Circle of Friends (33 page)

When Holwell first granted Rajaratnam's request for a hearing on the wiretaps he said the government had “recklessly or knowingly misleadingly omitted several key facts” in the initial application. Streeter and Bharara had met at least once during this time. They agreed that despite Holwell's initial bluster—they were prepared to be “smacked around” a bit by Holwell—they weren't going to lose and the wiretaps would be safe. Streeter was confident that he had provided enough evidence to prove that nothing Kang and Goldberg had done was “reckless.” It was a mistake, plain and simple, and there was no way Holwell would upend the biggest post-financial crisis white-collar case on a simple mistake.

What they didn't know was how close they came to being wrong and watching Rajaratnam possibly walk away free. Holwell is a judge who is hard to read. He displays little if any emotion when weighing evidence on such pretrial matters. Streeter and Bharara didn't know it but nothing Holwell heard during the hearing changed his initial assessment of the wiretap application. In fact, Holwell has told people it only reinforced the need to “suppress,” or throw the wiretapped evidence out of court.

The hearings lasted four days, but they could have lasted four minutes as far as Holwell was concerned; he was ready to side with the defense and throw out the wiretaps. It would be a huge blow to the government. In a sense, if Rajaratnam's taped conversations were thrown out, one could make the case that most of the ensuing telephone wiretaps of all the other people investigated in the mammoth roundup were so-called fruit of the poisonous tree (and hence inadmissible in court) since they had grown out of an illegal wiretap.

“Okay, this is a real mess,” Holwell thought as he began to scope out the reasons for upending what was possibly the biggest insider trading case in history. Without the wiretaps, the government had to resort to conventional means such as witnesses and circumstantial evidence, the stuff that makes insider trading so difficult to prove in court, since witness memories fade and markets are full of rumors that are hard to differentiate from inside information.

The government's efforts on the broader issue would be dealt a huge blow. Defense attorneys would be given a road map to have evidence thrown out of court. Forget nailing Rajaratnam; cases against lesser subjects could be thrown out, including those against many of the current cooperators. It was unclear how many of the other wiretap applications excluded the same information, but it was a good bet this wasn't an isolated example.

As Holwell prepared to suppress the best evidence against Rajaratnam—indeed, possibly against any white-collar criminal in recent memory—he alerted his clerk, a bright Harvard Law grad named Justin Raphael, to start the work to prepare the opinion. In Holwell's mind, the courts were pretty clear when it came to anything that looked like government misbehavior: They don't tolerate it and evidence tainted by it is inadmissible.

Raphael was hardly an expert on the inner workings of Wall Street though as an undergraduate, he wrote a magazine piece where he tried to explain why so many college graduates chose a career there. While “money is the sole rule of the Street,” he wrote, “it is far from its only allure.” The essay went on to say that people on Wall Street love the “adrenaline rush” they get at work, and they “relish the competition” of deal making. Raj Rajaratnam couldn't have said it better.

Raphael graduated from Harvard Law in 2009, and now just a year later he was advising a federal judge whose decision could upend the biggest inside trading case since Ivan Boesky. Raphael knew that Holwell worried broadly about the invasion of privacy issues that wiretaps presented. He was also aware that wiretaps were rarely used in white-collar law enforcement. Insider trading might be bad, but was it worth trampling on the U.S. Constitution?

Title III appears to be pretty clear on one important matter: The government needs to show a federal judge that before it can invade a private citizen's
privacy
it has exhausted all conventional techniques. And at least in this case, the government left out a key piece of evidence. Simply put, Goldberg and Kang screwed up, and when it comes to privacy rights, you're not supposed to screw up.

That's when the twenty-five-year-old clerk pressed the sixty-five-year-old Holwell to reconsider what he described as the judge's antiquated notion of privacy. The notion of what is and isn't private has been changing in recent years. He urged Holwell to consider all the personal information that appears on the Internet, and accordingly to temper his views about privacy to reflect modernity; with technology very little of our lives is truly private.

