Circle of Friends

by Charles Gasparino

  But most of all, the jury never seemed to connect with the case Dowd was trying to make: that Rajaratnam’s mosaic, rather than his access to various pieces of confidential information, was responsible for his decisions to buy or sell or short stocks. In his own words, Rajaratnam was showing that just the opposite was true: It was the various pieces of illegal information that made the mosaic, which at bottom was assembled through a network of like-minded criminals.

  Rajaratnam may have been a good guy surrounded by bad people like Roomy Khan, who were ratting him out to save their own skin, as Dowd argued. Indeed several government officials working on the Galleon probe said they had grown personally fond of Rajaratnam, based on listening to the wiretaps. Take out the illegality and Rajaratnam, with his worldview of the markets as a battle to be fought every day, seemed like the type of guy they would want to have a beer with. But if Rajaratnam was such a mensch, what was he doing hanging out with avowed liars like Roomy Khan or with second-tier traders like Danielle Chiesi (also soon to be convicted and headed for jail) unless of course they were sharing insider tips?

  Put that all together, and after the six-week trial and two weeks of deliberations, the jury came back with a solid guilty verdict on all fourteen counts. That was more than enough to put Rajaratnam away for a long time, which Holwell had no problem doing.

  The federal judge known for his deliberate approach to the law handed down what could be a death sentence for a fifty-four-year-old man suffering from diabetes, as Rajaratnam was: eleven years in a federal prison, the same one in Butner, North Carolina, that houses Bernie Madoff and mobster Carmine “the Snake” Persico, for a crime that Holwell described as a “virus in our business culture that needs to be eradicated.”

  Later, Dowd told reporters that the case was his last one, and that Rajaratnam would appeal. His new defense team at Akin Gump began pulling every piece of evidence they had, every court precedent in an attempt to somehow disqualify the wiretap evidence. Such a strategy could take years if successful, and there’s no guarantee it would be successful.

  Still, the Rajaratnam legal team noticed a few openings. Just before Rajaratnam’s sentencing another federal judge sentenced Zvi Goffer (part of David Slaine’s circle of friends) to ten years in prison, which set an unfair precedent, they could argue. How could any judge give Rajaratnam even a day less than someone most people have never heard of?

  But their biggest card was the government’s much-publicized missteps in the wiretap application. The law was intended to amass evidence against suspects who operate covertly and who refuse to cooperate, and a case could be made that there was nothing secretive about Rajaratnam’s business, unlike the mob or terrorist cells. He had been on the SEC radar for years. His instant messages and emails were a matter of near-public record, and hedge funds were a regulated industry.

  But Holwell didn’t rule the way he did by thinking that he would be overturned on appeal. He knew there would be questions that the jury had agreed to convict Rajaratnam as a scapegoat for Wall Street crimes he had nothing to do with, such as those that led to the financial crisis. Accordingly, he asked the jurors if “the fact that the case involves the financial industry, Wall Street executives, hedge funds, mutual funds and the like, makes it difficult for anyone to render a fair verdict.” They agreed it didn’t.

  He also did his own homework and double-checked the reasoning of his clerk that despite the missteps, the wiretaps were still legal under the Title III test, namely that the government couldn’t establish Rajaratnam’s guilt without them. His conclusion: “Insider trading is a telephone crime.” In other words, there was no other way to prove Rajaratnam’s guilt than to have access to his private telephone conversations.

  James Comey, who held Bharara’s job during the Martha Stewart investigation, had made nearly the same assessment a few years earlier. Recall that Stewart didn’t face criminal insider trading charges because the government couldn’t come up with solid proof that Stewart knew she was trading on illegal information when she began selling her shares of ImClone just before the news broke that tanked the stock. There were no wiretaps in the Stewart case, just her word and some suspicious trading records.

