CHAPTER 12
NEVER LET A GOOD SCANDAL GO TO WASTE
We did all the work,” muttered a senior FBI official when he digested the New York Post story about Bharara’s speech. By now senior FBI officials were convinced the speech was part of a broader campaign by Bharara’s press office to take credit for the bureau’s hard work.
The FBI is an office inside the Justice Department, but it’s in many ways an independent agency. Its director is appointed by the president, not by the attorney general. FBI agents need U.S. attorneys to bring cases, but U.S. attorneys need the FBI to help them make those cases.
Now a battle over which part of the Justice Department deserved credit for the fruits of the crackdown threatened that relationship at a time when so much work was yet to be done. The expert networks and their role in funneling dirty information to the hedge fund business were now on the front burner at all the major law enforcement agencies involved in the insider trading probe. New informants were being brought forward, and wiretap authority sought. The pursuit of new targets was still an objective for all the government agencies.
Most of all, senior officials in the FBI worried about the agency’s place in history. The FBI’s early days include the secretive J. Edgar Hoover, but the modern version of “the Bureau” is one where image and PR count. Press releases touting arrests are routinely sent to reporters to make certain the public knows that all the money spent on investigations produces results. In fact the agency assigns at least one agent to protect its image in Hollywood, since criminals often develop their first impression of the bureau from seeing it in the movies.
Combating Bharara’s PR blitz, though, would be a dicey matter. He was, of course, the U.S. attorney, and with that he had a bully pulpit not available to any FBI agent, or even to Janice Fedarcyk, the newly appointed head of the New York office of the FBI.
Eventually the FBI would get into the act, tipping off selected reporters to show up for high-profile arrests. But FBI officials complained that the Southern District had a big lead. A November 20 story in the Wall Street Journal added color and depth to the New York Post scoop about Bharara’s speech. Citing people familiar with the matter, the Journal reported that “federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation,” as well as the shadowy world of the “expert network business,” where inside tips were passed from company executives moonlighting as researchers to big hedge funds.
The story sent shock waves across Wall Street. Seated at his usual luncheon perch, the San Pietro restaurant in Manhattan, John Mack, having just retired from Morgan Stanley, predicted that his old nemesis Gary Aguirre was behind the insider trading assault. Others at the exclusive Manhattan eatery believed it was an overambitious Obama Justice Department following the class-warfare message of their supreme leader.
Still others said the ultimate target was Cohen, whom the feds had been eager to grab for years. “But I bet they never get him,” said one executive as he chowed down on his plate of thirty-dollar pasta. Hedge fund executives and their legal staffs read the story for detail and nuance to predict the feds’ next move.
Cohen, meanwhile, wasn’t specifically mentioned in the account, but no story about insider trading allegations would be complete without a mention of SAC Capital. In this case the mention stemmed from an FBI person of interest, John Kinnucan, the independent research analyst whom the FBI had come across as someone who used expert networks and other sources of insider information and passed them along to his clients, which included major hedge funds and mutual funds.
Kinnucan had done something unusual a few weeks earlier. It was after Special Agents David Makol and Edmund Rom paid a visit to his home in Portland, Oregon, and he sent a blast email to his clients, firms like SAC, Citadel, and other big hedge funds, alerting them that “two fresh faced eager beaver” FBI agents had showed up to his home, offered to play some tapes they had of him passing along and trading on inside information, and told him he could make the case go away if he wore a wire to snare some of his clients.
The way Kinnucan described his FBI encounter in a subsequent interview was more dramatic; he said Makol and Rom announced who they were, surrounded him, and after offering to play a recording of some of his illegal doings, began shouting threats about how long he would spend in jail because of his illegal activities. At one point they brought up someone else who had been found on the wiretaps—a sales representative from a technology firm that Kinnucan used as a source of information. The sales rep’s son just died in a biking accident. “It’s a shame if we put him in jail,” Makol said, referring to the sales rep. “But we don’t feel sorry for you.”
