Circle of Friends (16 page)

Sanjay Wadhwa made the reverse commute, which was only fitting now that he was on the verge of cracking possibly the biggest insider trading case ever. In 2003, Wadhwa left a boring but lucrative profession as a tax attorney to work at the SEC. It was a bold move, but one that made sense to him at the time: He was still single and he was bored with corporate tax work. The idea of investigating Wall Street crimes intrigued him. It was around this time that the New York State attorney general, Eliot Spitzer, uncovered mountains of Wall Street abuse, and the SEC, the federal government's traditional enforcement agency in the world of white-collar crime, took a backseat to Spitzer's efforts.

What made Spitzer so powerful (and such a dangerous competitor for the SEC) was that he combined prosecutorial skills with a real working knowledge of Wall Street. He was the scion of a mega-wealthy real estate developer and as a result knew Wall Street and its key players from private schools. Wadhwa wasn't in Spitzer's league as far as contacts were concerned, but as a tax attorney he had the skills to read financial statements and investigate complex corporate crimes.

And he was willing to work cheap, a requisite for any SEC employee. Wadhwa's first case involved whether specialists on the floor of the New York Stock Exchange were overbilling clients, effectively charging greater commissions than the “best price” called for under existing laws. The result was a string of high-profile enforcement actions against some of the biggest floor brokers in the country, and a broad settlement with the big firms that transacted business at the NYSE, which led to hundreds of millions of dollars in fines and penalties.

But it wasn't enough. The SEC had been exposed by Spitzer as a slow-footed bureaucracy, unable to see big scandals staring them right in the face—such as the research analyst investigation Spitzer had spearheaded earlier in the decade.

But Wadhwa discovered something else. The entire analyst investigation—which involved untold billions in potential losses—or the $50 billion Madoff scheme would each be treated as a
single case
by the SEC's bean counters, who were forever trying to show that the commission was doing all it could to combat corporate crime.

As such, investigators like Wadhwa were discouraged from taking on complex, time-consuming investigations and were prodded by management in Washington to keep the wheels churning by going after low-hanging fruit. Ironically, the management of the SEC wanted the same thing from its investigators that the hedge fund managers wanted from their traders: lots of wins.

The only difference was that the hedge fund guys also demanded huge payoffs for their wins, whereas the goals at the SEC were pretty puny. The SEC's administrators seemed to care more about making their numbers than about cracking big scandals.

This mind-set irked Wadhwa, who saw it as a professional stumbling block, unless, of course, he could find a case that could set him apart. He thought he had one in 2005: a brokerage account held under the name of a Croatian seamstress, Sonja Anticevic. She displayed an amazing knack for buying shares of companies before corporate events, including buying Reebok just before it was purchased by Adidas in 2005. Instead of giving in to the pressure from his bosses and moving on to a case with greater numbers potential, Wadhwa dug deeper. This was one savvy seamstress, or so it seemed. She bought Reebok call options through a New York broker, which earned her more than $2 million, and she wasn't alone in the scam.

Big bucks were being wired in and out of her accounts from banks in Austria. Wadhwa quickly got an injunction to freeze the brokerage account and filed charges against Anticevic, even though she was living in Croatia at the time. The case sparked a media storm in the Balkan nation. Reporters swarmed her house. Anticevic said the account wasn't hers and that she had little if any real understanding of Wall Street. In one interview she said the closest she ever got to high finance was through a nephew, a former Goldman Sachs broker named David Pajcin.

It didn't take long for Wadhwa and his supervisors to make the obvious connections. When Pajcin and another Goldman broker, Eugene Plotkin, became privy to corporate secrets, they traded on them through a network of accounts, including one held by Pajcin's aunt in Croatia. Anticevic's name may have been used in the plot—perhaps she even received a few bucks for her help—but the scheme had Wall Street, with its questionable mores, written all over it.

Wadhwa was now working closely with the federal criminal authorities, a blueprint he would employ on a much bigger case just a few months later. The FBI agent assigned to the case was David Makol, known, much like Kang was, for his ability to turn witnesses. The assistant U.S. attorney was Benjamin Lawsky, a lawyer with a bipartisan résumé (he clerked for Republican judges, but was a committed Democrat) and a penchant for big cases in prosecuting terrorists, drug dealers, and now insider trading.