He also urged Holwell to consider what a Title III application is all about and put himself in Judge Lynch's shoes: Would he have really said no to the wiretap even if he knew the SEC was still looking into Rajaratnam's trading? Of course not. The evidence against Rajaratnam was significant, maybe not enough to put him in jail, but clearly enough to approve a wiretap and a necessary ingredient to convict someone who might otherwise get away with fraud.

Insider trading is a crime of communication; if you don't know how Rajaratnam is making his communications, how can you properly investigate his activities? All told, maybe one in ten wiretap applications had been denied in recent years, Holwell discovered. Based on all of that, Raphael asked, was he really ready to let Raj Rajaratnam and countless others off just because of a procedural mistake?

In the end Holwell wasn't. On November 24, 2010, he issued his sixty-page decision denying the requests of Rajaratnam and his fellow defendant Danielle Chiesi to suppress the wiretaps as evidence in the case.

Holwell mentioned the failure of the government to cite the SEC's investigation in its wiretap application. But, he pointed out, the SEC's long-standing interest in Rajaratnam was
the reason that
a wiretap was necessary. Conventional investigative techniques had been used and “nevertheless,” he wrote, they had “failed to fully uncover the scope of Rajaratnam's alleged insider trading ring and was reasonably unlikely to do so because evidence suggested that Rajaratnam and others conducted their scheme by telephone.” Even if Kang and Goldberg had included the SEC probe in the application, “it would ultimately have shown that a wiretap was necessary and appropriate.”

In the opinion, Holwell clearly sided with the government, but in granting approval, he put investigators on notice that they had better do things right if they wanted to tap a target's phone. In fact, the judge used the word
reckless
in his decision more than twenty times. Bharara read the decision with a mixture of anger and relief, according to people who know him. Anger because based on what he had heard this wasn't nearly the slam-dunk Streeter had predicted. His relief came because with the admission of the tapes into evidence, he was all but assured his biggest victory since being appointed as Manhattan U.S. Attorney, even if he had no idea his margin of victory (and Rajaratnam's margin of defeat) came thanks to a recent Harvard Law graduate who had once written an essay about working on Wall Street.

J
onathan Hollander had just left the gym, feeling the usual high that comes after a good workout, when he was approached by a couple of FBI agents, including David Makol. According to Hollander's account, they said he wasn't under arrest, but the agents also indicated he was under suspicion as a member of the “SAC crime family” engaging in insider trading.

The crime family reference wasn't hyperbole, Hollander would later concede. Hollander accompanied Makol to a nearby diner, as Makol so often takes his targets. They sat down and ordered coffee, and before Hollander took his first sip, Makol produced a piece of paper. It showed a chart in the style of those iconic depictions of Mafia families, with Steve Cohen's face displayed at the top and arrows pointing below to a host of other SAC people.

Hollander has told people the experience was jarring, particularly because Makol was clear and direct in his approach. They knew Hollander was trading on inside information.

Also jarring was the chart Makol handed him. He has told people it bore a startling similarity to one of those used to describe organized crime families with the
capo di tutti capi
, in this case Cohen, at the top of the alleged criminal enterprise, followed by his captains and soldiers. Hollander said he recalled seeing his own photograph somewhere near the bottom left-hand corner, as if he were a low-level soldier in the bigger criminal conspiracy.

SAC is actually a multitude of hedge funds operating in a semi-autonomous manner, though Cohen has final say over key trading strategies. One unit is said to be different: CR Intrinsic, a subsidiary inside SAC that operates as Cohen's private hedge fund, where most of his money has been kept. Hollander had worked at CR Intrinsic for four years.

Cohen had managed money directly for the fund where a chunk of his net worth has been held. Analysts like Hollander and traders know they receive their biggest bonuses by funneling investment ideas to Cohen and cranking profits for CR Intrinsic. An analyst or trader who works for this division could have direct access to Steve Cohen himself.