  Those days are done. Over the years, other traders have explained away various regulatory inquiries of suspicious trades just before market-moving events by pointing to their “mosaic” of information that produced the stock pick. No more, law enforcement officials say. As proof, they point to the sharp decline in expert network business, which had supplied hedge funds with the necessary fillers for their alleged mosaic. Primary Global had all but closed down when the Rajaratnam verdict was delivered. Gerson Lehrman was still around, but many hedge funds were not employing expert networks anywhere close to the levels they were prior to the investigation.

  Maybe traders would stop talking on the telephone when passing along tips in a post-wiretap world. Or maybe, just as the mob does, hedge fund executives would start patting each other down to check for wires before discussing business, give up talking on the telephone all together, and do what crime bosses have resorted to doing: meet at public places but speak with their hands over their mouths so FBI cameramen can’t read their lips.

  Either way, wiretaps were here to stay.

  After the Rajaratnam verdict, people like Kang and Wadhwa slowly went back to work; both would receive promotions and accolades inside their respective agencies, as would Makol and Chaves. Brodsky and Streeter took their bows, albeit privately, and would leave the government for the greener pastures of private practice.

  Just a few weeks after the Rajaratnam verdict, Bharara appeared at a symposium on white-collar crime at the City College of New York. The event was sponsored by the Financial Writers Association—a group that represented the very same journalists who were critical to the government’s strategy of using the media to get out the message that Wall Street was finally being held accountable for its behavior.

  During the speech, he made certain to point out that despite the attention his office had given to insider trading, his prosecutors were hardly one-trick ponies. They have aggressively pursued fraud of all types, including more than one hundred cases involving mortgage fraud, which was at the heart of the financial crisis. And to counter the widely held belief that no big firm was charged with a crime related to the crisis, he recounted how his people fined Deutsche Bank more than $500 million.

  Still he was also clear and unapologetic about the resources he had dedicated to eradicating insider trading. The list of people under investigation, including those convicted like Rajaratnam and those cooperating after reaching plea deals, made the insider trading probes the largest and probably most expensive investigation ever in the history of white-collar law enforcement. More trials were on the way, including Rajat Gupta, and the investigation into SAC was about to rev up. Much more money would be spent on these cases (the Justice Department says it doesn’t keep a tally), and according to Bharara, it was money well spent.

  “First, it should be clear by now to anyone other than the most obstreperous academic and stubborn editorial page writer,” he said, “that insider trading of the type and nature that we have now charged dozens of times over is an insidious offense—it neither advances the market nor is it victimless nor does it fall into a hazy gray area as some suggested before they ever had a chance to see the actual allegations we made and the actual proof we collected.”

  That “stubborn editorial writer” may have been this author. No matter. Bharara was undeterred by the criticism and what he was now hearing from some people inside the Justice Department and in broader legal circles over what they believed was his exploitation of an investigation that was well underway when he took over as U.S. Attorney.

  The internal criticism grew loudest after a lengthy profile of Bharara appeared several months later. Bharara’s face blanketed the cover of Time magazine with the headline “This Man Is Busting Wall Street.” The story opened with a fascinating anecdote i
llustrating how the U.S. attorney had played a direct role in the investigation, actually listening in on a wiretapped conversation of insider trading information being shared between two of the guilty parties in the probe. If only the anecdote were true. Indeed, government officials were listening in on the conversation. They were FBI agents, not Bharara, and not even one of his top lieutenants.

  In 2011, while giving a speech before a federal law enforcement group filled with former bureau agents, he wore an FBI shirt. During the speech he explained that just a few days earlier he had been wearing it and someone mistook him for an agent, which was the “biggest compliment I could get.”

  That gesture alone was hardly enough to quell the hurt feelings as the Time profile made its way around the federal law enforcement offices in lower Manhattan. To be fair, when Time fact-checked the story, Bharara’s spokeswoman Ellen Davis has told people that she objected to the characterization that he was doing the actual listening to the wiretaps, but the reporter said he wouldn’t take out the anecdote because it was broadly factual—the U.S. attorney’s representatives were doing the listening.

