Circle of Friends (19 page)

But the decision to cooperate almost never comes easily with white-collar criminals. Mob suspects accept being caught as the price of their business. With the death of the conspiracy of silence known as
omertà
, they calmly accept proffers and witness protection. Being a mob rat doesn't quite carry the same stigma as it did years ago, particularly when everyone is doing it.

Not so in the white-collar world. Here government investigators discovered a certain lack of self-awareness about the nature of their illegal acts, and their consequences. Most consider themselves good people—no matter how much they lie, cheat, and steal. Others think that they're merely rubbing up against the line between what's legal and illegal, while others know they've crossed over and into the dark side but think they're too smart to get caught.

It's arrogance that lands them in jail—that and misplaced trust in the equally untrustworthy people with whom they're committing illegal acts. And when they're caught, the objective is to show how their world has fallen apart—particularly when a B. J. Kang explains how they might be spending some significant time in prison with some of the more undesirable people in the world.

Kang decided that the direct approach with Khan would work best: He would just lay out the evidence at hand, namely all those IMs with Rajaratnam that looked pretty sleazy, and the money she was making from her secret dealings. And scare the hell out of her with threats of jail time since she was a second-time offender.

Repeat offenders can spend more than a decade in prison—particularly those who make a lot of money breaking the law, which is the category Khan would find herself in. Galleon made millions off the Hilton Trade but Khan didn't do so badly herself, making a quick $600,000 by purchasing shares of the company just prior to the Blackstone takeover. And that was just the beginning.

R
oomy Khan lived in a $13 million mansion in an exclusive Silicon Valley gated enclave known as Atherton. Kang would later describe the home as a “sprawling palace,” with large walls surrounding it. So this is what you get for making six hundred thousand dollars on a single trade, Kang thought, as he approached the residence with another FBI agent, Kathleen Queally. If you combined both agents' government salaries, they wouldn't earn half as much as Khan and her circle did with just that one piece of insider information on the Hilton trade. It's hard to believe that the inequality of their situation was lost on either of them as they approached her front door.

But there was more to Khan's story than her expensive home, as Kang and his partner's research had discovered. True, she and her husband lived richly (her husband, Sakhawat Khan, was an engineer who had thirty patents under his name for chip designs), but they seemed to have run through much of their wealth.

In other words, Rajaratnam, the billionaire, might have the will and the financial means to fight, but odds were that Roomy Khan, knowing her financial situation and how much jail time she would face, would have compelling reasons for becoming the most important witness in the Galleon probe and perhaps the most important witness in the government's long crackdown on insider trading.

At least that was their bet as they rang Khan's doorbell and a woman with dark hair and brooding eyes answered.

“Roomy Khan?” Kang asked.

“Yes, that's me,” she answered.

“I'm Agent Kang and this is Agent Queally of the FBI. . . . We need to talk.”

Khan's response only added to the suspense. “What took you so long?” she said before letting both agents into her spacious home.

CHAPTER 7

THE FLIP

A
ny government hopes that Roomy Khan could immediately be flipped from conspirator to cooperating witness were quickly dashed. Khan, of course, had seen this drill before. It had been six years ago that she had secretly agreed to cooperate against Rajaratnam in return for her own freedom. So she knew that in order to score a no-jail deal this time around she would have to provide the feds with much more than just dirt on the Galleon boss.

As Kang entered her home he immediately got down to work. He told Khan she had been caught trading on inside information. They had plenty of evidence and if she went to trial she would be going as a two-time loser, given her past record. If she wanted to avoid serious jail time, she needed to cooperate.

As Khan listened, Kang further explained the crimes they were certain Khan had committed: passing insider tips to Rajaratnam on various stocks including companies like Polycom, Hilton Hotels, Google, and probably a lot more through her well-maintained source network in the Silicon Valley tech community.

Kang described to her the intercepted instant messages and how they provided enough evidence to arrest her almost on the spot. Then he emphasized that since she was a two-time offender, what she faced if she went to trial and lost—which is what happens, they explained, to more than 90 percent of those indicted for various white-collar crimes—was years in jail.