Kinnucan held to his story, saying he had done nothing wrong—the information he received from the sales rep or anyone else “can be downloaded off the Internet.”
Makol was unimpressed. “Come on, John,” he shot back. “You know something is happening before it happens.”
Kinnucan said it all went down as he was sitting in his kitchen, worrying about being arrested in front of his wife and children, who weren’t home at the time.
Kinnucan declined the FBI’s request to cooperate, and a few hours later he became among the more bizarre footnotes in the insider trading drama. His blast email was leaked to the Wall Street Journal and soon went viral, picked up by other media outlets, both print and television.
As any defense attorney will tell you, targets shouldn’t antagonize the feds. The government, being the government, can always find something to charge you with, and they will do so if you rub their noses in it.
But that’s exactly what Kinnucan did. He appeared on both Fox Business and CNBC to tell his story, not of a fat cat guilty of cheating the system, but about an average citizen unfairly targeted by the all-powerful federal government, waging a political vendetta.
Kinnucan described himself as a mere researcher, pushing information to his clients like everyone else does on Wall Street and in the hedge fund business. He penned a column in the Dealbook section of the New York Times titled “Why I Declined to Wear a Wire,” and in it he wrote: “My personal belief is that much of this enforcement activity is politically motivated and will ultimately only serve to delay the return of confidence in our country, on the part of Main Street and Wall Street alike.”
The question is, why? At the FBI, the guess was that he was desperate and that Kinnucan thought he could keep them at bay by having the media portray him as a victim. Others at the FBI simply believed Kinnucan was crazy, which appeared increasingly the case as his criticism of the government turned more bizarre.
Still, there was nothing strange or crazy about why the FBI believed Kinnucan could be an important witness. The Journal originally reported that the agents wanted him to focus on SAC. Kinnucan has said they were interested in another client, the Chicago-based hedge fund Citadel.
Either way, both were major clients, as were about a dozen other large hedge funds and a smattering of mutual funds.
Kinnucan’s email, and its description in the press, had the practical effect of further putting the hedge fund business on red alert. The feds were ready to move and they were willing to do anything within the confines of the law to snare the biggest players in the business, including playing hardball with a witness and threatening to confront him in front of his wife and kids.
Most hedge funds just hunkered down, hiring press agents to manage the fallout when the subpoena arrived and its name was leaked. Such leaks often cause investor panic, and as the tally of hedge funds under scrutiny became known, investors reacted in kind. Suspects reacted in their own way. Some tried to keep a low profile. Former SAC trader Donald Longueuil was recorded describing how, after reading a story about pending arrests, he destroyed hard drives on his computer that contained trading data.
Longueuil was eventually snared the same way Drim
al was caught: thanks to the cooperation of a friend. The best man at his wedding, Noah Freeman, a former SAC portfolio manager, wore the wire that led to Longueuil’s arrest. Both were fired from SAC in 2010 for poor performance, which was hardly surprising to investigators given the sink-or-swim mentality that operated at SAC and how, they believed, it caused some traders to push the limits of acceptable conduct.
Freeman’s odyssey from criminal to informant began when he was out of the hedge fund business for a few months, teaching at an all-girls school in Boston—that’s when he was approached by B. J. Kang, who gave him the same choice he gave everyone else who came onto his radar: Cooperate or go to jail.
Freeman chose to cooperate, helping the FBI develop evidence against his best friend, and telling all he knew about SAC. Freeman’s SAC experience was important to FBI investigators. He confirmed much of what they knew about the inner workings of the giant hedge fund, and how Cohen himself operated, namely by culling the best trading ideas from his money managers.
None of which is illegal, of course. Although Freeman said he had minimal direct contact with Cohen (he worked in Boston as opposed to Stamford), he also shed more light on how he believed illegality took place at SAC. A report in Bloomberg News citing an FBI memo said Freeman told Kang at one point that the pressure to give Cohen profitable trading strategies was immense, and that pressure led traders like himself to cross the line into trading on insider information.