  It’s unclear if the reporter understood the difference or if Bharara understood how much anger from the FBI was now being directed his way. Of course, every government agency likes to boast about its successes, and Bharara’s press office wouldn’t be the first to work with reporters to tout the success of a given initiative. Eliot Spitzer was a master of such tactics, using the bully pulpit as the New York Attorney General to generate enough headlines to make him governor. And, there was plenty of leaking and political grandstanding during Rudy Giuliani’s reign as Manhattan U.S. Attorney, much of it involving Giuliani himself as he prepared to run for New York City mayor.

  Bharara is said to bristle at the notion that he has used the bully pulpit in a Giulianiesque manner. He has even done some research on the topic, pointing out to anyone who questions his motives that newspaper stories from the 1980s show how his predecessor used the media in a more overt manner than he ever has and how he has shared credit for the success of the various insider trading probes. And he does have his fans who say Bharara deserves to take credit for running a law-enforcement agency that so far has a perfect record in convictions.

  Still, people inside the Justice Department and particularly at the FBI have found many of Bharara’s media moves distasteful and have felt they diminished the role agents and career prosecutors have played and, in their eyes, were designed to advance his own career. By the time the Galleon investigation had put Rajaratnam in jail, speculation swirled that Bharara was in line for Eric Holder’s job as Attorney General or that he was weighing a run for political office.

  Not coincidentally, profiles of FBI officials involved in the insider trading crackdown sprung up in the press. Chaves came up with the idea of getting Michael Douglas, the actor who played maybe the most infamous (and fictional) insider trading crook, Gordon Gekko, in the movie Wall Street, to tape a public service announcement about the evils of insider trading.

  Douglas agreed because he said he was astonished how many Wall Street types he met loved his character—maybe too much. The short segment showed footage from the film with Gekko, dressed in his trademark suit, his dark hair slicked back, delivering to an audience filled with investors one of the film’s most famous lines: “Greed, for lack of a better word, is good.”

  The commercial then cuts back to Douglas more than twenty years older. His hair is much grayer now and he has a simple message: Greed isn’t good. “The movie was fiction,” Douglas says about insider trading, “but the problem is real.” He then urges people with knowledge of insider information to contact their local FBI office.

  Bharara was said to be angered by not being part of the media event. Later that day he held a meeting with Janice Fedarcyk, the head of the FBI New York bureau to discuss his concerns mainly with some of Chaves’s comments during a briefing with reporters to unveil the Douglas spot. According to people close to him, Bharara was annoyed that Chaves appeared to have mocked him during the briefing. “Nobody over here would do that to you,” he told Fedarcyk. According to FBI sources, Fedarcyk said some people in the bureau believed Bharara’s press office had planted stories that failed to mention the FBI’s contribution to the case. Bharara said taking credit for the success of the investigation was never his intention.

  In the end, both sides called for a truce in the publicity battle. The cheaply done video, meanwhile, had some impact; people at the FBI say they received a couple of dozen insider trading tips.

  Sanjay Wadhwa was a mere spectator during the Rajaratnam trial and the publicity war that broke out between the FBI and Justice Department, but that didn’t mean he wasn’t busy. He was no longer a staff attorney. Thanks to his work on insider trading, he had been appointed an associate regional director in the New York office of the SEC, meaning he was one of a handful of officials in charge of various investigations.

  His star was certainly rising. Wadhwa now held meetings with the new SEC chairwoman, Mary Schapiro, and with Bharara as well. His meeting with Bharara was said to be wide-ranging and included a discussion about how two South Asians like themselves handled the obvious fact that they were busting up criminal conspiracies that dealt with people of the same heritage.

  Wall Street is a big place, and Wadhwa’s teams looked beyond insider trading for white-collar crimes. He had a case brewing against the New York Stock Exchange for allegedly providing better access to information to big hedge funds that trade through the exchange than to other investors.