“I'm a consultant,” she initially and almost defiantly explained in response. She never mentioned her business relationship with Rajaratnam, just that they were friends. Her communications with the billionaire about stocks were merely Rajaratnam's attempt at being “nice” to her, she said.

Khan explained that she had worked for Galleon in the past, tried unsuccessfully to get rehired a few years back, but a mutual friendship built over a love of trading stocks and a common ancestry continued. And she wasn't that rich, she told Kang. Despite her big home, cars, and swimming pool she and her husband had hit a rough patch financially (the full embarrassing details would come out later, including underpaying her maid and possibly violating state labor laws). Khan pointed to the five computers and six telephone lines in her home. She explained how she went to conferences and company road shows in order to do her job as a consultant and a trader for a company called Trivium Capital Management.

The information she passed along to Rajaratnam and others was not stolen from companies, as is insider information of the illegal type. Rather, she maintained, she was merely doing what a good reporter does: talking to a lot of people at these public events and passing along what she heard. Mainly what she had been passing along to Rajaratnam was “broker chatter.”

Her explanation hardly impressed Kang, who knew full well that insider tips are often passed around at such venues, and was convinced that Khan was someone who feasted from this underworld of sleaze (as her lifestyle, including the $13 million, 9,000-square-foot mansion he was sitting in, made evident).

The FBI's experience with cooperating witnesses is good but not perfect. No real statistics exist on recidivism among bad guys who turn stool pigeon and provide information, but the general consensus is that when most people are given a second chance to start a new life after a life of crime they go on the straight and narrow.

But there are always a few who don't. Sammy “the Bull” Gravano infamously became a drug dealer after cutting a deal in order to put away for life someone the feds considered a bigger criminal: John Gotti. In return, Gravano avoided a long jail sentence for murder and racketeering. Gravano, friends would say, yearned for the gangster life.

Likewise, it seemed like Roomy Khan had never gotten insider trading out of her blood. She was well sourced inside Silicon Valley, particularly among the burgeoning South Asian community, which, government officials believed, acted no differently than past immigrant groups—that is, being insular and chatty with people they consider their own.

It didn't hurt that Khan had the intellectual aptitude to game the system as long as she had. She was well educated, having graduated with a degree in physics and a master's degree in engineering from Columbia University. Combining that with her contacts in the hedge fund world, she was able to move effortlessly between the high-tech world of Silicon Valley and the trading desks of Wall Street, where knowledge of companies and their inner workings often translates into big money.

Put it all together and Kang, along with the rest of the federal investigators assigned to the Galleon case, believed that Kahn had, like Gravano, returned to a life of crime. One key difference, of course, was that Roomy Khan didn't commit murder or sell drugs. So giving her another chance to set things right seemed appropriate.

Not that Kang emphasized just how palatable the government found the prospect of letting her go once again. In fact, he did just the opposite, reiterating to Khan in no uncertain terms how ready he, the FBI, and the U.S. Justice Department were prepared to put her in jail for a long time.

To emphasize his point, as the meeting continued, he showed Khan what he considered one of the more incriminating IMs, dated January 9, 2006, where she appears to have told Rajaratnam that she needed to get back to her sources inside the company for guidance about when he should trade Polycom, a technology company that manufactures videoconferencing equipment and trades under the symbol PLCM.

“donot buy plcm till i (get) guidance; want to make sure guidance OK,” the IM stated.

Of course, the notion of “guidance” could mean a lot. For example, she could be doing her “channel checks,” a key component of the mosaic theory where analysts check with various sources of legal information—other analysts and market participants, not necessarily those with insider information—to confirm their mosaic investment thesis.

Or she could be utilizing her network of friends inside the Silicon Valley tech community to find out confidential information about the company, as Kang and the Justice Department believed. Khan said that wasn't the case. She told Kang she was no longer speaking to corporate insiders “because of the trouble she got into with the FBI several years ago.”