In late 2008, Hollander left SAC after his supervisors told him he was laid off to save money following financial-crisis related losses that led to SAC's first down year since its inception. Not long after, the FBI came calling. If the intent of the meeting was to scare Hollander into some kind of cooperation agreement, it was successful. Makol said the proof of Hollander's insider trading was significant; an informant had led them to trades in Hollander's personal account in shares of Albertson's food store chain.

The informant, an investment banker at the firm UBS, said that he had witnessed Hollander being given a tip about Blackstone's pending buyout of Albertson's. Hollander made an easy $3.5 million by snapping up shares of Albertson's in his personal account.

Hollander ultimately agreed to two “proffer sessions” with government investigators. Such interviews with law enforcement allow the target to speak freely; the testimony receives immunity, and it's an indication that the feds are interested in bigger fish.

In this case, there was little doubt who the feds were interested in as Assistant U.S. Attorney Reed Brodsky quizzed Hollander not just on the Albertson's trade (Hollander said he hadn't shared that tip with anyone at SAC) but on the inner workings of the hedge fund, namely how information flows from traders and analysts to the man at the head of the organizational chart.

Unlike Streeter, who had focused on other white-collar cases before taking in the Rajaratnam prosecution, Brodsky had been working on insider trading cases for years. He was in his early forties, and had joined the Southern District after a stint in private practice. He's known as a tireless and smart worker. If he has a fault it's in his overpreparedness, which can hurt him at trial, where juries respond best to simple, linear cases from prosecutors.

But this wasn't a trial, merely an attempt to get Hollander to tell him everything he knew about Cohen's operation. Overpreparedness didn't matter. Brodsky knew going into the proffer sessions the key elements of how SAC worked. Cohen, of course, ran things, but many buffers stood between him and the information source. It was known as a hub and spoke structure, in which portfolio managers and analysts fed him the best ideas that they were trading on.

This happened all day, every day, since Cohen rarely took a day off. The competition was fierce to get Cohen's attention, Brodsky knew, because of the rewards for profitable trades. SAC bragged that it had created the first stand-alone compliance department in the hedge fund business. By the time Hollander was approached by the government, the compliance unit was among the hedge fund industry's largest such operations with 36 people watching its trades. Brodsky, like others involved in the probe, believed SAC's efforts to detect dirty trades weren't enough given all the trading at the firm, and they probably came too late. After spending some time on the Albertson's trade, prosecutors seated across from Hollander made it pretty clear what they thought of the hedge fund by asking their witness to tell them “everything you know, firsthand or secondhand about insider trading at SAC,” according to a person who was present.

This person said the investigators asked about Cohen's knowledge of dirty trades as well. “They asked John ‘what do you know about Steve?' ” this person said. “They were clear that they wanted to know about whether Cohen himself did anything.”

During his two sessions with Brodsky and Makol, Hollander said his interactions with Steve Cohen were pretty nonexistent. “He said he was ten rungs below Cohen,” said the person who was present during the interview. That said, he observed a lot during his time at SAC. He told Brodsky that the tone of the firm was set from the top and the message was emphatic: Do whatever it takes to make money. Insider trading, despite the firm's compliance efforts, occurred frequently, he said.

By the end of the discussions, Hollander had given enough evidence to escape jail. A short time later, Hollander would provide the same information to the SEC during another proffer session. He paid a $220,000 fine for trading shares of Albertson's, settling an SEC civil penalty that included a five-year suspension from the securities business, and, most important, serving no jail time.

Hollander would later say that, based on his questioning, he believed Brodsky and the government agents in the room were convinced SAC used dirty information to profit in the markets. It may not be the only reason for SAC's stellar returns since its 1992 inception and the fact that it never lost money except during the cataclysmic year of the 2008 financial crisis. But at least according to Hollander's interpretation of the questioning, government investigators thought inside dealings played a significant role in the fund's performance. Since 1996, SAC had produced annual returns of 25 percent for investors, though in recent years as the fund has grown and as its compliance efforts have increased, those returns have trailed off. Still, SAC's performance compares very favorably to the roughly 8.5 percent returns cranked out by the great Warren Buffett, not to mention the S&P 500's relatively paltry 5 percent return, during that time period.