Freeman conceded that he took steps to evade the firm’s compliance rules. These included policies designed to curtail the passing of inside information by forbidding SAC employees from talking directly to executives of public companies through expert networks. Freeman also admitted he communicated by the video-calling service known as Skype rather than through emails on his computer because he said it wasn’t checked by SAC’s compliance team.
But Freeman also described a compliance system that was fairly easily evaded, and “willfully blind” to illegal activities, according to one person with direct knowledge of what Freeman told the feds. He pointed to his use of one Primary Global expert named Winifred Jiau, an American citizen who was born in Taiwan. Primary Global had been raising red flags at SAC where the compliance department was putting an end to its use. Freeman found a way around the ban simply by paying Jiau through trading commissions, rather than directly as a consultant, which would have brought on greater scrutiny.
With that, Jiau earned $200,000 a year dispensing inside information to Freeman, mainly from her contacts at technology companies like Nvidia and Marvell Technology. Jiau clearly had her quirks. To those who employed her services, she was bossy, high maintenance, and, according to Freeman, appeared to have a predilection for high-end seafood.
In addition to getting paid cash, Freeman felt obliged to provide Jiau from time to time with fresh lobsters, he said. Despite his disdain for Jiau, he jokingly referred to her as “Poohster” or “Winnie the Pooh.” But what she was doing was no joke. Freeman’s cooperation led to a wiretap, and at one point Jiau was recorded calling the money she received “sugar” to help complete the “recipes” of insider trading.
With Freeman’s assistance, by late 2010, the expert probe had progressed well beyond Tony Longoria, the AMD manager, to include people like Jiau; Walter Shimoon of Flextronics; Daniel DeVore, a supply manager at Dell; and Kinnucan, who wasn’t an expert, but rather a researcher who relied on experts to help him guide his clients at the hedge funds. Jiau fascinated investigators not just because she liked to eat lobster. She graduated from Stanford with a degree in statistics and was plugged into the nerd crowd throughout Silicon Valley, which like the traders in New York played a key role in the various insider trading clusters.
For all Jiau’s outlandish requests, Kinnucan seemed to one-up her in the weirdness department as his media tour continued. “If they arrest me they will have to arrest the entire Wall Street research community,” he said during one of his more lucid moments, since the information he traffics in—estimates of sales, and shipments of computer parts, etc.—is part and parcel of the research business.
Lee Ainslie, the founding partner of the hedge fund Maverick Capital, was allegedly ducking paying Kinnucan for some research before the trouble started, prompting this email outburst by Kinnucan one night: “Yo Lee homey, Sorry to break it to you, but looks to me likely that Maverick will soon be charged with insider trading. Just thought I’d let you know. . . Regards, JK.”
Maverick eventually paid him some money, and Kinnucan’s outbursts to Ainslie ended. Others, particularly those he considered his accusers in government, weren’t so lucky.
In one email sent to various reporters, attorneys, and investigators, Kinnucan called Bharara “a limp dick Indian piece of shit.”
The more Kinnucan spoke or emailed reporters and clients, the more he angered people at the Justice Department and the FBI, particularly Chaves, who believed he had given Kinnucan, like Slaine, a second chance at a new life. They had a solid case against him for insider trading, and now he was trying to make the FBI look like the Gestapo.
Shimoon was now a cooperating witness and told the feds he had given Kinnucan inside information on Flextronics. Wiretaps indicated that Kinnucan received inside information on other tech companies and passed them to people like Freeman at SAC. His name came up from other sources and cooperators. He wasn’t the biggest fish in the insider trading sea, but he was as guilty as Rajaratnam.
