Circle of Friends (24 page)

D
rimal and Slaine had come a long way since their days working out at the Vertical Club in Manhattan, and Slaine certainly yearned for his old life versus the one he had now as a cooperating witness. Yet for all his misgivings about being a rat, Slaine proved an adept one. He prodded and pushed the ever-growing circle of friends for information—and for the sources of their information. At one point he convinced Drimal to set up a meeting with Rosenbach, his old Galleon friend and later nemesis. “Tell Gary I want to see him, I miss him,” Slaine told Drimal, who passed the information to Rosenbach.

Rosenbach demurred, Drimal has told people, after speaking to his wife who said it wasn't a good idea to get involved with someone who had nearly ripped his head off in a steam room. It's unclear how valuable Rosenbach would be to investigators in any event. Rosenbach may have been a tough boss, but former Galleon employees say Rajaratnam went to great lengths to hide key details about the hedge fund and how he obtained trading information from Rosenbach, who has not been charged by investigators. Others weren't so lucky, because, as Chaves and his team would determine, Slaine was a natural. He could mingle and elicit incriminating details about insider trading schemes from people he had never met before, and because of that the circle of friends now included not only Drimal and Zvi Goffer, but also Zvi's brother Emanuel, a trader named Michael Kimelman, and in a short time, many more.

“It's better for everybody” if you don't know our source, Zvi Goffer advised Slaine one afternoon in late August 2008 as they sat for one of their many meetings while the feds listened in from another location. Before this meeting Goffer and Drimal had approached Slaine about the possibility of a business venture—that the group would start its own hedge fund. Slaine was asked to invest $2 million to start the venture, but first he had to know the source of the insider leaks.

“A construction worker,” was Goffer's first answer. Slaine was unimpressed at the time, but Goffer was adamant: It pays to know less, just in case Slaine were ever caught by the feds. “It's the guy fixing the pothole,” Kimelman then joked, before turning to other matters. The government couldn't determine based on the evidence at hand whether Kimelman knew or didn't know about the source of the inside information on 3Com and a host of other stocks that Zvi Goffer and the circle had traded on. At this point they didn't care as they made final preparations to close in on the guy who undoubtedly knew all: Goffer, the so-called Octopussy, and the name had nothing to do with the James Bond movie of 1983.

He earned the handle from FBI agents on the case because he seemed to embody all that was wrong with Wall Street—only more so. In 2008, he had just got a trading job at Galleon, but his real aim was to establish a presence at a major hedge fund, share tips with Galleon chief Raj Rajaratnam, and then make the big bucks trading at his own hedge fund and keeping the lucrative fees for himself.

Goffer had “balls,” was one way investigators described the thirty-one-year-old trader, the more they listened to his conversations on tape. He openly discussed ways to cheat the system as well as ways to evade being caught. He once purchased a cell phone for one of the sources and had programmed two telephone numbers labeled “you” and “me” so they could communicate secretly, at least in his mind. After the 3Com deal, he broke the phone in half, keeping one half and telling the source to destroy the other.

In fact, Goffer constantly cautioned his cohorts to be careful, because you never know when the government is listening. He openly called himself paranoid, but he thought that his paranoia and all those steps he took to protect the source of his deal leaks would save him. Of course, they wouldn't. By mid-2008, Goffer's telephone had been tapped for more than six months, with government investigators listening to everything from his dinner dates with business prospects, trips to Madison Square Garden to watch the Knicks, to his attempts to game the market through trading on and passing along inside information.

By late 2008, Chaves and Makol believed they were sitting on a gold mine of potential cases—but they wanted more. The telephone wiretaps had already been in place on Drimal's telephone thanks to the probable cause evidence Slaine had come up with, and as Chaves and Makol kept listening, the list of targets grew, leading to a series of other wiretaps that enlarged this circle of friends even more.

As good as Slaine was as a spy, nothing could replace the wiretaps for effectiveness. Because Goffer's telephone was now bugged, and because of Slaine's recorded conversations with Drimal, the feds soon uncovered the source of the leaks: a thirty-one-year-old lawyer named Jason Goldberg, who had a friend inside Ropes & Gray, a thirty-three-year-old lawyer named Arthur Cutillo.