  But his main focus was insider trading, where he had a laundry list of potential new targets that he hadn’t even made a dent in yet, a list he once described by separating his hands a yard apart, a smile on his face.

  Many of the cases related to mopping up what was left of the Rajaratnam circle and investigating the expert networks. Others involved SAC Capital and trades flagged by regulators as being suspicious, including some heavy trading in drug-company stocks.

  Wadhwa’s star was rising and it was his turn to get some good publicity for it. The normally understated investigator agreed to cooperate for a long profile in BusinessWeek. With that, the backstabbing that once was directed at Bharara from the Justice Department and the FBI now focused on Wadhwa. Some people inside the Justice Department openly began to downplay his role in the investigations, as if he and his team had never met Rajaratnam and had never brought his case to the FBI in the first place.

  Truth be told, there would be no investigation without Wadhwa and people like Michaelson at the SEC, and many FBI agents and federal prosecutors owe at least part of their government careers to his efforts.

  Add enforcement chief Robert Khuzami to that list. “Look what we did to [Angelo] Mozilo and Goldman Sachs,” Khuzami snapped after reading a column about how the SEC had focused on the low-hanging fruit of insider trading while bigger white-collar criminals went free.

  Khuzami had come to the commission more than three years earlier vowing to restore the agency’s former status as the gold standard in the federal regulatory system. In late 2012, he was now ready to step down and return to a highly lucrative job in the private sector, but the commission had barely made a dent on many key issues.

  Khuzami did much to restore the SEC’s image. The sin of missing the Bernie Madoff scam was still hanging over the SEC, and will never be fully expunged from its history, but Khuzami at the very least made it a sin of the past.

  The new and allegedly reinvigorated SEC, with Khuzami leading the charge, raked in record numbers of enforcement cases. Khuzami’s investigators took on Goldman Sachs and Angelo Mozilo, the former chief of the company that sold many of the toxic mortgages at the heart of the banking crisis, Countrywide Financial.

  Yet the markets were still fractured, with technology issues more than occasionally disrupting the normal flow of trading. Facebook’s IPO was a disaster after a trading meltdown on the Nasdaq stock market caused more havoc than
any insider trading scheme. That fiasco was immediately followed by another trading malfunction at Knight Capital. The phenomenon known as a flash crash was a few years old by now but regulators at the SEC were no closer to figuring out how to stop them. Small investors appeared oblivious to how much time Rajaratnam was spending in jail; fearing the next meltdown, they kept buying bonds and gold.

  The abuse of credit default swaps—where traders could buy these contracts (a bet that a company might default on its debt), short a company’s stock, and profit from the market fear it would produce—went unaddressed as if the financial crisis in which they played a part had never happened.

  And for all the SEC’s chest-thumping regarding the Goldman case and charging Mozilo, not a single major bank chief was charged in a financial-crisis-related crime. Even MF Global’s Jon Corzine, whose bets on risky European debt led to $1 billion of his customers’ money being lost, escaped prosecution.

  But Khuzami had insider trading. In 2011, his division filed more enforcement actions than ever before, and came one shy of the record in 2012. Much of that spike was the result of insider trading, and Khuzami rarely missed an opportunity to tout how the SEC was back to being the tough cop on the beat of Wall Street, even if the cases could be traced to his predecessor, the allegedly listless Chris Cox.

  And he may be doing it by expanding the definition of what constitutes a dirty trade. Many of the defense attorneys representing clients snagged in this probe say he has. They point to a 2012 speech by an associate director from the agency’s New York office, David Rosenfeld, who, according to people present, put traders on notice not to have private, one-on-one meetings with company officials because of the chance that nonpublic information might be shared. Rosenfeld even suggested that any working relationship with an expert network—even one that doesn’t involve swapping nonpublic tips—will raise suspicions among prosecutors and regulators.