Makol and Lawsky offered Pajcin a deal: Cooperate or go to jail. His cooperation brought more light to the scheme, which was later described in the
New York Times
this way: “Mr. Plotkin's arrest in April 2006 was the first of a number of insider-trading cases brought by federal prosecutors and the Securities and Exchange Commission that year and 2007. But none matched the scheme involving Mr. Plotkin, a fixed-income associate at Goldman, and a former co-worker, David Pajcin. Their plans involved a former Merrill Lynch analyst, a New Jersey postal worker who served on a grand jury, two workers at a magazine printing press and an exotic dancer.”

Plotkin was later found guilty and sentenced to almost five years in jail. Pajcin pled guilty and avoided jail time. Anticevic, the retired seamstress, was charged by the SEC, fined, and then later acquitted, but Wadhwa had taught his supervisors a valuable lesson: It takes time to produce cases that matter.

He was about to show them something else: It pays to have a diverse workforce. Wadhwa was born in New Delhi and came to the United States when he was nineteen to embark on his career in finance. His South Asian heritage gave him immediate access to a growing and close-knit community of other finance types of similar descent.

Wall Street, it should be noted, has always displayed a clannish behavior involving ethnicity. WASPs dominated the banking business through the nineteenth century, but with immigration from various parts of Europe came Wall Street's broader integration. J. P. Morgan, the original WASP bank, remained a super power, but upstarts reflecting the country's new entrants were everywhere: German Jews created the mighty Goldman Sachs; Jews from Eastern Europe created Bear Stearns; and Irish-American brokers ran Merrill Lynch.

Those divisions have been blurred considerably. Hank Paulson, a Christian Science farm boy from Illinois, ran Goldman in the 1990s. Stan O'Neal, an African-American whose grandfather was a slave, became CEO of Merrill Lynch in 2004, replacing David Komansky, the Jewish son of a Bronx postal worker.

By 2007, another wave of immigration from Asia had begun to transform Wall Street again. Fueled by the same grit and determination as prior entrants, Asians were now holding senior positions across Wall Street and running major hedge funds, including one of the world's largest and most successful, the Galleon Group, founded by Raj Rajaratnam.

Sanjay Wadhwa knew a lot about finance. He earned a specialized degree in tax law and an MBA to go along with his law license. He could read a balance sheet upside down, and what his supervisors at the SEC liked about him was that he could make sense of it all for them.

His knowledge of the South Asian community was about to serve him well, when he stumbled across what he thought was a modest scam: A hedge fund name Sedna Capital was engaging in what Wadhwa thought was
cherry picking
—a practice in which hedge fund managers allocate winning trades to certain privileged customers, and the losers to others.

The fund was run by a trader named Rengan Rajaratnam, who didn't ring any bells as far as Wadhwa was concerned, until he dug a bit deeper and noticed that among those in the privileged class was Raj Rajaratnam.

Raj Rajaratnam was something of a wunderkind on Wall Street, particularly among South Asians. He was born in Sri Lanka, the son of a wealthy businessman, educated in England and at the University of Pennsylvania's Wharton School of Business. He began his career at Chase Manhattan Bank, and later the investment bank Needham & Co. He showed an immediate understanding of technology companies and it wasn't long before he was running a technology hedge fund for Needham. Soon he took a controlling interest in the fund and changed the name to Galleon Group, after the ships in the Spanish Armada that carried gold and yet were able to sail through turbulent seas.

Galleon started with just $250 million in assets. Its objective was to match rapid-fire trading—the same stuff done by SAC Capital—with intense research. Rajaratnam, the founding partner, was a former analyst and the operation's big thinker, while Gary Rosenbach, who had been his head trader at Needham, ran the desk.

Rajaratnam boasted that he and his people visited three hundred companies per month; unlike SAC, where the scorecard is looked at every day and even every minute of the day, Rajaratnam said his traders weren't rewarded simply by making money. “They are there to limit losses,” he was quoted as saying. “I don't want them to hit home runs.”

One competitor marveled that Rajaratnam “sucked the air out of the room” when raising money from investors. He targeted the top players at major technology outfits, the same places he researched at Needham. They would be valuable to Galleon not just as clients but also as sources of information for Rajaratnam's trading.