Cutillo made a good living as a corporate lawyer, a living made even better because he aided the Goffer circle of friends by passing along nonpublic deal information, such as the Bain Capital purchase of 3Com, and much more. His price: kickbacks of cash for passing along the deal information to Goffer, who would then pass the information “downstream” to others like Drimal.

As Makol and Chaves sat and studied the activities of this circle of friends, they realized just how brazen the participants in this scheme were: young lawyers and traders looking to make money and doing whatever they could to meet that end.

They also realized it was probably standard operating procedure in the hedge fund business. Zvi Goffer was hardly a criminal mastermind. In other words, he had learned the business of insider trading from someone else, so there had to be many more people like him out there.

They would have liked to have arrested Goffer on the spot, based on what they knew, but really big cases aren't made that way. They're made by moving up the ladder; you start small, targeting one cooperator, and move upstream until you nail the ringleader.

Upstream movement would put Craig Drimal next in line, but that too would have to wait, as the probe kept leading investigators to an ever-widening array of bad guys.

“Amazing,” is all Chaves thought as he studied a large whiteboard in his office in late 2008. His cluster of suspects had numbered to over a dozen—but with so many wiretaps going at the same time, he and his team had come up with scores of leads and potential targets. And based on the leads Slaine had provided, the possible targets seemed endless.

CHAPTER 9

ODD COUPLES

H
ey, so did you hear anything on Xilinx?” Roomy Khan matter-of-factly asked Raj Rajaratnam one afternoon in early 2008.

The call was no different than the dozens of other conversations the two had had since they began their business relationship of sharing market intelligence years earlier. Only this time, Khan was a cooperating witness for the government in its probe of Rajaratnam.

Even better, the feds were listening to every word of the call. They could rewind and replay the tape to their hearts' content.

“I think this quarter is okay. Next quarter not so good,” Rajaratnam said, adding: “I haven't made the call I have to make. I got to call a couple of guys there at Xilinx.”

To be sure, the call in and of itself wasn't enough to bring charges against Rajaratnam, but as Rajaratnam's lawyers would even concede, it was a great start for the FBI. Later the FBI would track down one of the guys: Kris Chellam, the technology company's chief financial officer, who would eventually settle civil fraud charges and pay a hefty fine that amounted to nearly twice the $1 million he had earned for passing along tips as a key member of Rajaratnam's circle of friends.

But that would have to wait. Meanwhile, Roomy Khan was turning out to be an excellent accomplice in their effort to bring truth and justice to the markets, particularly if you could look beyond the messy details of her cooperation.

Khan's phone lines showed calls to a vast array of Silicon Valley insiders, people who, she would later admit, were part of her own circle of friends that she had never let go of even after being caught by the FBI years ago. Doug Whitman was described as a “putz” by one of his competitors, a one-trick pony who started his fund with some lucky picks and then fell back on his circle of friends to keep returns high and his investors from bolting. He and Roomy Khan were longtime friends and remained key partners in her various schemes, the government discovered. Another one of her best sources of insider tips was a top executive at the tech firm Polycom, who was a neighbor. They often shared illegal information at the local coffee shop.

Still, criminality was turning out to be a tough habit for Khan to break even as she took her second turn as a government informant. She 'fessed up to most of her illegal trading activities, but the government kept finding more. In addition to deleting email messages from Deep Shah, the Moody's analyst who tipped her off to Blackstone's purchase of Hilton, she also used a cell phone listed in her gardener's name to cover her tracks as she continued to talk with Shah. That is until she eventually gave him up to the feds on their way to building the case against Rajaratnam (and through these wiretaps, many of his associates).

To put it plainly, she was still violating the law while she was cooperating with the FBI. She wasn't quite on the level of infamous Boston mobster Whitey Bulger, who was killing people and dealing dope even while he was ratting out his fellow mobsters. But Khan's ongoing shenanigans might well make her toxic on the stand, particularly against the legal firepower Rajaratnam would assemble, even if they made her essential to entrapping Rajaratnam in his own words.

