makol. With a little digging Makol was able to see how Kinnucan conducted business: He was plugged into the expert networks and had associates at hedge funds, often coming to New York “for a few beers,” as he would say, with people at SAC Capital and other players. He also knew people inside technology companies.
He conducted business from his home in Portland, Oregon, which he shared with his children and his wife, Catherine. She was listed in incorporation documents as a partner in his venture known as Broadband Research. In reality the business revolved around her husband’s contacts in the tech world. It was created in 2003 when regulators were clamping down on the Wall Street research business.
For Kinnucan, as regulators were closing that door, a bigger door was being opened: the sale of his “research” to hedge funds, which were growing in number seemingly by the day.
Makol received authorization to tap Kinnucan’s telephone, but not with the goal of snaring Kinnucan and ending it there. In the government’s eyes he was small fry. The bigger goal was to snare his client roster, which included the omnipresent SAC Capital.
Illegal insider trading is rampant and may even be on the rise,” U.S. Attorney Preetinder “Preet” Bharara of the Southern District of New York said in a speech to a group of lawyers in October 2010. It was nearly a year after the Rajaratnam arrests, and two years after the financial crisis.
“In some respects, inside information is a form of financial steroid. It is unfair; it is offensive; it is unlawful; and it puts a black mark on the entire enterprise,” he said during the speech to the New York City Bar Association.
“Some have asked why use court-authorized wiretaps in insider-trading cases?” he said, alluding to the debate around the expanded use of wiretaps to include not just drug cases but also those involving insider trading.
“The quick answer,” Bharara said, “is that every legitimate tool should be at our disposal especially where, as in the case of insider trading, an essential element of the crime is a communication.”
He even borrowed a page from the man who appointed him, President Barack Obama, and found a class-warfare argument to justify the wiretapping spree on hedge fund fat cats. “Disturbingly, many of the people who are going to such lengths to obtain inside information for a trading advantage are already among the most advantaged, privileged, and wealthy insiders in modern finance. But for them, material nonpublic information is akin to a performance-enhancing drug that provides the illegal ‘edge’ to outpace their rivals and make even more money.”
The speech immediately found its way into the press (in this case the New York Post). It was, after all, a warning to the perceived bad guys or the already arrested bad guys like Rajaratnam, whose attorneys were preparing their fight to save him from serious jail time: The government was going to pounce and pounce hard.
The financial crisis may have escaped serious prosecution, but insider trading wouldn’t. It was low-hanging fruit for federal prosecutors and SEC brass—much-needed proof to the public that the law enforcement community was serious about cracking down on financial crimes, even if this particular financial crime had very little to do with the root causes of the financial crisis and following Great Recession.
By October 2010, the Justice Department had concluded that the prosecution of financial-crisis-related crimes was never going to happen. Aside from some civil cases brought by the SEC, most notably one involving Goldman Sachs, which was fined a mere $550 million for unloading toxic securities to unsuspecting investors, the financial crisis was over from a law enforcement standpoint.
Just a few months later, Charles Ferguson, the director of Inside Job, a documentary about the financial crisis, accepted an Academy Award and echoed the sentiments of most Americans when he shouted that “not a single financial executive has gone to jail and that is wrong!”
Ferguson’s statement was quickly seized on by the business media as proof that the federal government, even the allegedly reform-minded Obama administration, wasn’t up to the task. But a crackdown on insider trading might just change the subject, and perhaps even make Preet Bharara a law enforcement star.
It took about a year after being named Southern District chief for Bharara to tout the success of the insider trading crackdown he inherited. In doing so, he emerged as one of the most controversial law enforcement officials in the country. Harvey Pitt, the former SEC chairman, says Bharara deserves to take credit for the success of the probes even if they began under his predecessor, Michael Garcia. “He hasn’t lost a case,” Pitt says. “That’s a huge achievement.”
Others are less complimentary. “Preet’s a smart gut and a very good lawyer, but he’s also a publicity hound,” a former Justice Department official said about the new U.S. Attorney from Manhattan, while a former law school classmate of Bharara (they both attended Columbia Law) described him as “the last guy you would think of as a modern Eliot Ness, much less Rudy Giuliani.”