The strategy seemed to work. By 2007, Galleon had $7 billion under management, about half that of SAC Capital, but more than matching SAC's returns, or for that matter Bernie Madoff's no-lose recipe for success. People inside Galleon say the fund's returns were extremely volatile on a monthly basis, and Rajaratnam's trading was particularly volatile, with the Galleon boss having a huge year in 1999, and getting killed in other years.

But in the end, the fund's freewheeling culture where traders bet against each other seemed to work. In 2007, as the financial crisis began, Galleon earned its investors more than 12 percent returns; it lost just 3 percent in 2008 when the financial world collapsed. Its best year since its inception was 1999, when it cranked out returns that surpassed 90 percent amid the technology stock bubble. Like SAC and Madoff, it never lost money even during down years in the markets (except of course, 2008). On average Galleon returned 25 percent since its inception in 1997.

Rajaratnam became incredibly wealthy. He was now, according to Forbes, among the three hundred richest Americans, worth around $1.7 billion, though he wasn't your typical Wall Street fat cat. He was described by former employees as a family man who, when he wasn't working, spent time with his wife and children. He was also extremely generous, particularly when it came to giving to charity. “This country has been good to me,” he remarked, according to one former employee, as he wrote out a check for $500,000 to the New York City fire department after the 9/11 terrorist attacks.

He had also briefly caught the attention of the FBI for contributing money to an organization thought to be associated with the Tamil Tigers, the now-defeated guerrilla group that was then fighting for an independent Tamil state within Sri Lanka. (Rajaratnam, through his lawyers, has said he never directly financed the Tamil Tigers, though he hasn't been bashful about his support for Sri Lankan independence.)

Galleon also was well-known both to Wadhwa and the SEC. Over the years the firm's trading patterns had been flagged, raising the same suspicions that SAC had—namely, that Galleon had managed to pick precisely the right time to buy or sell stocks. And, like SAC, nothing seemed to stick to Galleon, at least so far.

Sedna was displaying the same knack for picking winners as Galleon did, Wadhwa concluded after a preliminary look through its trading accounts. But his gut told him it had less to do with Rengan's market intelligence than that of Raj. “If anyone is giving him insider tips, it's his older, more successful brother,” Wadhwa thought as he considered his next move. Wadhwa's hunch was that whatever Sedna was doing, what he had come across was bigger than simply cherry-picking stock trades for its best clients.

He was right. As he studied Raj's trading records, a similar pattern appeared. They both were trading in the same stocks (though Raj was wagering far bigger bets) and their trades were extremely well timed around market-moving events.

Y
ou guys are on a fishing expedition,” snapped Galleon attorney Jerry Isenberg as SEC officials camped out in the fund's offices searching trading records, allegedly as part of a routine examination, but in reality, part of something far more serious.

Wadhwa explained that his staff was just doing its job, and nothing more.

Which was true, but what he didn't say was that the “job” was no longer focused on Rengan Rajaratnam, or the lower level fraud of cherry-picking, but on whether his brother Raj Rajaratnam was engaging in insider trading at a very high level.

Sometime earlier, the examinations staff paid a visit to the offices of Sedna. Wadhwa had a good reason to send the SEC's examinations unit as opposed to the enforcement staff. The SEC conducts routine examinations all the time. Enforcement officials with their subpoenas and threats of filing fraud charges raise too much suspicion, and at times, may lead to the risk of the destruction of evidence.

Under the guise of simply kicking the tires, the inspectors were actually looking for trading records, emails, and IMs—instant messages that are commonly used to communicate between
tippers,
or the people who supply the inside information, and the end users of it, known in legal circles as
tippees.
The results of the examination confirmed what Wadhwa's more cursory inquiry had suggested: Sedna's trades were large and well timed to market-moving events, and as Wadhwa would say, “in the right direction.” If the announcement was bad, Sedna would short stocks; if the announcement was good, it would buy them up. Wadhwa would later describe them as “highly suspicious” because the search of emails and instant messages, or IMs, and telephone logs showed regular correspondence between Sedna and Galleon, and that they were trading the same stocks.