Kinnucan, meanwhile, continued to think of himself as a crusader against government overreaching as his emails—increasingly hostile and at times racist—suggested. That’s when the feds came to the conclusion that Kinnucan needed to know what happens when you call one of the government’s top law enforcement officials a “limp dick.”
“Mr. Kinnucan will soon need some help and there will be no one around to help him,” Chaves remarked at the time.
The government’s boasting about the onslaught of new cases may have been good PR, but combined with John Kinnucan’s own big mouth it had the practical effect of alerting at least some of the bad guys to stop doing what they were doing. Senior officials at the FBI openly fretted that the burst of publicity would cause some of the bad guys, mainly those born overseas, to try to flee the country rather than face arrest and prison.
Since so many of the suspects and targets arrested were of foreign origin, the government began to take measures to stop those they believed would most likely flee from doing so. Jiau, for instance, was immediately placed in custody and found herself in a series of federal prisons, including one in lower Manhattan for nine straight months following her arrest. Pretty harsh for someone who loved to feast on lobster, and things would get even harsher when she was sentenced to an additional four years in jail.
The feds weren’t so lucky when it came to Deep Shah, who had tipped Roomy Khan to Blackstone’s purchase of Hilton Hotels and was a key suspect in the probe. Shah had already gone missing, presumably fleeing to his native India before he could be arrested.
For now, that was the least of the government’s problems.
In the fall of 2010, the Southern District staff was embarking on its prosecution of Rajaratnam, with a trial date set for spring 2011. Its choice to lead the case, a forty-two-year-old prosecutor named Jonathan Streeter who had made his bones in the Southern District dissecting, then simplifying and winning some of the most complex white-collar fraud cases. Streeter’s most recent victory was against the infamous attorney Marc Dreier, convicting him of a massive investment fraud surpassed only by Bernie Madoff’s Ponzi scheme in size and brazen disregard for the law.
Streeter was known for his affability and directness, and most of all, he wasn’t a political grandstander, which is why he got along so well with the FBI agents while preparing for the trial. Something else also set him apart from those working on the inside trading investigations: He didn’t think insider trading was the white-collar equivalent of murder.
To be sure, Streeter di
dn’t buy the “victimless crime” excuse offered by academics (and those who had been caught during the probe) who suggested that insider trading had no practical impact on investor confidence. But he also saw limits to how much insider trading really did hurt the little guy particularly when compared to outright rip-offs. In Streeter’s worldview, the long jail sentences often meted out under the sentencing guidelines should be reserved for people like Madoff and Dreier, rather than the typical insider trader.
But that didn’t stop Streeter from taking on a case that was being regarded as a game changer for prosecutors who were still without a financial-crisis scalp to display as a trophy. First, Rajaratnam was no typical insider trader. The evidence showed him brazenly violating the law, basically thumbing his nose at the entire federal government just days after being questioned by the SEC with his Google and Hilton trades. Moreover, the Galleon investigation produced “one hell of a sexy case,” Streeter said at the time, emboldened by wiretaps, cooperating witnesses, and larger-than-life characters—all the ingredients of a great movie. What prosecutor wouldn’t want to try that case?
The trick was to assemble the evidence into a coherent narrative. As he listened to the wiretaps, and heard Rajaratnam incriminating himself in his own voice, Streeter, however, had two major concerns. First, since there was so much evidence, with all the various tape recordings, he could easily overwhelm the jury with information. He needed to narrow and simplify the evidence and that would take time.
He also needed to prepare for a major setback that could upend the entire case if Rajaratnam’s defense team, now led by veteran litigator John Dowd, succeeded in its goal to convince the judge to disallow the wiretaps.
Dowd was somewhat of a surprise choice to lead the Rajaratnam defense. He hadn’t been before a jury in a major white-collar case in years. His last big white-collar case was back in 1997 when he defended Fife Symington, the former Arizona governor who was accused of bank fraud (Symington was convicted, but later pardoned by President Bill Clinton).
Circle of Friends Page 24