And entrap she did, in the same casual banter she had used with the Galleon boss for years. “What's going on with the earnings this season? Are you hearing anything on Intel?” Khan asked Rajaratnam matter-of-factly in 2008.

“Intel I think will beat the current estimates by, they'll be up like nine to ten percent and then guide down eight percent,” he shot back.

After Khan asked for more “color,” or more exact data on the company's profit margins, he replied: “Margins I think will be good this quarter but next quarter will be below. . . . I'm not trading Intel anymore. . . . They're a fucking pain-in-the-ass stock.”

David Slaine had told people that his work in developing evidence against Drimal and the rest of this circle made him physically ill. He fought with his government investigators incessantly; both David Makol and Andrew Fish took turns berating him on what would happen to him if he stopped doing what he was told.

With the strain of going under cover for so long, Slaine lost weight, looked sickly, and before long he would break up with his wife, albeit amicably.

The thing that kept him going was the horrible alternative of not seeing his daughter for twenty years. Roomy Khan, meanwhile, was a great liar, Wadhwa and Kang discovered—perhaps the best they'd seen so far in the investigation. She did it so effortlessly, without a hint of despair or apparent remorse.

T
his is amazing,” Sanjay Wadhwa said as he was briefed by Kang on what Khan was producing, not just from her recorded conversations but through other records. Kang kept Wadhwa in the loop on most matters, but there were limits, particularly when it came to wiretaps. Conversations from Rajaratnam's phone were off-limits to anyone outside the Justice Department, and that included the SEC, as was the brief detour Kang made in the middle of the Galleon hunt to return to his first love, Steve Cohen.

Little is known about exactly how Kang got the court order to tap the Steve Cohen's telephone which began, according to one investigator, sometime after the 2008 Rajaratnam wiretaps were launched (Kang declined repeated requests to be interviewed for this book). But according to senior law enforcement officials with direct knowledge of the matter, Kang had to prove both a reasonable suspicion that Cohen was doing something wrong and that he couldn't get the information using other types of investigative techniques.

That, as it turns out, was the easy part. Much more difficult was finding something to incriminate Cohen on. When the Cohen wiretaps began, Kang could have received his probable cause from any one of a number of sources, including the suspicious trading that Funkhouser's computers detected. Kang had interviewed Patricia Cohen as well, and Slaine's information about the inner workings of the big hedge fund didn't hurt.

The judge granted his request, and for a period of time described by one law enforcement source as a few weeks, the federal government was listening to Steve Cohen's business affairs as conducted on his home telephone.

Cohen often holds a Sunday conference call with various traders to discuss market bets and other ideas from his home telephone. It was a grueling affair, at least according to those who took part in the weekly meeting. Traders would be grilled on their positions, and mostly their “conviction” level on stocks, meaning how strong they felt about a particular trade.

Kang believed that listening to these calls was one of the best ways to determine if Cohen really wasn't playing by the rules. But Cohen didn't bite. “There was a lot of noise,” was how one government official with direct knowledge of the wiretap conversations described what investigators discovered.

In the end it was a frustrating experience, particularly for Kang, people say. The calls provided no clear-cut evidence that Cohen knowingly or intentionally traded on illegal tips. It's unclear exactly what was said, but Cohen is known to speak in his own code, often about “conviction levels,” and to bullshit incessantly about various stocks. All of which is a far cry from hard-and-fast evidence that shows he engages in insider trading or condones it below his rank,

Or as one former Justice Department official put it, “In the end, we really didn't get shit.”

The question of why the wiretap came up empty became a huge debate within law enforcement circles. Maybe he was just that good a trader, and maybe the people he hired were for the most part incentivized to do their jobs legally by receiving huge pay packages to play fair. Since SAC was such a massive fund, trading billions of dollars in stocks every day, even the suspicious trades by a few bad players in its ranks when put in this context were just a small fraction of the fund's overall business.