Preetinder S. Bharara was born in India, and came to the U.S. when he was twelve. By all accounts, he came from a family of overachievers. His brother Vinnie, an Internet entrepreneur, would ultimately become a dot-com success story by selling a company he started to Amazon.com for around $500 million. Vinnie’s business acumen is a point Bharara makes often in speeches to show the Wall Street crackdown isn’t anti-business, just anti-corrupt businesses.
Bharara attended Harvard College and Columbia Law School. After graduation he landed a job in corporate law, and then became an assistant U.S. attorney for the Southern District of New York. He is described by fellow attorneys as a good prosecutor but one who also excels at the political side of the job. His affable personality combined with political savvy enabled him to befriend people in the office with ties to New York’s powerful state Democratic Party, such as Ben Lawsky, an ally of the senior U.S. senator from New York, Chuck Schumer.
Lawsky, himself a rising star in New York political circles, and Bharara have remained close associates through the years. When a job opened for the position of general counsel for Schumer, who was a ranking member of the Senate Judiciary Committee, Bharara got his shot at the big time.
Lucky break or not, he made the most of it. Schumer and Bharara led the committee’s investigation into the Bush administration’s firing of U.S. attorneys. The case made lots of headlines, but aside from a critical report, it produced no prosecutions. Even so, Bharara earned the trust of Schumer so much that when the Obama administration took over, Schumer’s very important nod to fill the Southern District post went to the guy everyone simply refers to as “Preet.”
Being in the right place at the right time has served Bharara well. The Southern District, as it is known in law enforcement circles, is a prosecutorial destination like no other. It is considered the most important of all the federal prosecutorial offices, primarily because its jurisdiction includes Manhattan—just about every trade, every financial transaction, has some link to a firm located in Manhattan. Consequently, a scam in Shanghai might be investigated by the Southern District because it had some roots in one or more of the big New York banks.
Over the years, the office has made good use of its power. One of its high-water marks came back in the 1980s, when another prosecutor from the Southern District, Rudy Giuliani, launched what was at that time the largest crackdown ever on white-collar crime.
That crackdown crippled that era’s big players, such as investment banker Marty Siegel, arbitrageur Ivan Boesky, and ultimately junk-bond king Michael Milken. It also led to Giuliani’s political career as mayor of New York and his subsequent highly lucrative career in the private sector, specifically the corporate security industry.
Bharara had to know what those cases had done for Giuliani and perhaps he was looking to create the same magic for himself. There were of course k
ey differences. Giuliani actually led the office as it was making the white-collar crime cases of the 1980s; thus he was responsible for its successes and more than occasional failures (several of his high-profile indictments floundered in court).
By contrast, Bharara had inherited much of his good fortune from predecessors in the Bush administration, though you wouldn’t know that from some of the rhetoric coming from the Southern District press office. To be fair, Bharara had little choice but to go public in a major way given the very nature of his job, which is to show the general public that law enforcement is addressing white collar crime, particularly following the excesses that led to the financial crisis. Moreover, a closer look at Bharara’s remarks shows he often gave credit to the career prosecutors and agents who had developed the cases before he took the job.
That said, his press department wasted little time touting various arrests that came as a result of the crackdown on insider trading. Bharara clearly understood what he had stumbled upon. As an assistant U.S. attorney he brought cases against Mobsters. But when he joined Schumer’s office he got a taste of how the Wall Street Mob worked. He was at the Senate Judiciary Committee when it championed Gary Aguirre’s cause against insider trading.
With that the Southern District press machine went into overdrive. One story in the Wall Street Journal promised a wave of insider trading arrests that would surpass the size and scope of Giuliani’s crackdown. The government had mountains of targets, and the press frenzy that followed sent the hedge fund business into disarray. Suddenly a guy, whose last name reporters had had a tough time spelling, was known across Wall Street.
Meanwhile, the takeaway from his now-famous speech heard all around the hedge fund world was unambiguous: Mass arrests in the insider trading probe were imminent. Or as one white-collar defense attorney with clients caught up in the expanding probe put it: “Preet believes it’s gonna be like shooting fish in a barrel.”
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