Kang wasn't buying it and kept pressing. He asked about the IMs regarding her trading of shares of Hilton before its purchase by Blackstone. She responded that she bought the shares of Hilton not because of any insider tip but because the publicity surrounding Paris Hilton going to jail for violating the terms of her probation was somehow good for the stock. It had nothing to do with advance knowledge of Blackstone's purchase.

As the interview entered its second hour, Kang's relentless questioning was taking a toll. Khan was growing increasingly nervous and agitated with each and every question that Kang just kept hammering away with, sprinkled with more than an occasional reminder about how much time she could be spending in prison if he were forced to charge her.

He later recounted to associates that the interview was a “roller-coaster ride” that lasted two hours and that Khan must have lied to him “a thousand and one times” during the meeting, before the wear and tear of having stern-faced FBI agents in her living room calling her a crook finally hit her in full.

That was when Roomy Khan began to cry.

“I know, I know, I'm going to jail if I don't cooperate,” she said in a state of panic.

“So what will it be?” Kang asked. “Jail or cooperation?”

“I have to cooperate,” she said, sobbing at the prospect of going to jail and giving up her lifestyle and all the accoutrements that her circle of friends had provided.

“She's in the right place,” was the word Kang relayed to Wadhwa just minutes after he had finished with the first of what would turn out to be many interviews with Roomy Khan during the next six months, as a precursor to her full cooperation against the government's primary target: Raj Rajaratnam.

Wadhwa deserved the first of many calls since the case was his as much as anyone's on the government's payroll. The former tax attorney had now earned a coveted status among the top investigators at the SEC. He was the guy the FBI called to describe the progress of high-level cases, not the other way around. Khan's initial lies during the interview were, as far as Kang was concerned, enough to put her away. (Remember, Martha Stewart went to jail for lying to investigators looking into suspicious trading, not because she was caught in the act.) But that would have to wait. Kang needed to touch base with his supervisors and come up with an official cooperation agreement to exchange evidence and testimony for leniency that Khan's attorneys would sign off on, thus leading to the final step: a wiretap that would snare Raj Rajaratnam once and for all.

T
he late fall of 2007 was a momentous month on Wall Street, though it had nothing to do with Kang's progress in making Raj Rajaratnam the white-collar version of public enemy number one. That's when three of the biggest chief executives on Wall Street, Stan O'Neal of the big brokerage firm Merrill Lynch, Chuck Prince of mega-bank Citigroup, and Martin Sullivan of insurance giant American International Group (AIG), resigned from their posts as it was revealed that they were part of a very different frenzy from the one that had transfixed the regulatory community at this time.

Each had played a role in the mania of risk-taking that in less than a year would upend the financial system, causing Wall Street firms Lehman Brothers and Bear Stearns to go broke. Those that remained managed to survive thanks to government bailouts.

The ousting of the big three CEOs were the initial shock waves of that cataclysmic event known as the Great Financial Crisis of 2008. Merrill and Citigroup were once supercharged companies that had feasted on risk for years, basically by underwriting and holding countless billions in faulty real estate investments that were worth just pennies on the dollar as the economy sank and the valuation of formerly overpriced housing began to reflect the economic climate. AIG's sin was that it had insured all that risk (primarily through writing financial instruments known as
credit default swaps
) despite not having enough money to cover these pending bills.

All firms would require some degree of government assistance to survive the eventual tumult along with the rest of the big banks, transforming what was initially a mild recession into a financial cataclysm that in many respects hasn't fully ended. Indeed, as I write this, the Treasury Department is finishing up its sale of the AIG stock it took in return for the bailout (at an eventual profit to the government), the Federal Reserve is debating whether to continue propping up the economy through what economists term
quantitative easing,
and the newly reelected President Obama and Republicans in Congress debate what to do about the government's sad fiscal state, which is due in large part to the enormous amount of spending undertaken in attempts to ameliorate the economic pain of the recession.