Circle of Friends (32 page)

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.

T
he 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 didn'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).

But Dowd, a former Marine, was someone Rajaratnam wanted. Like himself, Dowd is a fighter who both knew the law (he headed the criminal defense department of Akin Gump, a large Washington law firm) and knew that the case against his client was weakest at precisely the strongest piece of evidence: the wiretaps.

As mentioned earlier, wiretapping phones was hardly unprecedented, but prosecutors have rarely relied on that tool to build white-collar cases. According to government statistics, in 2009 drug cases were the most prevalent type of case investigated through wiretaps, followed by homicides, organized crime, and, somewhere near the bottom, white-collar felonies.

The procedures to get wiretap authority are pretty strict, and given all the various applications in the case, Dowd's bet was that he could find more than a few procedural mistakes and begin to chip away at the wiretaps that showed Rajaratnam breaking the law all in his own words.

Streeter knew where Dowd and his people were heading. The government has “limitless resources,” is the old saying, but Rajaratnam was a billionaire. In other words he had the resources to make the government look really silly if the wiretaps were declared inadmissible.

As the trial date approached, what looked like an easy win started to look somewhat less easy. For starters, Bharara, with his comments about the successful use of wiretaps, had made a crucial error: celebrating a victory that had yet to be won. It was a bad omen, and even worse, some government investigators worried it may have pissed off the judge, Richard Holwell, enough to get him to toss the wiretaps on a technicality.

A buttoned-down former corporate lawyer, Holwell was appointed to the federal bench eight years earlier by President George W. Bush.Holwell was known as a stickler for details, particularly when something as sensitive as a wiretap application was at issue.

Put simply, Streeter was worried that for all the mountains of evidence against Rajaratnam, the government could still lose by having the wiretaps thrown out of court. The implications were huge not just for the Rajaratnam case, but for the entire insider trading probe. Traditionally, insider trading had been difficult to prosecute precisely because it was hard to establish the exact nature of the communication between the tipper and the tippee.

Based on information uncovered by Cam Funkhouser's computers and those at the SEC, there were literally thousands of potential cases of insider information each year. The trades before major market-moving announcements, such as mergers and acquisitions, painted a fairly compelling picture of how rampant insider trading was in the markets. The problem was proving it. Even with witnesses testifying to the guilt of a tippee, he-said-she-said cases are rarely a slam dunk. Targets can always rely on the concept of a “mosaic,” or a combination of various pieces of (public) information, as the real reason for a trade, rather than any specific piece of nonpublic information. In the Martha Stewart case, prosecutors went for the low-hanging fruit that Stewart lied about her suspicious trades to investigators, rather than the more difficult case of proving that her trades themselves were based on inside information.

The Rajaratnam wiretaps left no doubt about intent. They showed in his own words how hedge fund traders worried less about their mosaics and more about their access to inside information in doing their jobs. And they were costly. Each wiretap needs at least a half-dozen investigators monitoring calls around the clock. Because the feds had multiple wiretaps going on at the same time, Perfect Hedge was already possibly the most expensive white-collar investigation in recent history—and the biggest waste of money if the wiretaps couldn't be used.

J
ohn Dowd may not have tried a case—at least not a case of this magnitude—in a while but he proved to be a crafty litigator from the outset. The actual trial of
U.S. v. Rajaratnam
wouldn't begin for several months, sometime in the spring of 2011, but the case was basically being decided in federal court in October 2010 when Dowd and Streeter duked it out before Judge Holwell over whether the wiretaps of Rajaratnam's cell phone—the same phone he used to dish inside trading dirt with Danielle Chiesi and his broader circle of friends—should be suppressed during trial.

Dowd's argument was pretty simple: The feds had to show—had to have proved to Judge Lynch back in 2008—that they had exhausted other methods of investigating Rajaratnam in order to get his approval to initiate a wiretap, and that the invasion of privacy that is at the heart of every wiretap was the last resort in catching an alleged bad guy. It was a high bar, albeit not insurmountable given the difficulty of prosecuting insider trading.

Title III of the Omnibus Crime Control and Safe Streets Act of 1968 is the federal law that allows the government to wiretap private citizens. There are rules and procedures that must be followed before wiretap authority is granted by a federal judge, including utilizing all other investigatory techniques before going for a wiretap.

The problem for Streeter was, Dowd claimed, that those rules and procedures were not followed, at least not that closely. In Dowd's words, the “FBI went straight to tapping the phones” before fully utilizing conventional techniques to investigate their targets.

Streeter was well prepared to make the argument that the wiretapping was necessary since Rajaratnam had been investigated for years without success. It was harder to defend against a procedural mistake made on the part of Goldberg and Kang when in their initial wiretapping application before Judge Lynch they failed to even mention that the SEC was investigating Galleon Group—and had yet to conclude that investigation.

Worse than making it look like the government was hiding stuff, it helped make Dowd's argument, namely that the government was so scared about not meeting the Title III test that it left out what the court needed to know to render a decision.

Kang took the stand and did his best to try to explain why he would leave out a key fact—namely that he didn't see it as necessary since the SEC and Justice Department always work together on cases. Any federal judge would know that, so it was unnecessary to put it in writing. Streeter tried to pass it off as an innocent mistake and one that wasn't material in granting the application. “There was nothing nefarious about it. . . it would be bad government if we didn't work with the civil authorities.”